Question

Why is diversification sometimes "necessary?" explain in 150 words or more please

Answer 1

When businesses grow, their growth in terms of revenue, market share and brand value often reaches a plateau. In company’s life-cycle this means that irrespective of the effort put in to the company, the results remain pretty much the same. At such point, in order to keep growing in terms of revenue, it becomes necessary to diversify.

Let’s take an example of Microsoft. The company makes operating system. It used to make operating system in the 80s and 90s and does so today as well. Consider if they had only one product. As population and computer adaptation grew over the decades, their sales and revenue numbers would have grown proportionally with the growth of the market. However, the company has grown to a billion dollar enterprise over last 4 decades. This growth rate is exponential due to their diversification strategy. The company not only sold operating systems but also sold associated software, tools to build software, enterprise services and now are selling cloud solutions. So it is clear that in order to grow rapidly, it is necessary for an organization to diversify.

At times diversification is also necessary for survival. Consider the story of Amazon. They began as an e-commerce business. However, the revenue from e-commerce business (till today) is not sufficient to make the company profitable. In order to boost the revenue, Amazon diversified into cloud business called AWS. Their AWS products are extremely popular and is the sole factor why Amazon is able to publish profitable balance sheets during their annual meeting. Again, diversification was important for Amazon in order to be a sustainable business.