Share this Story: Product diversification can be a boon to business... or not
Product diversification can be a boon to business... or not
While many businesses strive to achieve growth through product diversification, deviations from traditional products and target audiences can throw many businesses into a tailspin.
Denise Deveau
The business world has seen spectacular hits and misses on the part of companies attempting to step outside their comfort zones.
Walmart's foray into groceries; Indigo's expansion into giftware; Olay's move from wrinkle creams to beauty products for all ages; banks adding insurance services and wealth management to their portfolios…These are all examples of product extensions done right.
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"The greatest product extension success story of modern times has to be Apple," says Toronto-based author and branding consulting, Bruce Philp. "Fifteen years ago it was a computer company, but it managed to penetrate music, video distribution, home entertainment and telephony. Nobody saw that coming."
But for every successful launch a noteworthy failure can be found, from the McPizza fiasco in the early 1990s and the more recent Adidas after shave launch, to Birks' and Eaton's unfortunate move to extend a high-end brand to a lower end customer base.
The greatest product extension success story of modern times has to be Apple
Success or failure lies in understanding the dimensions that constitute a whole, Philp explains. "A product or service has three dimensions. It has to have a coherent target group. It has to have a coherent competitive set. If I'm Michelin for example, I'm in a group of brands that would include Goodrich. And it has to have a point of difference in either functionality or character."
Introducing a new product or line extension alters one or more of these coordinates, he adds. "If you change one thing, the risk is relatively low. Change two and your risk increases exponentially. If you change all three, you're essentially starting a new business. The most successful introductions are those that only change one variable at a time."
Apple for example never put at risk its target group and point of difference. "It was able to expand the brand to ludicrous levels simply by messing with the competitive set variable. At first it was Microsoft and IBM. Now it's Samsung," Mr. Philp explains.
When they have a successful brand, they look for ways to leverage that success and squeeze every drop they can out of a new brand until it dies down the road
In some cases, it is better to gradually work your way into a new product line. Procter & Gamble for example created a beauty brand juggernaut with Olay by introducing incremental products designed to dispel the old Oil of Olay wrinkle cream image. "Taking tiny steps gave them access to larger markets," Mr. Philp says.
The ability to extend product lines depends very much on how the company has traditionally branded itself, says Kenneth Wong, professor of marketing at Queen's School of Business. "If you think of Indigo as a bookstore, then moving into giftware and toys seems ludicrous. But if you consider Indigo to be a store that sells things book lovers buy, there's coherence to that."
One significant advantage is the ability to leverage existing branding and infrastructure, such as accounting and logistics, to reduce overhead and achieve economies of scale, he notes. "At the same time, you're able to reduce risk across product categories. If sales are down in one, they may be up in another."
Stellar product extension efforts in Wong's mind include London Drugs' move into cameras, computers, liquidation of goods, airlines and fishing lodges. "Virgin is another with records, soft drinks, airlines and phones. For Amex it's banking, insurance holdings and direct marketing services. In most cases these strategies revolve around a common customer with multiple product needs."
That's where Eaton's and Birks went wrong, he believes. "When they ventured into low-end offerings, they didn't realize that two different audiences required two different infrastructures. There has to be some sort of commonality between the existing and new business for a product extension to work."
While Cam Heaps, co-founder of Steam Whistle Brewing in Toronto, recognizes the role of brand extension in his industry, his company chose to stick to one product line. "I'd say 99.9% of people in the beer industry support product extension. When they have a successful brand, they look for ways to leverage that success and squeeze every drop they can out of a new brand until it dies down the road."
With such a clearly defined audience however, brewers are one group that rarely reach beyond the beer drinking community, he adds. "For Molson Canadian to come out with a Molson Canadian bottled water – that just doesn't happen."