In terms of corporate marketing, business diversification is the strategy to increase profits by selling new products in new markets. As with all strategies, diversification in business has advantages and disadvantages and the administration can use these advantages and disadvantages for different purposes.
Diversification in corporate marketing can be used for both offensive and defensive purposes. On the offensive side, business diversification can be used to increase the profits of the corporation through the business start-up in untapped markets. On the defensive side, it can be used to disseminate the assets of the corporation in order to protect themselves against the crisis in the market.
Diversification increases earnings
The greatest advantage of business diversification is the potential increase in revenue. Business Diversification means selling the products of a company in a new environment that has not been tried out in previous occasions; a successful business trip can lead to a whole new revenue stream. Better yet, these companies do not compete with older holdings of the corporation and tend to offer greater rewards than those of the pre-existing companies.
Cost of diversification:
A significant disadvantage to business diversification is the cost of the launch of new business in new marketing conditions. It is more difficult for enterprises to secure resources to start these companies because the element of risk is higher. On the other hand, there is no guarantee that the new company will begin production in the near future and a corporation may have to endure a loss for consecutive periods before they achieve sufficient market penetration to begin make a profit. Depending on when and how much profit, new firms may not be worth the investment.
Risk of diversification:
Another important disadvantage of business diversification is that it is the most risky of all possible marketing strategies. When a company sells new products in new marketing condition, it has neither the expertise needed to produce nor to sell it in those markets. In such case, you need to spend the money to acquire any knowledge or information for both, and there is possibility that your existing management may not be able to do this effectively, which could turn a potentially profitable project into a resource that is sinking without return.