When it comes to running a business, you’ll know that one-day things can look great, and the next, you could be in serious trouble.
That’s why it’s important to ensure you have a safety net around you at all times. Many big businesses look to diversification, helping to improve their stature in the world of business, while also keeping them above water should anything go wrong.
What is diversification?
This is a corporate strategy that many companies employ to help diversify their investment portfolio. The types of investments they make can span a wide range of areas, from ones within the company’s current market to increase its share or new markets away from the core business, to help increase the company’s profitability while increasing the company’s scope.
Many of these investments will be low risk, with the view of managing risk potential during any kind of economic downturn.
Types of diversification
However, when it comes to diversification, there are several types that companies use. These are:
- Vertically Integrated Diversification – this is when the company intends to enter into other business already associated with the current business.
- Horizontally Integrated Diversification – this is when the company acquires a firm in a similar business which complements the current business
- Concentric Diversification – this is when the new business is related to the current one by the process, technology or market, and is essentially a spin-off of existing facilities
- Conglomerate Diversification – this is when there’s no relationship between the business and the new business being acquired. Venture capital trusts are a great form of this diversification, as you can invest in other companies in return for access to tax reliefs
How it works
If you’re wondering how this form of diversification works, it’s all pretty simple. When it comes to the stocks in a company, they always do well when the economy grows. This is because investors want the highest returns possible, and bid up the stock’s price. On the other hand, bonds and other fixed-income securities do well when the economy slows down. This is due to investors protecting what they have during a slump.
Therefore, by diversifying in this manner, you’ll be covered if either happens.
Why it’s a good idea
As you can see from above, if you own a business, aside from growth, diversification is key to ensuring you remain above water in the otherwise cut-throat business world.
By diversifying your portfolio, and investing in stocks and bonds in companies similar and different to yours, you’re ensuring that if one begins to suffer, another will hold out during a time of need. This way, you’re guaranteeing a return, and ensuring that you’ll continue to make money in every possible economic climate.
If you’ve been sat wondering how to improve in the world of business, while staying safe, it seems like diversification is the way to go.
