Diversification is when a company produces a range of completely different products 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 to 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 revenue flow remains constant throughout the year.
For instance, the market demand for ice creams, juices, and soft drinks is more during summer but less in the winter season. If the companies producing these items diversify their production line to include winter apparel, they would be able to earn revenue for their business during the winter season.
Not every company needs diversification. Some use it purely to expand the grasps of their business further into every field of production. Depending on the strategies implemented and the demand for the goods produced, diversification can be a good investment or a waste of precious resources.
Why diversification is important in business?
However, if successful, diversification has many benefits, which is why it is considered essential for the growth of every business and therefor the diversification is important in driving business.
Growth of the Business
This one is straightforward and clear. There are a variety of ways in which you can diversify your products. 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 children’s toys. 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
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. The provision of goods and services alongside one another can maintain steady revenue for the company.
Brand Extension
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 customers. Brand expansion is often quite profitable if the same standard and quality of the goods are maintained because brands usually have many loyal customers who will buy every product they introduce into the market.
Creation of a New Production Line
Some businesses prefer to diversify their products but use different 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 entire brand’s success.
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.