Diversification that business enterprises undertake are their way to reduce risk. The look to spread out risk with different products, services, or with a focus on different markets. Consequently, if business is slow in one product or service area, or even marketplace, they can weather the storm so-to-speak because they have other products and services, and other markets that can sustain them until business picks up in the other areas they’re a part of as a multi-faceted business.
One theory of diversification is Concentric Diversification and companies diversify in this way through product diversification or market diversification. Think of it this way, a big retailer whose main product line is kitchen and bath products may decide to broaden its scope of offerings through adding home décor and furniture - such as sofas, love seats, coffee tables, wall units and accessories, including fine wall clocks and decorative objects to their inventory line up. They are diversifying by way of more products to serve a broader clientele – those looking beyond kitchen and bath items.
As far as market diversification goes, maybe this kitchen and bath retailer’s focus was the 25 – 25 year-old age group who are involved in buying and stocking their first homes with items. Now, this retailer may decide to diversify through going after the 45 – 65 year-old age group who may be remodelling and renovating existing homes they’ve been in for years and now want to redo their abodes. They will need, more often than not, new furniture, fixtures, accessories, décor and such to complement their remodelled homes. Therefore, the retailer has diversified through the new age group it is targeting – a new market they are going after.
Another theory of diversification is Conglomerate Diversification. Think of it this way, the above-mentioned retailer may decide to diversify through opening a subsidiary that offers products that have nothing to do with the firm’s usual business. Therefore, this retailer may open locations that sell car parts. They believe there is significant growth, revenue, as well as profit potential in this area.
The retailer has funds from their original business that can finance this new operation. They can run this new operation separately and gain sales from a market genre that has nothing to do with their original business. Therefore, this retailer, while still in the retail business, is offering a whole new slew of products and services in an entirely different business sector. This is diversification through dramatically changing their business focus for this newly established entity.