What does "diversification" refer to in business?

Diversification in business refers to the strategy of introducing new products into new markets to increase sales and reduce risk. By venturing into new markets with innovative products, a company can tap into different customer bases and spread its market risk. This approach allows businesses to not only pursue additional revenue streams but also to compete more effectively against competitors in both existing and new markets.

When companies diversify successfully, they enhance their growth potential and create opportunities for higher profitability. This strategy contrasts with simply offering existing products in new markets, which is more about market penetration than innovation. Similarly, reducing product lines or implementing cost-cutting measures focus on consolidation or efficiency rather than expansion or growth through new offerings. Understanding diversification as a growth strategy is essential for companies looking to thrive in shifting market conditions.