In simple language, diversification is all about creating new products and services and exploring new markets and customers. It also means taking more business development risks to make your company safer in the long run. While utilizing diversification isn’t completely necessary for a business to survive or thrive, it may help reduce overall business risk. To illustrate, pretend that you own a company that sells computer hardware. If you want to diversify this business, you could easily add other products and services such as software, repair services, and tech support services. You diversify by going from one product line to two products and two services, all under the same business umbrella. This means if one product’s sales lag during a particular period, the other three offerings can help offset the poor performance of the first product. Sales and profits from each product tend to fluctuate over time, but overall business sales and profits may become more stable if you have a variety of things to offer. On the flip side, you should keep in mind that attempting to diversify your business in completely unrelated markets can actually increase your risk. This can happen because you don’t have expertise in the newly entered market. Imagine that the computer company mentioned above decided to add books to its product line. While the owner may think he’s diversifying, if he doesn’t have the know-how to run a book business, it could negatively affect his software company. Adding more products and services may not necessarily reduce risk, which is what diversification is all about.
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