Trade diversification involves offering a range of different products or services, rather than specializing in just one, to attract more customers and sell more products. It can be risky but can lead to further success. Companies can attempt different types of diversification, such as concentrated, horizontal, or lateral. Nations can also benefit from diversification by developing new economic sectors.
Trade diversification is the process by which a company, nation or other economic entity offers a range of different products or services, rather than specializing in just one. The theory is that by offering a wider range of products through diversification of trade, a business can attract more customers and, therefore, sell more products. A cosmetics company formerly specializing in women’s hair products that introduces an additional line of products for men, for example, broadens its customer base by offering a more diverse range of products. Even the largest economic entities can benefit significantly from trade diversification. A nation with an economy entirely dependent on corn, for example, may be crippled by a poor growing season, while an economy with a variety of agricultural and manufacturing sectors might more easily survive such adverse conditions.
Many different factors can lead to trade diversification. A company may, for example, be successful enough with one product and use that success to launch another product under the same brand name. The development of new technologies can also lead to diversification, as advances in technology often allow for the development of new products. In some cases, diversification can lead a business to further success, thus laying the groundwork for further diversification.
There are many different types of business diversification that a business or other economic entity can attempt. In concentrated diversification, for example, a company introduces new products using similar components and technologies into a new business area: a successful furniture company that mainly supplies tables and chairs for restaurants, for example, may start making furniture for office and for the home. Similarly, in horizontal diversification, a company introduces new products or services that users of their current products and services may find useful. Also, lateral diversification occurs when a business attempts to introduce a new product or service that is completely unrelated to its current customers, products, or services.
In many cases, diversifying trades can be quite risky. A company typically has to spend a lot of time, money, and market research on introducing a new product or service. Also, unless the new product is clearly better than others already on the market, the company generally needs to have a well-known and respected brand name to successfully introduce something new into a competitive market.
On a larger scale, entire nations or other large economic entities could undergo commercial diversification by developing new economic sectors. This is generally good because it reduces a nation’s dependence on a specific economic sector. In some cases, new technology or the use of newly discovered natural resources can push a nation to diversify its trade. In others, the government might offer trade incentives or impose tariffs that encourage the development of certain industries, thus leading to diversification.
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