Discuss the potential benefits and risks in business diversification.no

To me, there is one major type of potential benefit and
one major type of potential risk when a business
diversifies.

The major possibility of benefit is that the
business can increase profit and revenue.  If a business, for example, diversifies up
and down its supply chain, it can give itself (through vertical integration) advantages
over competitors who lack such diversification.  In addition, the business can hedge
against problems in one area of business by having many different types of
enterprises.

The problem, though, is that diversification
can move a firm away from its core competencies.  Firms that are good at one thing may
not be any good at some other thing.  When they branch out to go outside of the things
they are truly good at, they become inefficient and actually lose
profit.

So there is a risk/reward element in
diversification.  It can be profitable, but it can also harm a
firm.