Ford Motor Company wants to double the types of vehicles it sells in China. The models the company sells only compete in 22 percent of the market there. The strategy should make perfect sense to anyone who obtained a business degree. If your company doesn’t sell enough products or services in its current line, expand the offerings. That way, you reach different market niches that wouldn’t consider your other models or versions. Or you create additional products that your customers might buy.
Product diversification can make a lot of sense. And yet, it can be exactly the wrong thing to do. There are three risks you run into through diversification: loss of focus, brand dilution, and consumer confusion.
Loss of Focus The old saying about the jack of all trades being master of none has a lot of truth in business. One of the classic examples is Apple. After the company fired Steve Jobs, it went into one thing and another. There were too many products to do all of them well, and it became impossible to fit them all into a coherent strategy. When he was brought back to the company, Jobs pared ruthlessly. He actually applied his design philosophy to the entire organization. The result? Apple redefines profitability and success, although it does so with relative few products. But what it does make has enough appeal to land plenty of customers.
Brand Dilution Executives often make a strategic error in thinking that they can extend their brands to virtually anything. That’s not the case. The wrong move can hurt your business. BMW would wound itself terribly by producing an economy car, even though there are many millions of people who can’t afford one of the company’s more expensive vehicles. Going that route would tell the well-heeled buyers that BMW no longer spoke to them, that it was too common. As a result, the company would lose market share. According to brand expert Laura Ries, Netflix made a huge mistake — not by raising prices or wanting to separate the streaming and DVD-by-mail businesses, but by trying to use the same brand name for both. The company alienated DVD rental customers by taking the trusted brand name away from them. Instead, it could have been like a Toyota, which also launched Lexus, Scion, and Prius.
Consumer Confusion It’s tough enough to launch new products that reach highly distinct demographic segments, as is true in the automobile business. But when there is little to distinguish the products, you run the risk of confusing the consumers. A famous research paper from 2000 showed that having a much greater number of selections of a product like jam can actually reduce purchase behavior by as high a factor as 10. Diversification can make sense and it can increase profits. But do it badly, and the business will actually be worse off because of it.