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Business: How Much of a Risk is Diversification?

Diversification is a means to reduce risk or increase profits by splitting your product offering over multiple audiences. This may sometimes mean creating new but similar items to sell or simply altering the packaging of an existing product to appeal to a new niche. A particularly good example of this kind of strategy is gendered items such as razors, which can be priced differently despite including the same materials.

Demographics

As a business tactic, it’s not always a particularly honourable one, as the latter example demonstrates, but it can help a company offset losses from one demographic if the others are enjoying some success. In other words, much of the early appeal of diversification is in the value of having a backup plan should everything go south. Digital diversification can be a different matter altogether, though.

shopping with mask

In many cases, the diversification of a virtual product may simply mean adapting the same thing for a new market or audience. Online businesses that operate a service, such as a video game, will often create multiple clients for several different countries. In this case, developers have the opportunity to charge for things differently, as, for example, Korean and European players don’t like the same things in their games.

The online betting company bet365 was able to diversify its sports betting business by expanding its operation to new countries and, perhaps more importantly, by incorporating new sports. In some cases, such as eSports, this can introduce betting to an audience that may not have had any previous interest in more traditional sports, such as football and tennis. Diversification is not all plain sailing though.

Brand Image

One of the more obvious examples of the risks involved with product diversification involves resources. Even if a new product is just a rebadged version of an existing one, the production company must have enough extra materials to compensate for the extra output. If the new product then becomes more popular than the existing one, there’s a risk that overall quality could fall across the company catalogue.

eating burger

There’s also the concern of brand image. Wanton expansion in all sorts of strange ways is the hallmark of mega-corporations like Amazon and Google, which have grocery stores, chocolate, underwear, and soap in their combined histories. However, creating things like the KFConsole, a joint effort between Cooler Master and KFC, as a chicken restaurant can make the company look bored, directionless, and wasteful – even if it might have been a joke.

The same issue affected the diversification efforts of cement company Blue Circle in the 1980s, when it started creating everything related to homeownership, such as lawnmowers, boilers, and baths. It’s a poor look for a specialist company, although their foray into producing bricks simultaneously made some semblance of sense. Today, Blue Circle only produces concrete, cement, lime, and mortar.

Diversification can produce quick success for a business and create a safety net in weak markets. However, the risk to a company’s bottom line and public image can be significant if this business strategy is misapplied.

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