What is Diversification?
Essentially, business diversification is the act of expanding a company, bringing it to a new, unfamiliar market, and potentially making money in that new market.
As stated by Forbes, "Diversification is about building new products, exploring new markets, and taking new risks."
Diversification is a complex task not suitable for every business / service. However, when done correctly, diversification can lead to massive company growth and success. Also, company diversification allows for one to not keep all their eggs in one basket. Working in various market ensures that if one fails, the company will not fall.
Pros to Diversification
- Can be very lucrative
- Success breeds success... if your markets are making money, you can spend more on new markets
- One market failing does not mean the whole company falls
Cons to Diversification
- Incredibly difficult to pull off... Typically businesses only have proper experience in one market
- May spread business too thin... It is very hard to give each market the attention it requires
- Very risky... Deciding to work in a market you know little about is very hard
Company diversification is a risky business that should be well thought out. Only companies with the resources to enter a new market should choose to do so. For example, a company successful in making cereal should have enough money to pay professionals to deal with another branch of business. If they wanted to enter the car market, they should have the money and connections to staff people with experience in the car market. Done correctly, diversification can lead to a powerful monopoly making millions (Nestle, Proctor & Gamble, Coca-Cola). All-in-all, diversification is not necessarily a good idea for 95% of business, especially small ones. Only already massive companies should consider expanding into a new market.