Diversify when your market shifts from physical to digital alternatives
If your core product category is being replaced by digital alternatives, you must either expand into the new category or find adjacent markets. Doubling down on the declining category, even if you're the market leader, leads to obsolescence. Market transitions from physical to digital (or analog to software) rarely reverse.
When to use
When you see digital alternatives gaining share in your physical product market. When customer behavior is shifting toward screens, software, or digital consumption.
Don't do this
Assuming your category will always exist because it always has. Defending the old category rather than embracing the transition. Waiting for 'the fad to pass' when fundamental behavior is changing.
1 Founder Who Did This
During 2000s, children's entertainment shifted to video games and digital. Physical toy sales declined industry-wide. Parents gave kids electronics instead of toys at Christmas. Toys R Us remained focused on traditional physical toys.