Diversification as a Business Strategy
One of the major goals of small businesses today is Expansion. Diversification is one means by which a business can expand, it comes with a wider scope in the operations of the business which could mean an increase in customers and an increase in revenue.
Diversification is a business strategy that involves developing a new product/service or entering into a new market. One argument for this strategy is survival; diversification reduces the risk of having just one line of products and target market, in the event of unfavorable circumstances, there will be a reduced threat to the business survival. When the business is diversified, different lines of products can offset for another and the business generally maintains its stability.
Product diversification can be implemented as an extension in the products that were provided before by adding similar products or services, this is known as concentric diversification. For instance, small business owners selling clothing and textile can diversify into selling shoes and bags; the seller is already familiar with the market and will simply introduce the new products to the buyers.
Conglomerate diversification will include moving to an entirely different or unrelated industry. For instance, the cloth line business owner decides to move into the electronics business. This comes with a lot of risks and the cost is usually high.
There is also horizontal diversification which entails introducing new products to existing customers. E.g., A business in the production of soft drinks introduces a new kind of drink to its customers. While vertical diversification is expanding the business backward or forward in the production cycle. For instance, a shoemaking business owner begins to sell material and equipment for making shoes.
Diversification, irrespective of the risks involved comes with considerable benefits;
Business growth- Availability of more products will result in a wider market and boost the image of the business.
Optimum use of strength and opportunities — The resources of the business will be put to maximum use by the business owner by diversifying. The brand name and reputation will help the new products in the market.
To minimize the risk of loss in an uncertain event- Business is full of risks. In a dynamic business environment, one cannot predict the next event that might cause a boom or repression in operation. Diversifying helps to have alternatives when one results in a loss.
Survival- Dealing in different businesses can help to diversify the cash flow, so when there’s an economic downtime for a particular product line, the business will still stand.
Some downsides of diversifying are;
Conglomerate diversification requires new skills. Management may not have the skill or adequate knowledge of the market within which it now operates.
An improperly planned diversification will have an adverse effect on both the new and existing markets because of insufficient resources.
The high cost of diversifying might also serve as a discouragement to business owners.
Workers' productivity might reduce because of divided attention.
Business owners are encouraged to consider these pros and cons as well as obtain adequate knowledge of products and markets before diversification. There are however other methods of expansion asides from diversifying, the business owner can try mergers & acquisitions or partnerships depending on what is most suitable in such an economic environment.
