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What Is Business Diversification?

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  • Written By: Esther Ejim
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  • Last Modified Date: 16 September 2014
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Business diversification refers to the process by which a company or organization employs the diversification business strategy as a means to an end. There is no one reason for embarking on business diversification, because it depends on the aim that the company or organization in question is trying to achieve. Some companies may decide to embark on business diversification in order to spread their risks, while others may simply use it as a means for expansion and growth. The various forms of business diversification include areas like customers, products or services, geographic and suppliers.

Customer diversification is a form of business diversification that involves plans by a company to diversify its products or services with the specific aim of targeting customers who are not currently a part of the company’s chief customer base. For instance, a company that is known for the production of products primarily aimed at teenage girls may decide to diversify its business with the aim of capturing the more mature women demographic. Such a business diversification process may include the production of items aimed at this selected demographic and the creation of awareness relating to this new diversification process. This strategy is important because it helps the company spread or mitigate its risks so that if there is a decline in the teenage market, the company can still rely on the business from the older women.

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Another process of business diversification is geographic diversification. Just like the name suggests, geographic diversification involves the physical aspects of the efforts by a company to diversify. This process is even more necessary in the era of globalization where many companies realize there are markets beyond their geographical boundaries. A good example of companies that utilize this type of diversification are the various fast food companies that often open new branches in different locations all over the world in an effort to increase their reach and consequently maximize their profits.

A diversification of suppliers means that a company diversifies the source of its raw materials and other necessary supplies. The aim of this diversification tactic is also the reduction of risks. When a company relies only one supplier or source for its raw materials, it stands the risk of not having any option if there is ever a problem with the supplier or source. For instance, the supplier might increase the price of the raw materials, and if the company does not have any alternative this will certainly affect its profit margin.

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miriam98
Post 4

@NathanG - I work for a software company that caters to the electrical utilities industry. It’s a very specialized niche. The problem is, there are only so many utilities out there. Currently we have about 40% of the market. Even if we had 100%, that would mean the end of the line for our business.

Unless we keep selling, we can’t stay in business. Support revenue alone is not enough to keep us afloat. So what we’re doing now is targeting the oil and gas industry.

We are busily retooling our software so that it can meet the needs of that industry, and keep us going (hopefully) for many more years to come.

NathanG
Post 3

@Mammmood - Sometimes it’s hard to practice diversification depending on the circumstances.

For example, our church went on a building program several years ago. They used suppliers down in the Gulf coast to supply the raw wood for the project. Then came Hurricane Katrina.

Suddenly the price of wood shot up, not only for those suppliers but other vendors as well. Normally we would play one company against another to get the best price, but in this case it was nearly impossible.

Everyone’s prices went up. We ended up curtailing the building program. We didn’t abandon it as such, we just scaled it back, so that we could continue to build but on a tighter budget.

Mammmood
Post 2

@everetra - I tend to agree with that analysis. It’s not customer diversification alone that has helped McDonald’s; it’s geographic diversification too.

I saw this program on TV once about how McDonald’s was expanding into China, getting a bigger market share than its competitors. China is a big enough market for anyone – we’re talking billions of people here.

But McDonald’s has an aggressive campaign to penetrate this market and sell to the masses. They are doing whatever it takes, even to the point of rebranding their signature meals to adapt to local cultural tastes. It’s smart, and I think it will keep them in the number one spot for years to come.

everetra
Post 1

Diversification just means “don’t put all your eggs in one basket.” It’s always been wise advice for investors and it certainly makes sense for businesses in my opinion.

Just today I heard an analysis of why McDonald’s is number one among burger franchises. It’s not about the hamburgers. As a matter of fact, Burger King and Wendy’s put out better burgers, according to customer surveys.

So how does McDonald’s acquire and retain the number one spot if it doesn’t produce better food?

The answer is “Happy Meals.” For the longest time, McDonald’s has targeted children in its marketing campaigns. Happy Meals are by far favorites among kids, better than comparable offerings at other fast food places.

So McDonald’s had essentially diversified its customer base. It not only caters to adults but to children as well and this is what puts McDonald’s at the top position.

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