What diversification is and why it’s important?
As an entrepreneur, it’s tempting to stick to what you’re familiar with and what’s proven to be effective. However, in today’s fast-paced business landscape, relying on a single product or service can be risky. To ensure long-term success and sustainability, diversification is essential. This article details down the significance of diversifying your business, the consequences of failing to diversify, the various forms of diversification, methods to implement diversification, and examples of companies that have successfully diversified.
What is a business portfolio?
A business’s collection of products, services, and commercial divisions is referred to as its portfolio. This compilation characterizes the company’s overall plan and establishes its identity. The portfolio may comprise a broad range of products or services, or it may concentrate on a particular specialty or sector.
BENEFITS OF MARKET DIVERSIFICATION
Enterprises can spread their risks and safeguard themselves from losses in one area by investing in various markets or industries. Consider a corporation that exclusively operates in the oil industry, for instance; it could encounter losses if oil prices suddenly plummet. However, if the same company broadens its investments and operates in the renewable energy sector, it can minimize the likelihood of losses due to oil price fluctuations.
Expanding market share
Diversifying into different markets or industries enables enterprises to access new customer bases and broaden their revenue streams. E.g., Consider a company that specializes in manufacturing sports equipment; it can broaden its operations to fitness apparel. As a result, the company can attract new customers who are intrigued by fitness but may not necessarily be interested in sports. This approach related diversification can assist in expanding the company’s market share and boosting its overall revenue.
By investing in various markets or industries, enterprises can identify prospects to increase their revenue and profitability. Suppose a company operates in the healthcare sector; it could also invest in the technology industry to create new healthcare technologies. This plan can assist the company in developing new products that can be marketed to both healthcare and technology industries, resulting in increased revenue and profits.
Enhancing innovation and creativity
Diversifying into different markets or industries enables companies to bring new ideas and perspectives into their core business, helping in the creation of innovative products and services that cater to a diverse customer base. Furthermore, diversification can motivate employees to break out of their traditional roles and explore new areas of the business. This approach can result in increased creativity and innovation, which can propel the company forward.
RISKS OF NOT DIVERSIFYING
Dependence on one product or service
If a business relies heavily on a single product or service, it leaves itself vulnerable to shifts in the market or changes in consumer behavior. If a company only sells a particular product, and that product falls out of favor with consumers, the company could suffer significant losses. Diversification helps mitigate this risk by spreading out a company’s offerings across multiple products and services.
Economic downturns can significantly impact businesses that are not diversified particularly those that rely on a single industry or market segment. If a company only operates in the hospitality industry, it could suffer significant losses during an economic downturn. Diversification can help protect a company by providing a buffer against economic fluctuations.
Not diversifying also makes a business vulnerable to competition. If a company only offers one product or service competitors can easily replicate it or offer a similar product at a lower price. Diversification helps a business stay competitive by offering unique products and services that set it apart from the competition. It also provides a safety net in case one product or service fails to gain traction.
Changing consumer preferences
Consumer preferences are always changing, and companies must adjust to remain relevant. If a business focuses solely on one product that is no longer popular, it risks experiencing significant losses. Diversification permits a company to adapt to shifting consumer preferences by providing a diverse range of products and services.
TYPES OF DIVERSIFICATION STRATEGIES
Concentric diversification refers to a strategy adopted by businesses to expand their operations by venturing into related markets or industries. Essentially, it involves adding new product or service lines that complement the company’s already existing products or offerings. This type of diversification can be observed when a company that manufactures sports shoes diversifies into producing sports apparel or accessories, for instance.
By using their existing resources, capabilities, and expertise companies can leverage their strengths to enter new markets or industries. This approach also mitigates some of the risks associated with diversification since the company already possesses some knowledge and experience in the related field. However, a potential downside is the risk of becoming too reliant on the existing market, which could constrain future growth opportunities.
Horizontal diversification is a diversification strategy where a company enters a new and unrelated market or industry. Unlike concentric diversification strategy, this approach involves adding new product or service lines that are unrelated products to the company’s existing offerings. For instance, a sports shoe manufacturer may diversify into producing consumer electronics.
The main advantage of horizontal diversification is that it allows a company to enter a new market or a new industry with high growth potential. It also reduces the risks associated with diversification as the company does not have to rely on its existing market. However, there is a risk of lack of knowledge and experience in the unrelated field, which may lead to failure.
Conglomerate Diversification strategy
Conglomerate diversification is a type of business diversification strategy where a company ventures into an entirely new industry. This approach involves adding new product or service lines that have no connection with the company’s existing offerings. For E.g., a sports shoe manufacturer may diversify into producing aerospace products.
The main advantage of conglomerate diversification business strategy is that it allows a company to spread its risks across different markets or industries. It also provides opportunities for high growth potential and increased profitability. However, there is a risk of lack of synergy and coordination between the different businesses, which may lead to inefficiencies and reduced profitability.
HOW TO DIVERSIFY YOUR BUSINESS PORTFOLIO?
Conducting market research
Market research is a vital tool for businesses to identify new opportunities in the market, understand consumer needs and preferences, and discover gaps that can be filled by the company’s offerings. With market research businesses can gather valuable data that can guide their decision-making and ensure that product diversification and efforts are strategic and informed. By conducting thorough market research businesses can make sound decisions and confidently expand their offerings.
Investing in new products or services
Investing in new products or services is another way to diversify your business portfolio which can be done by developing new products or services internally or by acquiring other companies that offer complementary products or services to current market. Investing in new products or services allows your business to expand its offerings, reduce its reliance on a single product or service, and tap into new markets and revenue streams.
Mergers and acquisitions
Purchasing other businesses can provide your company with entry into untapped markets, goods, or services. Mergers and acquisitions can also minimize competition, boost productivity, and open up fresh prospects for expansion and growth strategies.
Collaborating with other businesses through strategic partnerships is an effective means of broadening your portfolio without the requirement of significant investments or acquisitions. Partnering with other companies enables you to leverage their skills, assets, and customer base. Strategic partnerships can facilitate the expansion of your existing business’s reach, enlarge its product/service lineup, and allow access to new markets and income streams.
Franchising offers another avenue for expanding your business portfolio. By franchising your existing brand or business, you can broaden into fresh territories and markets without substantial investments or acquisitions. Franchising also allows you to tap into the skills and resources of your franchisees, who are invested in your business’s success.
SUCCESS STORIES OF DIVERSIFIED COMPANIES
Apple started as a computer company but has since expanded into smartphones, tablets, music streaming, and more. This business level product diversification has helped Apple become one of the most valuable companies in the world.
Amazon started as an online bookstore but has since expanded into e-commerce, cloud computing, streaming media, and more this diversification helped Amazon become one of the most dominant companies in the world.
Alphabet, the parent corporation of Google, has diversified into numerous industries, such as self-driving cars, healthcare, and smart homes. This corporate level product diversification has aided Alphabet in sustaining innovation and relevance in a swiftly transforming market.
Coca-Cola has diversified its portfolio by expanding its offerings beyond soda to include sports drinks, juices, and water. Diversification has helped Coca-Cola remain competitive and adapt to changing consumer preferences.
Diversification is essential for the long-term success and sustainability of a company. By spreading risk across different products, services, and markets, companies can reduce the impact of failures and maximize opportunities for growth. While diversification presents challenges, it’s a necessary step for companies looking to remain relevant and gain competitive advantage in a rapidly changing market.
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