Advanced Corporate Strategy

ST104x

What is product diversification?

Welcome to this second module of the Advanced Corporate Strategy course.

In this module, we will cover production diversification in depth. Note that product
diversification is often simply referred to as diversification.

We will look at the different types of diversification,

▪ the varying motives for diversification,
▪ the performance effects of diversification and
▪ diversification in emerging economies.

What is diversification?
A company is said to be diversified if it operates in more than one product market.

Diversification is one of the most important strategic decisions made by a firm because not
only does it define what the firm is all about, it has important performance implications as
well. Successful diversification can put a firm on a path of high growth and high profits.
Unsuccessful diversification can destroy a company’s profits and even threaten its survival.

Diversification deals with important questions that a firm needs to address, such as:
• Should it compete in only one product market or should it compete in multiple product
markets?
• If it decides to compete in multiple product markets, which product markets should it
compete in?

Given the complexity of factors involved, figuring out the “correct” answer to these questions
is not easy. So, not surprisingly, similar firms may end up with different answers to these
questions.

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 Advanced Corporate Strategy

ST104x

For example, consider the two Indian firms Intex and Symphony. Both these companies
compete in the air-coolers market. While Symphony operates in only the air-cooler market,
Intex is more diversified and operates in multiple product markets such as air-coolers, air-
conditioners, TVs, washing machines, refrigerators, mobile phone and so on.

Why does a company decide to focus on only one market while another decides to be more
diversified? Which approach is better?

You would be able to come up with your own answers to these important questions at the
end of this module. We will next discuss the different types of diversification before we
discuss the motives for diversification and the performance implications of diversification.

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