Diversifying… Always a Good Call?
18 Mar 2015
When one invests into a business or enters an industry, what is a good option? Specialization or diversification? I’m sure many of us have asked ourselves this question a number of times. However, like any other thing, both diversification and specialization have their pros and cons. While diversifying might often be considered the best option since it saves you from putting all your eggs in one basket, and prevents the possibility of the business going down entirely, it also has several drawbacks.
For starts, diversifying might mean having your fingers in too many pies. This as a result, often leads entrepreneurs and managers towards having to divide their attention to various businesses and not entirely focus on one. The pitfall to this is that one never gets to focus on a specific business and neither reach the point of excellence.
Moreover, diversification also leads to customers being confused about what your company stands for. If you choose to diversify, it is at least better to go into closely related options instead, but somehow, customers still fail to develop a clear meaning of what the business is about and what its core product is.
Additionally, diversifying means having to employ more human resources and invest into greater amounts of capital. It means expanding them company and yet not being able to focus on one dimension, which can often lead customers to think you’re confused about what you want to do with your business. Also, a bad reputation in one business can lead to customers thinking the same about your other businesses too, and therefore sometimes sticking to one particular product or service is the best option.
However, this also has its drawbacks which includes the fact that all your eggs are in one basket. Thus, one mistake could lead to the downfall of the entire company. Also, at times of overall market problems and issues in the industry, your business could not be doing so well and it is likely that you would not have any other source of income or business to rely on.
The brighter side of it all is that through specialization you get to develop a name for yourself in a particular industry and get known to be good at something. You could therefore excel at what you do and be a market leader which is less likely when you diversify.
All this said, one cannot be sure about which is a better bet. The answer would vary depending on the situation the entrepreneur is facing and is overall goals for the business.