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What are the reasons for product diversification?

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Quick Answer

Reasons for product diversification include expanding into different market segments and expanding sales. Diversification can also help reduce risk, according to Inc. Magazine.

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Product diversification is a strategy that many businesses use to grow and manage risk. It can involve creating new products, adapting existing products to suit the needs of other market segments or acquiring other businesses to tap into their product markets.

Many companies diversify to reach new customers and increase sales. However, there are several other reasons to pursue a diversification strategy. It can help distribute risk within the company as it offers other sources of income when one area of the business fails. Diversification can also help companies acquire new skills, build strong brands and take advantage of economies of scale. Diversification can also refocus a company in a different direction, help keep it secure against takeover maneuvers, or help it acquire new assets.

Diversification can have downsides and may not be appropriate for all businesses, as reported in Entrepreneur. It can eat away at existing sales because the new products may simply attract existing customers and cause the old products to become obsolete. However, this effect may be useful for businesses that are experiencing declining sales, as it can help bring back customer attention and phase out poorly performing products or services.

Businesses should plan diversification carefully. They should focus on the needs of their customers and new target customers and position new products in those target segments.

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