What is one potential risk associated with diversification in business?

Diversification in business involves expanding a company's operations into new markets or product lines. While this strategy can offer many benefits, one significant risk associated with diversification is the overextension of resources and management attention.

When a company diversifies, it often requires a greater allocation of financial, human, and operational resources. This can lead to a situation where existing resources are stretched too thin. Management may find it challenging to effectively oversee multiple business units or product lines, which can dilute focus and hinder performance across the company. As a result, strategic decision-making may suffer, and the business could see a decrease in effectiveness and efficiency in its core operations.

Furthermore, overextension can lead to a lack of expertise in the new areas into which the company has diversified. Managers may not possess the necessary knowledge to lead new initiatives successfully, which can increase the risk of failure. Balancing ongoing operations while exploring new ventures can also create challenges that impact overall business health, making this risk a critical consideration for firms looking to diversify.