SEMESTER I (Academic year 2022-2023)

Business Environment I

Topic-“Market diversification in the FMCG industry ”

SUBMITTED TO:
Prof. Shivani Naik
Faculty
NMIMS Kirit P Mehta School of Law

SUBMITTED BY:
Meet Shah
BBA.LLB (Hons). Div E
Roll no-E012
 Market diversification in the FMCG industry

Abstract

To study the importance of market diversification in the fast-moving consumer goods industry.
Market diversification is a very important strategy used by top-level management personnel.
This paper is useful to the CEOs and board members as to the benefits of market diversification,
and the reasons why people diversify their brands. - The researcher conducted a secondary
research method for this study and referred to Scopus-indexed journals and data collected.
Diversification is defined as “the entry into new markets with new products, the definition of
diversification has changed” by Myong Jae Lee, SooCheong (Shawn) Jang. Diversification is a
popular growth option for firms situated in developed as well as developing nations. (Saptarshi
Purkayastha, Tatiana S. Manolova, and Linda F. Edelman, 2012). There are two types of market
diversification. First is by diversifying into foreign markets. The second type is product
diversification. Through this paper, we are going to study whether there is a need to diversify.
There is a substantial gap in the research as all the research is done either outside India or in the
rural parts of the country.

Introduction

The definition of diversification according to Myong Jae Lee, and SooCheong (Shawn) Jang is
“Diversification as differentiating markets and pursuing more than one target market.”

Market Diversification is considered a method to increase the market share and the profitability
of a company. Market diversification is a very common business strategy which is regularly used
by people in high managerial positions but this does not always guarantee an increase in profits,
it has been considered one of the most important strategic management concepts to achieve long-
term financial goals at the same time minimising business risk. (Myong Jae Lee, SooCheong
(Shawn) Jang, 2007) Market diversification is very crucial for an exporting country if market
diversification is absent then it weakens the country's bargaining power and forces it to face
monopsonic pressure from importers. (Redwan Ahmed, Md. Al-Amin, Md. Tawhidul Islam,
2013)

The definition of FMCG according to Charles Mbohwa & Ndivhuwo Nemtajela is “The fast-
moving consumer goods (FMCG) organizations are fast, active organizations with a variety of
items.”

There are 33 types of FMCG. (Puneet Kumar, Nidhi Aggrawal, Himani Saraswat, 2021) Some
prominent examples are-:

1) Processed Goods
2) Prepared meals
3) Beverages
4) Baked Goods
5) Medicines
6) Fresh, Frozen foods and Dry Goods
7) Cleaning Product
8) Cosmetics and toiletries
9) Office Supplies

FMCG (Fast Moving Consumer Goods) are characterized as FMCG by certain factors like mass
production, goods which have short shelf life and goods which have high turnover rates. Due to
covid, the FMCG Market has undergone certain changes like the emergence of online and
mobile distribution channels. Another change in the market is the diversification of products in
the market. A key factor to the success of an FMCG market is the ability to build, develop and
maintain a strong distribution channel. (Yong Uk Cha, Min Jae Park, 2021). Another important
characteristic of FMCG is that the goods have a substitute good. (Hillary S. EKPE, Babatunde O.
BINUYO, Adekunle O. BINUYO, 2019) Penetrating rural is very essential for all FMCG firms
to improve their sales volumes. (G. Yoganandham, P. Jayendira Sankar, 2020)
The manufacturing of many fast-moving consumer goods has affected environmental turbulence
due to the keen competition of players in the industry. To cope with the competition in the
markets several organizations in the industry resorted to diverse strategies like diversification.
The FMCG sector is undoubtedly one of the biggest manufacturing firms in the world. ( Hillary
S. EKPE, Babatunde O. BINUYO, Adekunle O. BINUYO, 2019)

Gongming Qian and Ji Li suggest that global diversification leads to innovation. Product
Strategies include product life-cycle strategies and market introduction of new product
developments in addition to product mix decisions. (Burak Acikgöz, 2018)

Keywords: Fast Moving Consumer Goods, Market Diversification

Research Questions

1) What is FMCG?
2) What is market diversification?
3) Why do firms diversify?

Research Objectives

1) To understand what are FMC Goods.

2) To understand what is market diversification

3) To understand the reasons why companies like to diversify.

Hypothesis

H0: Market diversification will not improve for FMCG Firms.

H1: Market diversification will improve profits for FMCG Firms

Research Methodology

The research methodology adopted in this paper is an analytical and comparative study. The
research relied on secondary data. The data is obtained from sources such as books, news articles
and Journals available on the Internet for gathering reliable and relevant information. No primary
data has been utilized for this research.
Literature review

1) CYNTHIA A. MONTGOMERY-The researcher has used primary data to write this

research paper. The findings of her paper are that highly diversified firms have
significantly lower market power in respective to markets which have lower diversified
firms. Diversification increases the chances of predatory pricing and reciprocal buying.
This may also reduce Intra industry rivalries if 2 large conglomerates face each other in
many markets. The view of market power is that diversified firms bring a generalized
collusive power to the markets that they enter. The ability of firms to engage in predatory
pricing is independent of the specific market of the new markets that they enter.
Predatory Pricing is enhanced by the number of markets in which the firms compete. The
internal management of highly diversified firms often does not encourage heavy
commitments of corporate resources either to a single market or to specialized assets that
may be necessary for capturing key positions in the particular market. Diversifying firms
didn’t tend to be the most profitable markets. They just diversified into any market. The
reason that the firms could not diversify into profitable markets is due to the entry
barriers that are present in the markets. Thus, these barriers make it nearly impossible for
non-differentiated firms from competing in these markets successfully. Diversifying
firms tend to join those markets which have moderate seller concentration whose entry
barriers and average profit are likely to be less than those markets which have higher
entry barriers. This paper contradicts the widely held view that highly diversified firms
wield unfair market advantages.

2) Gongming Qian, Ji Li-The researchers used primary data to write their research paper.
The findings from the paper are that international diversification leads to innovation
because the firms which have diversified internationally have incentives to invest money
in the necessary resources to build and maintain the capabilities to continue to innovate.
The researchers have also stated that globally diversified firms can effectively integrate
their operations by standardizing products, rationalizing production and coordinating
R&D. Internationally diversified firms have more opportunities to achieve the required
 amount of scale and amortize investments over a wider base. A firm that has diversified
internationally management has to deal with the unknown cultures of the country they
have diversified in; they have to face competition from new competitors and a strange
and complex environment is characterized by a different set of political, economic and
legal factors. The only negative aspect of diversifying internationally is the lack of
managerial talent with international expertise but if the company finds the right person
for the managerial position then international operations can lead to superior
performance.

3) Myong Jae Lee, SooCheong (Shawn) Jang- The researchers used the primary data
method to write their research paper. The main reason for the business to diversify is
because of synergies and financial motives. Diversification of business units helps in
expanding the size of the business, marketing, research and development, achieving an
economy of scale in manufacturing and thereby generating a synergic effect for the
overall operation. The financial reason for diversification is based on the principles of the
portfolio theory. Portfolio theory is whenever the cash flow of individual business units is
not perfectly correlated; the total risk of the overall operation can be reduced by
diversification. The main motive of diversification can be related to the current
environmental factors of the firm, such as competition in the market, market maturity,
slow-down in sales and other threatening factors. Some other factors for companies to
utilize excessive resources of current operations for additional earnings. There are 4
categories which are used to gauge the degree of firm diversification. The factors are
single, dominant, related and unrelated products.

4) Adekunle O. BINUYO, Hillary S. EKPE, and Babatunde O. BINUYO-The researchers

used the primary data method to write their research paper. The findings from their paper
are that the researchers found that diversification strategy had a significant effect on the
probability of FMCG manufacturing firms. The sectors of consumers that account for the
bulk of the profit of the FMCGs firms are people who are at the low rung of the socio-
economic status of a country. This category of people is characterized as people who by
high price sensitivity which explain why people can easily change to suitable substitute
 goods at the slightest opportunity. Hence, FMCGs firms need to find ways in which they
can reduce the cost of production so that they can remain competitive both in business as
well as in the industry. Theoretically, diversification can drive the performance of a
company and by extension its growth. The researcher found that for firms in Lagos
Nigeria to progress and succeed they need to adopt diversification strategies.

5) Burak Acikgöz- Products are a critical element in the overall marketing offering. Before
developing and marketing its product, the company needs to make the company product
decision. The decisions are made at 4 levels. The 3 levels are-:

a) Individual product decision- The main focus of individual product decisions is to

create a core customer value. Inside these decisions, the manufacturer focuses on
product attributes, branding and packaging and labeling.
b) Product line decisions-The choice of products is one of the most important
decisions as it decides whether the company will be successful or not. In making
decisions regarding product lines a firm considers a variety of strategic factors to
select the direction of the product line. After combining all the product lines with
the company’s items results in a product mix.
c) Product mix decision-:
i) New Product Line is also known as product diversification. It is a compass
through which a company manages market segmentation based on its
multiple products in a competitive global marketplace. This has been one
of the most widely used marketing strategies for gaining market share and
opening new markets.
ii) The product life Cycle is the life of a product from its research and
development stage to the decline stage.
Findings

Firms can be at a competitive disadvantage to the specialized firms due to the distance of the
core product of the company to the other product. Some people view diversification as a
defensive strategy. Firms enter new markets to avoid non-attractive conditions or limited
potential in their current markets. Thus, they move from a position of weakness and not strength
which is usually the case for most firms which diversify into new markets. These firms diversify
to find new opportunities which are not available in their current market. The goal of achieving
sustainability and competitiveness can be achieved by diversifying. Diversified firms have to
compete in a series of individual markets. Diversification does have advantages. One of them is
that it derives cost efficiency rather than market power. International diversified firms can use all
their internal resources and capabilities to exploit the market imperfections existing in markets
around the globe. As a company diversifies itself in different countries managerial constraints
rise. The diversification strategies are influenced by the international experience of the top-level
management. Firms with high foreign operations tend to outperform those firms which have
medium or small foreign operations. Many researchers have researched to see how
diversification impacts the financial stability and profits of the company but unfortunately, the
results were inconclusive. Thus, we cannot say for certain if international diversification impacts
the profitability of a company or not. Diversification increases the number of destinations to
where the product can be exported while introducing new products at old markets, an exporter
can capitalize on different business options. There are many main growth strategies inside
market diversification. They are to increase the number of trade partners and export new
products to old markets.

Limitations

This research was based on the research done by other people. Many researchers have been
researching market diversification. These people live in different parts of the world. The result
that each one has got is different to the other one. Thus, I cannot give a conclusive answer as to
whether the profitability of a firm improves after market diversification. The duration to do the
research was also very little as only 30 days were given to write this research paper
Conclusions

The growing development of the Indian Economy, the impact of globalization and the drive for
privatization have made the FMCG industry more competitive and very volatile.( Elvita Aguiar
and Reddy, Y. V.,2017) The main aim of any firm in the FMCG industry should be to satisfy the
wants and needs of its consumers with its product offerings. (Burak Acikgöz, 2018)The strategy
of market diversification contributes to sustaining a country’s export earnings slowly but surely
ensuring a wider bucket of varieties of merchandise as well as markets. (Redwan Ahmed, Md.
Al-Amin, Md. Tawhidul Islam, 2013) Companies engaging in international activities are rising.
They are doing this by expanding the geographical scale and scope of international operations.
Diversification being too heavy or too light in the global regions causes a downturn in financial
problems. According to the theories, diversified companies would have a higher return and
higher risk than unrelated diversified companies because of the positive correlation of synergies
and business among the related business units. (Myong Jae Lee, SooCheong (Shawn) Jang,
2007) The influence of regional differences and the increased cost of geographic coordination
may reduce the benefits associated with the increased scope of foreign operations. Hence, due to
varying results from across the globe, I cannot be hundred per cent sure that the profit of FMCG
Firms will increase after market diversification.

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