What does diversification refer to in terms of business strategy?

Diversification in business strategy refers to the process of entering into new markets or developing new products that differ from a company’s existing offerings. When a business diversifies, it seeks to spread its risk by expanding into areas that are not directly related to its current operations. This can involve starting a completely new business or launching a new product line that is significantly different from what the company traditionally offers.

The appropriateness of starting a completely new business or product as a form of diversification lies in the potential to tap into new customer bases and generate additional revenue streams. This approach can help a company reduce its reliance on a single market or product line, allowing it to better weather economic fluctuations and changes in consumer preferences.

In contrast, other options such as merging two firms, acquiring another business, or expanding within the same sector represent different strategic approaches. Mergers and acquisitions focus on consolidation within the industry, while expansion within the same sector pertains to deepening a company’s presence in its existing market rather than branching into new areas. These strategies do not encapsulate the essence of diversification, which emphasizes the introduction of variety and risk distribution across different realms of business.