What is a potential downside to lack of diversification for a business?

A potential downside to a lack of diversification in a business is that it leads to increased vulnerability to market changes and risks. When a business concentrates its resources and efforts in a single market or product line, it becomes heavily dependent on that specific segment. This makes the business susceptible to fluctuations in that market, such as economic downturns, shifts in consumer preferences, or competitive pressures. For instance, if a company relies solely on one product and that product experiences a decline in demand, the entire business can suffer significantly. In contrast, a diversified business can spread its risks across different markets or product lines, helping to stabilize revenue even when one area faces challenges.

This concept is crucial for understanding how businesses manage risk and how strategic decisions regarding product and market focus can impact long-term sustainability and growth.