Product leaders often find themselves at a critical decision point. Should they keep investing in their original core product or should they seek new opportunities for their product?

This happens not only when a product struggles to find traction in a market, but more often when a product successfully finds product-market fit and the company is ready to sustain further growth.

The real question is not where to find resources to grow, but where to invest them.

To answer this question, it makes sense to consider the Ansoff growth matrix, a framework that looks at growth from two dimensions:

• Market: how to make best use of any knowledge and presence in an existing market to generate new product offerings.
• Product: how to exploit existing product capabilities and competences to strengthen or create a new position in the market

Growth happens by exploring both dimensions simultaneously and deliberately choosing what to evolve and what to completely change.

Diversification is the most aggressive strategy for growth. It is the only strategy where a company bets on two unknowns at once: a new product and a new market. Hence, diversification can destroy the most value if done wrong, but can unlock the highest rewards if pursued correctly. For founders and strategists who have earned product-market fit and are asking “what’s next?”, understanding diversification is the natural step forward.

This post addresses product diversification as growth strategy is structured in 4 main sections.

Meaning of product diversification	Clarifies the meaning of product diversification and how it sits within the Ansoff Matrix alongside the other product growth strategies.
Types of product diversification	Breaks down the three approaches to diversification so you can identify which one fits your situation.
Reasons to diversify	Explores the main reasons behind a product diversification strategy and when it makes more sense than the other options.
Best practices for product diversification	A practical process, from planning through execution to consolidation, to turn a product diversification strategy into a structured move.

Meaning of product diversification

Product diversification is not the only option for product growth. Many confuse diversification with other growth strategies. The difference is subtle but mistaking diversification for something else sets the wrong expectations, allocates resources poorly, and increases the risk of failure.

The four growth strategies are mapped by Igor Ansoff’s Product/Market Matrix (the Ansoff Matrix) along two dimensions: the product (existing or new) and the market (existing custom er segments or new ones).

The 3 growth strategies before diversification

The Ansoff Matrix defines four product growth strategies depending on whether product and market are new or existing.

Each startegy has its own level of risk and reward, as described in the following table.

	Market Penetration	New Product Development	New Market Development
Product	Existing	New	Existing
Market	Existing	Existing	New segment or market
Risk	Low	Moderate, mainly due to product delivery	Moderate / High, due to the uncertainty of the market segment
Reward	Defend and grow market share by better addressing existing customer needs, for example with new features or different user experience	Differentiate product offering while maintaining focus on customer needs	Address unserved needs
Best when	Market is not saturated and competition is limited	Customer needs are clear but poorly served with existing offerings	Existing product can serve a new customer segment with limited adaptation

A note on “new market”. A new market does not necessarily mean a completely different industry. It means a new customer segment: a distinct and identifiable group with a clearly different need.
For example, consider Polar. The company is traditionally known for high-end heart rate monitors for elite athletes. However, over the years Polar has grown by targeting new customer segments, including health-conscious individuals seeking accurate vitals monitoring.

The fourth way to grow: product diversification

Diversification targets a new customer segment with a new product. It does not necessarily require entering a completely unrelated market. What makes it “diversification” is the combination of both unknowns at once: a product that does not yet exist in your portfolio and a segment whose needs you have not yet served. This is what separates it from new product development, which stays anchored to existing customers, and from new market development, which relies on an existing product.

The reward is twofold: access to an entirely new customer segment, and a new product platform that can fuel further growth. This choice is best applied when a company spots an underserved segment that its existing product cannot fully address.

Common paths to execute product diversification

A diversification strategy typically demands new capabilities and challenges established ways of operating. To manage risk, some companies first pursue new product development or new market development before making the diversification leap.

Those that move directly to diversification typically do so through one or more of the following approaches:

1. Distribution partnerships — develop new sales or distribution agreements with existing partners that provide a lower-risk entry into the new segment.
2. Internal R&D — leverage existing innovation capabilities to build new products organically from the ground up.
3. Licensing — acquire intellectual property, exclusive production rights, or distribution rights from another company.
4. M&A — merge with or acquiring a player that already has the product developed or already serves the target segment.

Types of product diversification

There are three different types of diversification, depending on how far a value proposition stretches
from its current product and market position. They are: concentric, horizontal, and conglomerate diversification. Choosing the right type depending on a company’s ambitions and capabilities, is the first practical decision in a diversification strategy.

Concentric diversification

Concentric diversification is the lowest-risk form of diversification. A company expands into an adjacent customer segment with a new product that is closely related to its existing capabilities, technology, or distribution infrastructure. The new product is different enough to address a distinct segment, but built on foundations the company already owns.

Choose concentric diversification if your company already has strong core capabilities, such as a patent, a software platform, an exclusivity agreement, a proprietary process, that you can repackage and reuse to serve a new but related need.

Example: A Middle East startup offering smart lockers for online retailers as an alternative to doorstep delivery wanted to grow its total addressable market. Rather than focusing only to large retailers through B2B agreements, they developed a plugin to integrate with Shopify and local e-commerce platforms. The plugin acted as a new product to target small online merchants and their end consumers directly. The new product wrapped the same core logistics engine and physical locker infrastructure into a new customer interface. As a result, market reach more than doubled while brand identity, physical assets, and core operations remained intact.

Horizontal diversification

Like concentric diversification, horizontal diversification targets a new but adjacent market segment. However, the company cannot rely on repackaging existing capabilities. Hence, the new product shares no technical or operational foundations with the existing one. The only strategic leverage is market proximity: the new segment is close enough to the existing one that the company’s market knowledge, brand, or commercial relationships provide a meaningful head start to position the new product.

From a product development standpoint, horizontal diversification is more demanding than concentric. However, the reward can justify the effort: by reaching a new customer segment, you differentiate your revenue into two different streams. Thus, by serving multiple segments, you can paradoxically reduce your overall portfolio risk, despite of the higher product development risk in the short term.

Example: A European startup providing childcare centers with a platform to manage operations and parent communication identified an adjacent segment: small childcare operators struggling to manage part-time workers’ schedules and leave requests. This was a distinct group with a clearly different need, workforce management, unrelated to the parent communication platform the company had built. Market research confirmed that existing workforce management solutions were not designed for the specific constraints of small childcare operators. The company therefore developed a dedicated time management solution from scratch, with no meaningful technical overlap with its core product, but with solid market awareness.

Conglomerate diversification

Conglomerate diversification is the most demanding of the three options. It involves developing a new product for a completely new market, with no meaningful overlap in technology, capabilities, or customer knowledge. The company is essentially starting a new business from scratch while running an existing one.

Unlike concentric and horizontal diversification, conglomerate diversification offers no familiar ground to build upon. Everything from product development to distribution must be built from the ground up. The potential reward is full portfolio diversification and exposure to entirely new industries. The cost is complexity, resource intensity, and significant execution risk.

This is why conglomerate diversification is largely the domain of large corporations with the capital and management bandwidth to absorb that overhead. If you comes from an SME, rather choose concentric or horizontal diversification.

Reasons to diversify

For large companies, diversification is a corporate-level strategy focused on portfolio management and risk spreading across unrelated business units. In contrast, for startups and SMEs, diversification is typically a business-level or product strategy decision. In these smaller firms, diversification represents an evolution of the core product to capture adjacent market opportunities, making it an integral part of the product roadmap.

As a product leader looking for growth opportunities, you need a clear reason to choose diversification over the other three options. In fact, diversification is probably the least obvious and more complex among the four growth strategies.

This means that the reason to choose diversification must be solid. The good news is that it does not have to be a one-time, all-in commitment. As we will see later, you can explore whether diversification is the right option by running experiments with limited allocated resources.

So when does diversification make sense? The reasons differ by company size. Smaller companies tend to diversify by reaction or opportunity. They respond to market shifts or capitalize on existing strengths. Larger companies diversify more deliberately, driven by risk management and portfolio ambidexterity. The following three reasons apply across the board, but carry different weight depending on where you are.

Reaction

When your current market becomes saturated, competition intensifies, or your product risks obsolescence, diversification should be on your strategic decision table.

However, when you diversify as a reaction, you need clear evidence, not just assumptions, before moving to implementation. You need clearance on which new customer segments to target and why your capabilities give you a credible path to serving them. Without that, a diversification initiative becomes more of a quick fix rather than a thought-through strategic solution.

Once you have the evidence, concentric diversification is typically the less risky move. It lets you rely on existing capabilities rather than rebuilding from scratch under pressure.

Opportunity

Rather than from competitive pressure, opportunity-driven diversification starts from reflecting on your own capabilities. You may have technical know-how, intellectual property, R&D results, or unique customer relationships that position you favorably to an unmet need in an adjacent segment, at a lower cost and risk than a competitor starting from zero.

This is particularly relevant for startups. Research by Marc Gruber and Sharon Tal on technology startups shows that hyper-focus in a single market can become a dangerous constraint. In their study, 72% of the companies analyzed changed their market focus within their first three years. Keeping a small number of related market opportunities open, rather than locking in prematurely, gave the most successful ventures room to find more viable ground. An additional benefit is that moving early into an adjacent segment can close the door on competitors before they identify the same opportunity.

Risk hedging

The investment logic of “not putting all the eggs in one basket” applies to product strategy too. If a customer segment’s viability weakens or a disruptive competitor enters the market, a diversified product portfolio reduces the risk of collapse across the whole business. This is precisely why larger companies maintain broad product portfolios. Google, for example, runs dozens of products, with many of them generating more than a billion dollars in annual revenue.

For large companies, risk hedging alone can justify diversification. For small companies and startups, it cannot. Resources are tight, and spreading them across multiple bets for the sole purpose of hedging can paradoxically reduce the odds of survival.

For SMEs, risk hedging alone is not a reason to diversify. Spreading resources too thin across multiple bets without a stronger strategic rationale is itself a risk.

Portfolio ambidexterity

Risk hedging responds to uncertainty that already exists. Portfolio ambidexterity goes one step further: it acknowledges that the business environment will keep changing in ways that are impossible to predict, and builds the organizational capacity to adapt before the pressure arrives.

The concept involves the ability of an organization to balance two apparently contradictory, yet complementary, activities simultaneously:

• Exploitation: Continuously evolving existing products and capabilities to stay competitive through market shifts, regulatory changes, and incremental technological innovation.
• Exploration: Building and nurturing new capabilities in anticipation of future market needs. This is often implemented through dedicated organizational units with mandate and resources to pursue innovation beyond the core business.

A prime example of ambidexterity-driven diversification is Telefónica. In 2012, as Big Data technologies emerged, the global telecommunications giant recognized the untapped potential in the vast volumes of network data it produced daily. Rather than treating this as an opportunistic side project, the telecommunications giant established a dedicated business unit to develop data analytics services. They started using anonymized, aggregated data to provide insights on crowd mobility. They finally developed Smart Steps, a business intelligence product for the retail and the transportation sectors. While this case may appear to be simple opportunity-based diversification, Telefónica’s ability to execute was rooted in a deliberate ambidextrous culture. They had the structural agility necessary to explore a new opportunity without compromising their core business.

Best practices for a product diversification strategy

If you decide that product diversification is the right growth option, you will quickly find there is no universal recipe. Every company interprets it differently based on its capabilities and constraints. What is consistent across successful cases is that diversification is never improvised — it requires discipline and preparation. The following best practices, organized across three phases, raise the chances of getting it right.

The three phases: preparation, execution, consolidation.

Preparation

Before committing resources to a new product or segment, you need to validate that the opportunity is real, that your capabilities give you a concrete path to it, and that you can sustain the investment long enough. The following practices help you do that.

Map new demand: Identify additional needs your product can serve by looking in three directions:

• Upmarket: Add premium features for high-margin customers.
• Downmarket: Simplify to a low-cost, essential version for price-sensitive customers.
• Adjacent: Apply your core logic to solve analogous problems in different industry sectors.

Log customer painpoints: Setup a system (for example using tools like Freshdesk or Jira) to log feature requests and complaints. Consider them as diversification signals. Regularly analyze whether these requests reveal a need for an entirely new product rather than just a feature update.

Unbundle capabilities: Create an inventory of technical skills, proprietary technology, data sets, modular software components, team know-how. Use “what-if” brainstorming to imagine these resources decoupled from your current product and combined to address new customer needs. For example: “What if our logistics routing algorithm was sold as a standalone API for city planners?”

Seek non-consumers: Identify your “non-consumers”, individuals or organizations that would find your product useful but are unable to purchase or use it due to limitations in cost, skill, access, comfort or awareness. Create specific “Non-consumer personas” to capture and understand their barriers to entry.

Scan the horizon: Beyond your current environment, evaluate what is changing by actively monitoring:

• consumer behaviors shifting (e.g., the move toward sustainability or the “sharing economy”).

• technological innovation that can make a new product possible or your old one obsolete.

• new regulation that can create barriers to entry or opportunities for compliant products.

Experiment: Before fully committing to diversification, you need to make sure the diversified product finds product-market fit. Run experiments to test technical feasibility, and that your product offering meets what customers need. Don’t be afraid to change your hypotheses or reiterate based on failed experiments. Although this an execution-driven step, it is part of the preparation phase.

Calculate resource commitment: Diversification requires capital. Evaluate how much cash is needed to fund the new product or venture for at least 18–24 months without requiring immediate ROI. Commit only when you are confident you can sustain it.

Execution

Once you have identified a viable diversification initiative, it is time to execute. Diversification creates organisational change. John Kotter’s 8-step change process offers a useful structural reference. Here the steps on how to apply that thinking in practice.

Initiate change: Establish a sense of urgency by ensuring the diversification vision is clear and shared across business and product teams. Assign a carefully selected, cross-functional team (at minimum someone from sales and marketing, product, and technical operations) to drive the initiative forward.

Define objectives and key results: Set clear, measurable objectives with key results you will track throughout. Many companies use aspirational OKRs to keep teams committed to high-risk, high-reward initiatives.

Position the brand: Decide whether your current brand can stretch credibly into the new category, or whether you risk diluting your core value. A sub-brand or entirely new identity may be the right call.

Activate channels and partners: Identify and activate the specific distribution channels and partners required for the new segment. This may mean building a new sales capability, entering new digital marketplaces, or leveraging existing partnerships in the target industry.

Estimate time-to-market: Map all operative steps from conception to launch. Do not underestimate the gap between the two.

Share progress: Keep the rest of the organization informed as the project develops. Many startups dedicate a slot in their weekly all-hands meeting to new business opportunities. This fosters transparency and prevents the initiative from feeling like a black box.

Kill or move on: Diversification requires the courage to stop. If a product fails to hit its milestones or a segment proves not viable, kill the project and move on. Don’t fall in love with the idea. Despite its vast product portfolio, Google has killed hundreds of products to maintain focus.

Consolidation

While a diversification initiative is underway, maintain oversight on both your core product and the new initiative itself. Stay open to adjusting course when things do not go as planned.

Track performance: Establish a dedicated dashboard to monitor the health of the new initiative. Key metrics should include:

• Customer acquisition cost: the average cost of acquiring a customer in the new customer segment

• Customer lifetime value: the gross profit the average customer generates over their retention period.

• Time to profitability: How long before the new product becomes cash-independent.

Standardize and scale: The “scrappy” methods used during execution must now be professionalized. Document processes, stabilize the supply chain, and integrate the new product into your standard quality assurance and customer support workflows.

Absorb or spin-off: While during the initial execution phase your diversification initiative may be an isolated project with its own team and resources, once the new product or brand establishes itself, decide if it can be absorbed to reduce overhead. Alternatively, if it requires a different culture or brand identity, keep it as a separate business unit or as a spin-off.

Stay focused but keep yourself open

Diversification is probably the most rewarding option for product growth, but it is also the most complex, because it requires not only to create a new product but also to target new customer segments. If you are not sure whether diversification is the right way for your product or business to grow, evaluate if the any of the other less risky options are more suitable.

1. If your current target customer segment is large enough, easily reachable, and not dominated by one or two dominating players, market penetration (improving your current product to better serve your customers’ needs) may be the right call.
2. If your current customers trust you enough to ask you for additional products, new product development (for the existing customer segment) is your lower-risk path.
3. If you find other customer segments that may benefit from your current product and appear underserved by current offerings, consider new market development (repositioning your current product to the new customer segment).
4. If you find new customers who need a product that does not yet exist, and you have the capabilities to build it, diversification may be your strongest growth path.

Regardless of the growth path you choose, what matters most is to be prepared and not assume that the market you operate in today will stay the same for long. Keep scanning and build your base.