Business Diversification:

The Risk And The Reward

By
William Craig

Diversification is about building new products, exploring new markets, and taking new risks.

But as risky as it can be, it may also be a great way to maintain a measure of stability. The cost
of ignoring this can be severe. As the world went digital, the companies tried and failed to claim
their place in the new order (referring to Blockbuster). It was a transition that almost claimed the
life of Netflix. That is, until they recognized that streaming - and not DVD rentals - was the
future of entertainment.

But diversification is not a cure-all for the struggling business, nor a sure way to cement your
lead but it’s one potential answer if you want to remain competitive.

Is Diversification Necessary?

The short answer is no. The world is full of companies that found their specialty early on, built a
market around that product, and decided to make it their focus.

National Semiconductor Corporation

One example of failed diversification is National Semiconductor Corporation. The company tried
to make electronic consumer products in addition to the semi-conductors that went inside them
(in the 1970’s). But they overlooked one major flaw: the company wasn’t suited for retail
manufacturing. In the process, it was crushed by companies that were very well suited for that
purpose as well as insulated against any kind of financial downturn. By the time digital watches
became popular in America (the company specialized in analog devices and subsystems),NSC
had been driven from the marketplace, suffering huge losses that largely overshadowed its
success in the arena of semiconductors

Diversification may not be necessary, but it may also save your business.
Successful Diversification Stories

General Electric is one of the greatest diversification success stories. What began as an 1892
merger between two electric companies is now an international, multi-billion-dollar company
and the world's 26th largest firm in the United States. Over those long years, GE successfully
branched out into a wide variety of industries including power and water, transportation, oil and
gas, aviation, healthcare, and more. In short: GE is a world-class diversifier.

I'll also submit for your consideration Ring Power: a full-line CAT dealer with locations
throughout Florida. CAT construction equipment certainly caters to a specific audience and fills
a particular need. Nevertheless, Ring Power has grown considerably since 1962, and now
offers products and services in the agriculture, marine, pipeline, government contracting, and
entertainment industries.

The Path to Diversification

Businesses diversify by finding a related product, researching its potential, and then making an
entry into that new market. Apple, Amazon, Google, and Microsoft they all come with this
diversification.

Keep in mind that your path toward diversification will be decided, at least in part, by how much
of a risk you want to take - and how much money you have available to take it.