Diversification is a strategy to reduce risk and is used by different companies to expand their reach. This strategy allows businesses to increase profitability by diversifying new products or services into other areas.
One simple way to see it is this: imagine that you have only one big client or just one product that you sell. This means that you have a single point of failure. That can be hazardous because if that single product fails or that one big customer goes bankrupt, then you have a problem that could break your business.
The importance of business diversification is well understood by businessmen like Stefan Soloviev who decided to reorganize the family business under a holding company. The real estate industry is an excellent example of one where diversification is rising more every year.
How to Get Business Diversification
Even when you understand why diversification is important, it can be a little challenging to understand how to do it. Product diversification can be concentric. This is when the business adds similar lines to a current product. Conglomerate diversification is when the business moves into completely unrelated areas and horizontal diversification is when it enters a new area but targets existing customers. However, the objective of all of them is the same, to diversify.
Research and Development
The process of creating new products and services is a process of research and development; to do so is important and necessary. It’s also a huge investment, but investing in research and generating new ideas provides opportunities to diversify.
Target Other Markets
Another important and essential step of diversifying is targeting other markets. Managers should research customer demands and what the company’s strengths are. In other words, it is necessary to think about what the company does better than its competitors and how it is received by customers.
Reach a New Client Base
As stated before, having just one big client is not a good idea. When a business diversifies, its client base must diversify, too. It could take an investment of time and effort, but it will pay off.
The Bottom Line
It is important to understand that despite the benefits of diversification it can have drawbacks. There are some approaches that are riskier than others, but when managers do it with the proper care the profitability increases considerably. There are some times when diversification becomes a necessity for company survival. However, you don’t have to get to the point for your company to benefit from this sort of action.