Diversification in this sense involves expanding your business in a particularly risky manner. When you diversify, you are usually expanding into a market that you have no previous experience or customer base in. For this, many companies need to develop a new product to corner this market. Many companies that attempt to diversify fail after failing to take a part of the market from well-entrenched competitors.
Nevertheless, there are good reasons to at least try diversifying. In the event of a market crash for a certain product or service, your other products on a different market may be able to fill the gap in revenue until the problem mends itself.
There’s also the 80/20 rule to contend with: the idea being that 80% of whatever product you make is bought by 20% of your customers. There’s always the possibility of these customers choosing another providers based on overall cost or availability, and as a result, developing a new product for a market that hasn’t been penetrated before will give you a larger customer base and more revenue security as the 20% leave your service.
Among the many reasons that these kinds of changes fail is that the company attempting to diversify has to compete with companies that already have experience in this field, or if this field is completely new, it’s a completely untested market that may not even have much demand to begin with. Sometimes they just don’t put enough research into the market they’re trying to break into and deliver a worse product or service.
Despite the risks, there are a number of companies that took to diversifying and it paid off: Apple, for instance, started off making computers, making several innovative products but failing to get sales due to the high price tag and the constant competition of Microsoft for software and IBM for hardware products. When Steve Jobs re-joined the company in 1998, the shift away from expensive but powerful and creative products to things like the iMac, iPod and the later development of the iPhone and iPad shifted Apple’s main business ventures from a PC hardware and software provider to a mobile hardware company. And just looking at Apple’s net worth and overall impact on the technology industry after 1998 would tell you that Apple did the right thing.
Other companies like Canon (originally a camera production firm), Disney (still a film manufacturer, but also runs Disney IP-themed recreational parks) and Virgin Group (originally a music publisher, has diverged into air travel and telecommunications) have managed to diversify without suffering tremendous losses or company shutdowns. The main obstacle in diversification is uncertainty towards what will actually be of interest in this market the company is trying to introduce itself into.
When planning out diversification, acknowledging what people want is paramount to success. This may involve a lower price, different materials/ingredients or product design based on demographics. Diversification is a risky prospect but can provide companies with long-term security and promote your brands in different markets.