The Significance of Diversification
In the business industry, diversification is an important step that some entrepreneurs believe it necessary to be taken. Diversification basically means to branch out into different product ranges or marketplaces; while this strategy may possess some risks, diversification is often viewed as a safety option against downturns in the business.
Avoid loss and downturns
A conventional reason for diversification is to avoid a major backlash when an industry or sector faces a downturn. Retailers that sell a narrow range of products find it difficult to survive a decline in the industry; an economic depression could drive the business out of the industry if entrepreneurs don’t focus on selling a variety of products. The business sector is a fast and unpredictable place where any trend could fall out or restart so in order to stay relevant and up to date with the world, retailers need to incorporate a diverse range of products.
Diversification encourages healthy competition amongst businesses, and oftentimes certain products that are rare or under served become a retailers’ top-selling product. Basically an entrepreneur can never be too sure of what really sells and what doesn’t. A retailer can fill in the additional demand that other competitors are likely to do so. If your business gets in first, you can increase your customer base and/or establish yourself as the top-provider. This will give your business additional revenue and an edge in the market.
Diversity also helps your business build stability in profits and overall market value. If you concentrate too heavily on a narrow range of products, you risk volatility in revenue and resources as changes in demand and supply can cause problems. If your retail business focuses on a large variety of products, you may face less risks that the unpredictability of demand and supply can cause. Thus, the aim is to invest in various assets so they will not all be affected the same way by market events. Losing some customers here or there isn’t destabilizing if your business is diversified.
Why should you diversify?
By diversifying your product range, you are making sure you don’t pull all eggs in one basket. Diversification helps your business distribute its risks as a loss incurred in one type of product can be compensated with profits in another range. The more uncorrelated your products are, the better are your chances of establishing a firm place in the market.
It is also important to note that diversification amongst different assets is equally significant. Different assets such as bonds and stocks react differently to adverse events; in some cases certain economical conditions don’t affect bonds or stocks. Generally, bond and equity markets move in opposite directions so if your business is diverse across both platforms, unpredictable movements in one will be offset by positive results in another.
And finally, don’t forget the importance of location. Diversification also means that you look into products that are available outside your geographical area. This will ensure that customers from other areas will also visit your store for exclusive buys; all helping towards maximizing profits.