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What Is Diversification of Business? - Strategies, Definition & Examples

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  • 0:01 What Is Diversification?
  • 0:45 Strategies for…
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Lesson Transcript
Instructor: Shawn Grimsley
Companies sometimes diversify their business activities to manage risk or expand into new markets. In this lesson, you'll learn about business diversification, different diversification strategies, and be provided some examples. A short quiz follows.

What is Diversification?

Diversification occurs when a business develops a new product or expands into a new market. Often, businesses diversify to manage risk by minimizing potential harm to the business during economic downturns. The basic idea is to expand into a business activity that doesn't negatively react to the same economic downturns as your current business activity. If one of your business enterprises is taking a hit in the market, one of your other business enterprises will help offset the losses and keep the company viable. A business may also use diversification as a growth strategy.

Strategies for Diversification

There are different diversification strategies a company may employ. We'll take a look at some of the primary strategies.

Our first strategy is concentric diversification. A company may decide to diversify its activities by expanding into markets or products that are related to its current business. For example, an auto company may diversify by adding a new car model or by expanding into a related market like trucks. An advantage to this approach is the synergy that can be created due to the complementary products and markets. Additionally, expansion can be relatively easy because the skills and knowledge to run the new business are similar to those the company already possesses.

Another strategy is conglomerate diversification. If a company is expanding into industries that are unrelated to its current business, then it's engaging in conglomerate diversification. For example, the car company we've been discussing may decide to enter the computer business, the toothpaste business, the real estate business, and the furniture business. Conglomerate diversification is a good means to manage risk as long as you can effectively manage each business, which leads us to the disadvantage. Management may not have the skills or experience to manage the new enterprises.

While you can hire new management, there will still be administrative problems with running different types of businesses, such as competition between the different businesses for resources.

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