What is diversification?

The concept of diversification is a business growth strategy that can be carried out with different objectives, such as increasing market share, reducing costs of production or enter new markets.

According to the market of origin and in which the , we can understand two types of diversification. On the one hand, we find the related diversification, which is usually the most common, since the company diversifies its business activity within the same sector in which it operated. An example of related diversification might be a canning company that buys another distribution company.

On the other hand, unrelated diversification occurs when the company enters a new market that has nothing to do with it. For example, when a dairy company enters the digital applications market.

Horizontal and vertical diversification

Within the related diversification we find different forms of business diversification:

  • Vertical integration: it is about diversifying business activity by increasing the capacity of the company and occupying more parts of the existing process between the creation of the product until it reaches the customer. It can be backwards if you occupy the place of your supplier, or forward if you use your products, or start distributing them.
  • Horizontal integration: this type of diversification occurs when a company tries to increase its market share, improving the variety of its products.

Investment diversification

Despite the fact that the concept of diversification is very widespread in the business field, we must know that it is also a fundamental concept in the world of investments. Diversify the investment, consists of making investments in a very diverse way and without correlation with the aim of reducing risk and achieving higher returns. Investing in different products, in different markets or in different currencies will mean that if one investment goes wrong, the others are not affected.

Si quieres learn to invest you should know that one of the basic rules is diversification. When markets are as changeable and volatile as the stock market, betting all your money on one card is a risky mission and the consequences can be lethal. Therefore, it is essential to allocate your money to different options that may be beneficial.

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