Why do Big Businesses Diversify their Business?

why giant companies diversify business

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

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.

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 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 profit yet but after 10-15 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 which 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

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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About Anuj Vohra

Hi , I am Anuj Vohra. Founder of Itsfacile.com & Saral Investment.

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