Factors Governing Diversification of products

The company’s diversification programme is related to a variety of factors which, collectively and individually, determine its extent and nature. One of the important factors is the customer himself. In some lines, a customer prefers to buy a variety of products from one source. For instance, a dealer in sanitary ware must supply a variety of sanitary ware to cater to the specific needs of customers. But if the manufacturer provides only a few products, the dealer may refuse to stock them and will definitely shift to those producers who supply a wide product range. Likewise, dealers and retailers in most cases buy the entire product line from one manufacturer. This is understandable because they want to deal with one manufacturer to enjoy the benefit of the company’s promotional performance in terms of trade.

In same cases, product line diversification becomes essential in order to ensure that customers do not establish relations with other vendors. Thus, a tube manufacturer may find it desirable to make tyres as well. Otherwise, customers will prefer to deal with those manufacturers producing both tubes and tyres. In many cases, it is always profitable to market more than one product in order to counter the effects of seasonal or cyclical fluctuations. For instance, a woolen clothing manufacturer may find it desirable to enter the market of ready-to-wear clothing.

Some firms diversify to spread their risks. A highly successful textile manufacturing firm, to avoid excessive competition, may enter the business of chemicals and dyes. In any -, however, the pressing problem is to determine the variety of items that are to be added to the product line. Salesmen quite often feel that their sales volume will increase substantially with the addition of a number of products in a line. Also, a marketing executive considers diversification as an important tool for increasing the company’s market share and competitive strength. Quite often, it has been noted that companies yield to the pressure of their marketing men and start selling new products. In the initial stages, sales show a profitable growth, but later on they begin to decline. This is mainly because in the early stages, due to the enthusiasm of salesmen to sell the product, the retailers’ tendency to try out new products and also consumer curiosity about them increase the sale; but subsequent sales may decrease if the product fails to satisfy the needs of consumers. So before embarking on any diversification programme, the company should make an intensive market research and then design its sales forecast.