What advantage does diversification provide to businesses?

Diversification provides significant advantages to businesses, particularly through risk reduction via multiple revenue sources. When a company diversifies its products, services, or markets, it spreads its investments across different areas. This means that if one sector experiences a downturn or faces challenges, the other sectors can compensate for that loss, stabilizing the overall financial health of the company.

For instance, a business that operates in both consumer electronics and home appliances can mitigate risks associated with fluctuations in consumer demand or supply chain disruptions in one of the sectors. By having multiple revenue streams, the business can maintain a more consistent cash flow and ultimately achieve greater resilience against market volatility.

The other choices do not align with the primary benefits of diversification. Higher product prices might result from market power but are not a direct advantage of diversification. A single revenue stream increases vulnerability, as it leaves a business exposed to risks inherent in that one sector. Concentrating on core competencies can lead to specialization but does not inherently offer the protective benefits of diversification. By expanding into new areas, a business can enhance its market position while minimizing overall risk, which is a core advantage of a diversified strategy.