Final answer:
A diversification strategy entails introducing a new product or service to a new market segment, leveraging product differentiation to provide variety and compete beyond just price in a monopolistically competitive market.
Step-by-step explanation:
A diversification strategy often involves introducing a new product or service to a new market segment. This approach allows companies to branch out from their current operations and reach new customers, minimizing risks associated with relying on a single product or market. One of the key concepts tied to product launches and market diversification is product differentiation. Product differentiation is essential in establishing a product's unique attributes and appeal in the face of monopolistic competition. Companies can differentiate their products based on a variety of characteristics such as styles, flavours, locations, and other features which then enables them to stand out in the marketplace.
Product differentiation plays a crucial role in this strategy as it allows a company to offer something unique that can cater to the tastes and preferences of a different customer segment. By bringing differentiated products into new markets, businesses strive to create variety and avoid the limitations of perfectly competitive markets, where products are undifferentiated and competition is based mainly on price.