If a company expands its product range, this is called product diversification in economics. Etymologically, the word “diversification” goes back to the Latin adjective “diversus” and the verb “facere”, which means something like “different” and “do”.
Definition / explanation
In economics, the term product diversification describes the expansion of a company's product range with a new or different product.
There are three types of product diversification:
horizontal product diversification - With horizontal product diversification, a company expands its range to include products from the same economic level or branch. The new / different products are related to the previous product line. For example, one company has recently started producing hand mixers in addition to microwave ovens - both are kitchen appliances.
vertical product diversification - One speaks of vertical diversification when products are added to the range either from an upstream or downstream production stage. This is also called backward / forward integration. As a company, you orient yourself towards the value chain and try to increase your so-called vertical integration.
Beispielsweise könnte ein Restaurant auch Landwirtschaft betreiben, um so günstig Nahrungsmittel zu produzieren, die später in der Restaurantküche zu Speisen verarbeitet würden. Hiermit hätte eine Diversifikation auf vorgelagerte Stufen stattgefunden. Umgekehrt spräche man von Diversifikation auf nachgelagerte Stufen, wenn z.B. ein landwirtschaftlicher business eigene Geschäfte oder ein Restaurant eröffnete.
lateral product diversification - Lateral or diagonal diversification is understood as the product expansion to include products that have no technical or economic connection with the company's previous product range. A car manufacturer would also produce refrigerators, for example.
Reasons and Risks
Product diversification mainly takes place when a company wants to open up new markets or win new customers. In the case of vertical diversification, lowering production costs usually plays a decisive role. So it's a corporate strategy.
Diversification carries the most risk in the Ansoff matrix. Opening up a new market and converting production involves one-time additional costs, because new know-how and new machines have to be acquired. The Berry Index can be used to measure diversification.