Diversification in business could bring about being able to manage risk. In a simple sentence, “do not put your eggs into one basket.” It will also make sense to define risk management in simple term before going further with my blog post. Risk Management is the process of identifying, assessing, and controlling threats to a sole trader or an organisation’s capital and earnings. These risks stem from a variety of sources including financial uncertainties, legal liabilities, technology issues, strategic management errors, accidents, natural disasters etc. Diversification can be explained as a growth strategy that involves entering into a new market or industry – one that your business does not currently operate in.
WHAT IS AN EXAMPLE OF DIVERSIFICATION IN BUSINESS & WHY IS IT IMPORTANT?
An auto company may diversify by expanding into a related market like selling of trucks. When there is diversification in investments, the tendency of financial losses will be greatly minimised in order to maximise your returns. For example, Coca Cola is a classic example of how to do diversification, the company is committed to exploring new ideas and growing their product to the extent that even in a world when some people are seriously high sugar intake, the Coca Cola brand is still largely adored.
WHY SHOULD A COMPANY/SOLE TRADER DIVERSIFY?
Diversification is a risk-reduction strategy used by businesses to help expand into new markets and industries and achieve greater profitability. This can be attained by diversifying new products and services in new markets, targeting new customers, and increasing profitability.
WHAT IS DIVERSIFICATION IN INVESTMENT?
Diversification can be explained as the practice of spreading your investments around so that your exposure to any one type of asset becomes limited. This practice is designed to help reduce the volatility of your portfolio over time.
WHAT STRATEGY SHOULD BE ADOPTED TO DIVERSIFY BUSINESS?
It depends on what works best for you. It may require modern technology, skills, or marketing approach to diversify and achieve massive and positive results. The following is a type of diversification: Concentric diversification, it involves adding new products that have technological or marketing synergies with existing product lines or industries, but appeal to new customers. For example, a PC manufacturer could start producing laptops etc.
DOES IT PAY TO DIVERSIFY, WHY?
Diversification could lead into poor performance though. It could result to more risk and higher investment fees. The word “diversification” usually makes investors feel safe. However, it could give a false sense of security and lead to investment mistakes if the reverse becomes the case. It is hard to argue with the common sense behind diversification within the investment process.
A FEW DIFFERENT TYPES OF DIVERSIFICATION STRATEGY
Lighter Capital Blogger (The Start-up Finance Blog) explains diverse types of diversification strategy in the world of business in two paragraphs below. According to the blogger indicated above, he/she explains that there is not one strategy that fits all solution for growth. Diversification can present itself in a variety of ways depending on a business owner wishes to get started with and can either be entirely different from a current business.
“If a company decides to add more products or goods/services that are unrelated to what they are currently offering, but since it will enable them to meet some more needs of their existing customers; this is known as horizontal diversification. Horizontal diversification is known to be diversification strategy with the least amount of risk involved. The reason being a sole trader, or a company is working mostly within familiar customers and market segments. For example, if a company dives into the production of Printers. This is a different product altogether, but it has the potential to attract many of their existing customers.”
“Concentric diversification occurs when a company enters a new market with a new product that is technologically similar to their current products and therefore are able to gain some advantage by leveraging things like industry experience, technical knowledge, and sometimes even manufacturing processes already in place. Concentric diversification can be beneficial if sales are declining for one product, as loss in revenue can be offset by a rise in sales from other products. An example of concentric diversification would be a computer manufacturer who diversified from clunky desktop PCs into laptop production. This would allow them to immediately take advantage of the new wave of computer users who demanded more portable solutions.”
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