diversification – The expansion of business operations into new or unrelated products, services, markets or industries
To remember what diversification means use the following mnemonic:
This was quite a diversion and the sign ahead was verification (diversification) that we were somewhere new and unrelated.
The goal of diversification is to reduce risk by spreading out investments and revenue streams. By diversifying, a company can protect itself from economic downturns in one particular market or from a decline in demand for a specific product. Additionally, diversification can lead to increased efficiency and productivity as companies can leverage their existing resources and expertise in new areas. However, it’s important to note that diversification also comes with its own risks, such as spreading resources too thin or expanding into a market which later fails. Therefore, it’s crucial for companies to carefully consider their diversification strategy and ensure they maintain a focus on their core business while exploring new opportunities.
An example of a business successfully diversifying is Amazon. Amazon started as simply an online bookstore, but its practice of diversification in the products and services offered has been a key reason for its huge growth. No longer just selling books, Amazon offers an incredibly wide variety of products, cloud computing services, and even streaming original content.
Another example of a company successfully diversifying is Disney. Originally focussing on film production only, the company has since diversified into theme parks, television, and even cruise lines. This diversification has helped Disney become one of the most popular and valuable entertainment companies in the world.
However, despite many success stories of the diversification strategy, there are also examples of it failing. One of the examples is the video rental company Blockbuster, which dominated the movie rental market in the 1990s. The company tried to diversify into the newly growing online streaming market but mismanaged the transition, failing to commit to the market early enough to compete with companies such as Netflix.
Another example of a diversification failure was Richard Branson’s Virgin Group expanding into the carbonated beverage market with Virgin Cola in 1994. Despite a small amount of success in the UK upon the launch, the diversification was an overall failure as it could not compete with the influence and brand loyalty of major market shareholders PepsiCo and Coca-Cola. The product was discontinued in 2009 after being limited to availability only on Virgin operated trains, planes and in Virgin stores.
Diversification is an option that many farmers have adopted to subsidise their farm life. This produces increased revenue and secures their future. The ways that farmers diversify include the following:
- Using spare sheds and renting them out as workshops or storage space.
- Selling produce created on the farm in a farm shop.
- Converting spare buildings into tourist accommodation.
- Adding value to the grown produce by manufacturing such things as yoghurt, cheese or cider.
- Renting spare rooms as bed and breakfast.
- Renting a field out for caravan parking.
- Building permanent caravan parks.
- Camping sites for tents.
- Building motorbike tracks through woodland.
- Fishing ponds which farmers keep stocked up.