Diversification is when a company produces a range of products that are completely different from one another but can benefit the business as a whole by improving its sales and increasing its clientele.
The most common reason for diversification is the need to survive. Businesses fight for their survival in the market and are willing to expand their production lines to incorporate new products so that they can earn bigger profits.
In cases where a business produces seasonal products that only earn revenue for a selected time of the year, diversification of products can ensure that the flow of revenue remains constant throughout the year.
For instance, the market demand for ice creams, juices and soft drinks is more during the months of summer but less in the winter season. If the companies producing these items diversify their production line to include, winter apparel for instance, then they would be able to earn revenue for their business during the winter season as well.
Not every company needs diversification. Some use it purely as a means of expanding the grasps of their business further into every field of production. Depending upon the strategies implemented and the demand for the goods produced, diversification can be a good investment or a waste of precious resources.
However, if successful, diversification has a lot of benefits and that is why it is considered to be essential for the growth of every business.
Growth of the Business
This one is straightforward and clear. There are a variety of ways in which you can diversify your products, and if you increase the number of products you offer, you will automatically expand your business, resulting in its growth. These ways can include:
Expansion of the Existing Production Line
An example of this could be a company that produces fashionable shoes and diversifies its business to incorporate toys for little children. The two products have nothing in common, but as long as they are both in demand in the consumer market, the company is sure to earn a considerable amount of profit.
Provision of Additional Services
In order to grow a business through diversification, companies often add additional services to existing products. For instance, a car manufacturing company can offer maintenance and repair of its cars on every new purchase. Provision of goods and services alongside one another can maintain steady revenue for the company.
A brand extension also becomes easier with the help of diversification. Famous brands and established businesses can extend the range of products to gain more fame and customers for their brands. Brand expansion is often quite profitable if the same standard and quality of the goods are maintained because brands usually have a large number of loyal customers that will buy every product that they introduce into the market.
Creation of a New Production Line
Some businesses prefer to diversify their products but use differing names for each of their production lines. The reason for this approach is that using the same brand name for new products is a risk. If the new goods and services are not as popular as the previous products, their failure can negatively impact the success of the whole brand.
Hence, the importance of diversification for business success cannot be denied. As the business gains success, it provides monetary benefits to its owners and leads to further opportunities for progress. Considering the number of ways in which diversification can be used to expand and grow a business, it becomes clear that every booming business must eventually opt for diversification to survive and prosper.
However, entrepreneurs need to be cautious when using choosing to diversify their products. Diversification, if implemented too early, can lead to the downfall of a new business and can be a costly failure even for established businesses if it lacks the same quality as previous products.