Management Notes

Reference Notes for Management

Diversification is best described as which of the following?

Diversification is best described as which of the following?


A. Existing products in new markets
B. Existing products in existing markets
C. New products for new markets
D. New products for existing markets

The Correct Answer Is:

C. New products for new markets

Correct Answer Explanation: C. New products for new markets

is the correct answer when describing diversification. Diversification involves a strategic expansion into entirely new markets with entirely new products or services.

It is a riskier but potentially rewarding approach to growing a business because it often requires developing products or services that the company has little to no experience with and targeting customer segments that may be entirely different from the company’s existing customer base.

Diversification is often pursued when a company seeks to reduce its dependency on existing products or markets, or when it identifies opportunities for growth outside its current scope. This strategy is associated with exploring uncharted territory, aiming to create new revenue streams that are unrelated to the company’s current offerings.

Here’s a detailed explanation of why the other options are not correct:

A. Existing products in new markets:

option corresponds to a strategy known as market development, which involves introducing existing products or services to new customer segments or untapped geographic areas. In this scenario, the company is essentially leveraging its established products to address new audiences or regions.

It does not involve creating entirely new products, but rather extending the reach of existing offerings. This strategy is less risky compared to diversification because it capitalizes on the company’s existing strengths and expertise.

B. Existing products in existing markets:

This option aligns with the strategy of market penetration. Market penetration involves intensifying efforts within current markets by selling more of the same products or services to the existing customer base.

Companies pursuing this strategy aim to capture a larger share of the market by increasing their sales volumes or by gaining a larger percentage of the existing customer base. Market penetration is about maximizing the potential of established products in familiar markets, rather than venturing into new territories.

D. New products for existing markets:

This option relates to a strategy known as product development or innovation. Product development involves creating new products or enhancing existing ones to meet the evolving needs and preferences of the company’s current customer base.

It does not entail entering entirely new markets, but rather expanding the range of offerings within existing markets. This strategy is often used to stay competitive, respond to customer feedback, or take advantage of emerging trends within the company’s established customer segments.

In summary, diversification represents a strategic move involving entirely new products or services in entirely new markets. It is a more radical approach, as it involves venturing into unexplored territory.

The other options, while important growth strategies in their own right, pertain to different approaches such as market development, market penetration, and product development, which are distinct from the concept of diversification.

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