Why do Big Businesses Diversify their Business?

6 years ago

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Once a company starts growing, the board of directors always think to diversify their business. Why? because it gives a lot of flexibility.

Diversification is a growth strategy that involves entering into a new market or industry.

We all have observed so many companies who continuously diversify the business. There are so many things by which the founders decide to enter into another industry.

The great example is Amazon. Amazon is not only diversifying businesses but also the company is scaling up very fast. Ecommerce is not a single business of Amazon. The company is in cloud computing business and entertainment business as well.

Giant companies generally don’t start a new business. Such companies acquire emerging small or medium-size companies that’s how they reduce the cost of building a new business from ‘ZERO’.

4 Reasons Why Giant Companies Diversify Their Business:

1. Changing in the market:

Generally, giant public or private limited companies always keep their eye on what is happening in the market.

They tend to look at which industry is booming or which industry has the highest potential to grow. Also, they prefer to invest in the companies which have not make a profit yet but after 4-5 years the business is going to boom.

In most of the cases, big companies always prefer to buy SME(Small and Medium Enterprise) rather than buying private equity.

2. Loss Protection:

Diversifying business always gives benefit in quarterly or YOY (year-on -year) result of a company.

For instance, Reliance Jio is a subsidiary company of Reliance Industries Ltd. We all know Reliance Industries main business is petroleum.

Let’s assume Reliance made a big loss in the petroleum sector. But, it would not be highlighted because the subsidiary company Jio made a huge profit. That’s why Reliance Industries don’t need to worry about the numbers of the main business.

3. Expanding Product line:

To expand the business, big businesses need to increase the number of products or services they provide.

It requires a big amount of investment that’s why expanding product line is not easy for small or medium-sized companies.

Such companies are already leading players in a particular area. They can afford loss also if the new idea of expanding the product line doesn’t work. And, if it works, it can give a lot of benefit to the company as well as the shareholders of a company if the company is public limited and listed.

4. Brand Value:

Every business targets different people to grow the business. By diversifying the business, the company targets people who are different from the main business.

If the company able to provide the best service or product, it helps to increase the brand value of a company.

Let’s understand briefly…

ITC Ltd (Indian Tobacco Company) :

One of the best companies in the history of Indian stock market, ITC Ltd(Indian Tobacco Company) was known for it’s cigarette brands.

According to Wikipedia, ITC ltd holds 81% of market share of cigarette products in India.

But, today if we see the businesses of ITC, they are everywhere. Not only that, they are also leading in many new sectors.

Here are the businesses of ITC.

FMCG
Hotels
Personal Healthcare
Info-Tech
Education and Stationary

Reliance Industries:

Reliance Industries was a petroleum company before 2015. Majority of the revenue was coming from petroleum products.

Soon, the company entered the telecom industry which has completely no business relation with the petroleum industry.

By giving a lot of free services for a longer period of time and by providing quality service at affordable rates, Reliance Jio has become a number one telecom company of India.

When I am editing this article, on May 5, 2020, there is COVID-19 outbreak. All of a sudden, domestic and international transportation has stopped, most industries which require petroleum products have to stop working.

In addition, there is a massive price drop of crud oil all over the world.

Because of this, Reliance Industries could have been deep trouble but Jio saved Reliance.

People get bored in their home. People need the internet to consume content and spend their time and that’s where Reliance Jio has been getting massive profit from a large consumer base which is nearly 400 million.

These other businesses themselves have a different people to target. And also, the potential of growth is endless.

Reliance Industries Ltd, Mahindra Group and Tata Group have built the best businesses by continuously diversifying the business.

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