What Is Business Diversification? Types + Examples

What if one market downturn could wipe out your entire business? If you’re relying on a single product or revenue stream, that risk is real—but avoidable. Business diversification can help a company survive adversity and upheaval, something that every business confronts at some point. It also offers a way to cultivate new opportunities if markets shift.

A sudden change in consumer preferences, the arrival of a disruptive competitor, or supply chain breakdowns can torpedo a business that doesn’t have income from a diversified portfolio. 

Discover business diversification strategies that will work for you in any market and see how two Shopify merchants used them to find new customers and gain financial stability.

What is business diversification?

Business diversification is when a company enters a new business or market—that differs from its current operations—to create new revenue streams. The main objective is to mitigate risk, because relying on a single industry or product line requires that everything goes right and that your business never encounters a setback. 

Diversification acts as a strategic firewall, helping to contain damage from unforeseen circumstances. It’s also more than just a defensive maneuver: expanding into new areas opens up opportunities to capture a wider customer base and capitalize on emerging trends. A successful diversification strategy can help you do the following:

• Achieve greater financial stability. By creating multiple, independent revenue streams, a company can smooth out the peaks and valleys of its income. Seasonal lulls in one business line might be offset by peak season in another, which could lead to more consistent cash flow and make the business better able to handle economic fluctuations.

• Gain a competitive advantage. Entering a new industry or launching complementary services allows a business to reach potential customers it missed with its original product offerings. An expansion can increase market share and build a stronger brand presence.

• Take advantage of what you already do well. Diversification lets you replicate your strengths in a different product or field. 

• Drive innovation and learning. Venturing into a new business requires a company to learn new skills and adapt to evolving market trends and challenges. 

Types of diversification strategies

• Related diversification
• Market diversification
• Unrelated diversification
• Vertical integration

A company can diversify by taking a number of different paths. Some of those include:

Related diversification

Also known as concentric diversification, this is a common strategy used to expand into new products or services related to your current operations. Related diversification lets you leverage your existing customer base and production process, as well as build on your existing brand strength. 

For instance, a company making hiking boots might launch a line of backpacks that uses its brand and market knowledge for operational synergies.

Market diversification

This strategy involves selling your existing products or services in a new geographic market, customer demographic, or a new distribution channel, like an ecommerce brand opening brick-and-mortar stores. 

For example, consider a company that manufactures high-end ergonomic office chairs. It typically sells in bulk to corporations, but it launches a new ecommerce website to sell directly to remote workers. The product is the same, but the market is new. 

Unrelated diversification 

Sometimes referred to as conglomerate diversification, this is the most ambitious approach. Unrelated diversification involves expansion into a new industry with no connection to your current business model. Berkshire Hathaway, for example, started as a textile company, branched into insurance, and also owns one of the nation’s freight railroads. 

Small- or medium-sized business owners might consider unrelated diversification to balance seasonal cash flow. For example, the owner of a landscaping company might buy a local snow-removal service. The businesses themselves aren’t related, but one peaks while the other is in a trough. This provides steady cash flow year-round.

Vertical integration

This is a strategy where a business expands to control more of its supply chain. The goal is to control quantity, reduce costs, and create distribution channels.

There are two types of vertical integration: 

1. Backward integration: This is a bakery buying a flour mill.

2. Forward integration: This is when the bakery opens its own retail stores. 

Diversification examples

Learning more about successful diversification can help inform your own expansion plans. Here’s how two Shopify merchants used it to build stronger businesses.

1. Momofuku

Momofuku, the Asian American culinary empire founded by chef David Chang more than 20 years ago, was built on world-class, brick-and-mortar restaurants. When the 2020 pandemic crippled even the most successful eateries, the company hatched a related business diversification plan to expand into consumer-packaged goods (CPG) with product lines for home cooks.

The move was a necessary way to reduce risk in an industry suddenly turned upside down. 

“Brick-and-mortar stores [were] closed, but other businesses were able to continue to sell things online,” says Momofuku CEO Marguerite Maricel on an episode of the Shopify Masters podcast. “For restaurants, there just wasn’t that out-of-store experience or a way of generating revenue. So I think, for us, it was really about diversification and protecting what we do.”

Key to the strategy was creating products in line with its current operations, such as its signature chili crunch, soy sauce, and seasoning salts. Momofuku’s move into a new business segment allowed it to offer the business’s cuisine and experience to a national audience for the first time, reaching millions of consumers who may never set foot in one of its restaurants. 

“We wanted to create products that were both exciting for us to use at home, but also were of the quality that we would use in our own spaces,” Marguerite says. The final, packaged products are the exact same ones used as standard ingredients by the chefs in its restaurants, guaranteeing authenticity for the home chef.

2. Chandler Honey

Chandler Honey, founded by Tique Chandler, sells premium infused honey. As a small business, Tique was keenly aware of the financial risk tied to a physical production space. To mitigate risk, she decided to lean into what she was already doing in a new way. 

Her first business diversification effort was white labeling, which is when a business sells a generic product, manufactured by a third party, under the retailer’s own brand name. She decided to use her production space to create honey products for other businesses. 

“White labeling is taking my processes and creating a product for someone else with their branding on it rather than my branding,” Tique said on an episode of the Shopify Masters podcast. “I’ve got all these strengths that allow me to work with people who want their own honey brands. And that’s a great recurring customer to help me pay my bills so that I can not worry about rent, and I can just worry about growing my own business.” 

Her efforts paid off, providing her with a stable income and reducing the overall risk of her primary business. She also diversified her real estate by subletting part of her production space, creating another income stream.