Explain the positive and negative aspects of pursuing a single-product strategy versus a diversification one. Provide an example of a company that uses each type of strategy.

Question

What will be an ideal response?

Answer 1

In a single-product strategy, a company makes and sells only one product within its market. Making just one product allows you to focus your manufacturing and marketing efforts just on that product. This means that your company can become savvy about repairing defects, upgrading production lines, scouting the competition, and doing highly focused advertising and sales. The risk, of course, is that if you do not focus on all aspects of the business, if a rival gets the jump on you, or if an act of God intervenes (for a florist, roses suffer a blight right before Mother's Day), your entire business may go under. The single-product strategy is seen all the time as you drive past the small retail businesses in a small town: There may be one shop that sells only flowers, one that sells only security systems, and so on.

Diversification is operating several businesses in order to spread the risk. Diversification may be related or unrelated. Related diversification has three advantages: reduced risk—because if one product is weak, others may take up the slack, management efficiencies—because administration is spread over several businesses, and synergy, that the sum is greater than the parts. You see the diversification strategy at the small retailer level when you drive past a store that sells gas and food and souvenirs and rents DVD movies.