Published on
November 12, 2025
Concentration vs Diversification: Which Fits Your Business?
Explore the pros and cons of concentration versus diversification strategies for businesses, and learn how to align your growth plan with your goals.
When you want to make your business bigger, you have two main ways to go: stick to one thing or try lots of things. Let’s break it down:
- Stick to One Thing: Put all you have into one product, one market, or one part of your business. It’s easy to keep track, you get good at it, and you might bring in more money (for example, 2.3% more money for people who own shares from 2010 to 2023). The hard part is, if your one thing does not do well, your whole business can get hurt.
- Try Lots of Things: Put your money and time into more than one area. This way, risk goes down, your gains come more steady, and your business stays strong when times are tough (for example, you lose 30% less money when there are big drops, like in 2008). But, you may not grow as much (only 1.6% more money for share owners) and things might get hard to handle.
Fast Side-by-Side Look
| Thing | Focus | Spread Out |
|---|---|---|
| Risk | High, since all in one place | Low, as risks are shared |
| Chance to Gain | Big, if it works out | Small, but more steady |
| How to Run | Easy | Hard |
| Jumps Up or Down | Big | Small |
| Bad Times | Can lose a lot | Can stand better |
Picking the best plan depends on where your business is now, what you do, how much risk you can take, and what you want in the end. Putting all you have in one thing fits new or small firms. Spreading out is better for big, old firms that want things to stay safe. Each way has good and bad sides. So, match your plan with what you have and where you stand in the market.
Concentration Strategy: Focused Growth
What is a Concentrated Strategy?
A concentrated strategy is all about channeling resources into core strengths. Instead of spreading efforts thin, it’s a deliberate choice to double down on areas where you excel.
This approach demands confidence - not only in your chosen focus but also in your ability to foresee its future performance better than the broader market. Many companies today are opting for this focused route rather than diversifying into unrelated areas.
Let’s dive into why this strategy appeals so strongly to growth-stage companies.
Benefits of Concentration
The numbers paint a clear picture of why concentration can be so effective. From 2010 to 2023, companies with a focused strategy achieved an average relative total shareholder return of 2.3%, compared to 1.6% for diversified companies. Even more striking, firms that increased their focus saw their Tobin’s Q ratio rise from 1.5x to 1.7x[2].
Operationally, a concentrated strategy can simplify and streamline. By narrowing focus, companies can sharpen processes, build deeper expertise, and make faster decisions.
For growth-stage businesses, simplicity in management is another huge plus. With fewer priorities competing for attention, leadership can focus on execution rather than juggling unrelated initiatives. This clarity often leads to smarter strategic decisions and better resource allocation.
Expertise is another area where concentration shines. A team that hones its skills in a specific domain becomes better equipped to spot trends, tackle challenges, and innovate. Over time, this expertise compounds, giving focused companies a competitive edge over those spread too thin.
But while the benefits are compelling, the risks of a concentrated strategy shouldn’t be ignored.
Risks of Concentration
The potential for higher returns comes with a trade-off: higher risks. Concentration means putting most of your eggs in fewer baskets, which makes success in those areas absolutely critical.
Market volatility hits concentrated companies harder. If your chosen market faces a downturn, regulatory hurdles, or increased competition, the impact is felt across the entire business. Diversified companies, on the other hand, often have other segments to absorb such shocks.
Relying heavily on specific investments adds another layer of vulnerability. A meta-analysis of U.S. equity mutual funds revealed that while concentrated portfolios often outperformed diversified ones and benchmarks, they also exhibited far greater volatility[1]. In short, higher potential returns come hand in hand with greater uncertainty.
There’s also the risk of significant losses. A downturn caused by technological disruptions, shifting consumer behavior, or economic changes can hit a concentrated business especially hard. For growth-stage companies with limited financial buffers, such setbacks can be difficult to recover from.
Interestingly, the market’s view of concentration has evolved. Between 2010–2015 and 2019–2023, the median diversification discount dropped by 6 percentage points[2], signaling that investors are more open to rewarding focused strategies. However, this doesn’t erase the inherent risks - it just shows that investors are willing to back companies that execute focused strategies well.
To help companies navigate these risks, Phoenix Strategy Group provides financial modeling and scenario analysis. This ensures businesses fully understand their exposure before committing to a concentrated approach, helping them make informed decisions about their growth strategies.
Diversification Strategy: Balanced Growth
What is a Diversified Strategy?
A diversified strategy takes a different path from putting all your efforts into one area. Instead, it spreads resources across various assets, sectors, or geographic markets. Think of it as a way to avoid “putting all your eggs in one basket.”
This approach focuses on reducing risk rather than chasing the highest returns. If one part of your business struggles, other areas can help offset the impact. The goal isn’t to hit big wins but to achieve steady, reliable growth over time.
For companies in a growth phase, diversification can happen in several ways. You might branch out into new product lines, aim for different customer groups, or even enter entirely new markets. The trick is ensuring these areas don’t all react the same way when market conditions shift.
Benefits of Diversification
The clearest benefit of diversification is risk reduction. If one area of your business faces losses, gains from other areas can help balance things out. This resilience is especially important for growth-stage companies that rely on stable cash flow to fuel operations and expansion.
Take the 2008 financial crisis as an example. Companies and investors with diversified portfolios - including U.S. equities, bonds, and international assets - fared far better than those concentrated in financial stocks[3]. While concentrated portfolios took a beating, diversified ones held up more effectively.
Another advantage is smoother returns. Diversification often leads to more consistent performance, avoiding the dramatic highs and lows that concentrated strategies can experience. This predictability simplifies financial planning and can make your business more appealing to lenders, who favor stability when offering financing.
Preserving capital becomes especially critical during uncertain times. Diversified businesses tend to hold their value better in downturns, even if they don’t capture as much upside during booming periods. For companies eyeing eventual exits or attracting investors, this steadiness can be a selling point.
Lastly, diversification lets you tap into growth across multiple sectors. Unlike a concentrated company that might miss opportunities outside its niche, a diversified business can benefit from trends in various markets.
That said, the stability diversification provides comes with trade-offs that can affect returns and operational efficiency.
Drawbacks of Diversification
While diversification has its perks, it also brings challenges. One major downside is that it often results in lower returns during bull markets. When your competitors, focused on a single booming sector, are enjoying big gains, your diversified approach might deliver more modest results because strong performers are offset by average ones elsewhere.
Complexity is another hurdle. Managing multiple markets, product categories, or business lines requires more advanced systems, broader expertise, and tighter coordination. Decisions that are straightforward in a focused company can become tangled and complicated in a diversified one.
This added complexity also drives up costs. Running multiple operations means hiring specialized staff, implementing detailed reporting systems, and spending more time coordinating between teams. These extra expenses can chip away at the stability that diversification aims to provide.
There’s also the risk of losing sight of your strengths. A good example is General Electric. In 2021, GE decided to spin off its healthcare division to refocus on aviation and energy. The company realized that diversifying into healthcare had created inefficiencies and diluted its competitive edge.
Market trends also show a shift away from diversification. Between 2000 and 2023, the percentage of companies classified as diversified dropped from 57% to 45% globally. Additionally, the median diversification discount decreased by 6 percentage points when comparing recent years to the 2010–2015 period[2]. While the market is less harsh on diversification now, it still tends to reward businesses with a clear, focused strategy.
For growth-stage companies thinking about diversification, Phoenix Strategy Group offers fractional CFO services that can help weigh the costs and complexities. Their financial modeling tools let you explore various scenarios and understand the full impact of managing diversified operations before taking the plunge.
Concentration vs Diversification: The Truth About Building Wealth
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Comparison Table: Concentration vs Diversification
Here’s a clear side-by-side look at how concentration and diversification stack up for growth-stage companies. This breakdown highlights the key factors to consider when deciding between these two approaches:
| Factor | Concentration | Diversification |
|---|---|---|
| Risk Level | Higher risk due to reliance on a single area | Lower risk by spreading exposure across multiple areas |
| Return Potential | Potentially higher returns (20–30% above diversified strategies when successful) | Returns are steadier but generally lower |
| Management Complexity | Easier to manage with a focused approach | Requires broader expertise and is more complex |
| Volatility | Greater volatility with sharp fluctuations | Lower volatility, reducing portfolio swings by up to 50% |
| Performance in Bull Markets | Can significantly outperform | May lag behind due to diluted exposure |
| Performance in Downturns | More vulnerable to large losses | Better equipped to handle downturns with built-in buffers |
| Resource Allocation | Heavy investment in a single area | Resources spread across multiple initiatives |
| Expertise Required | Deep, specialized knowledge is essential | Broad expertise across various sectors is needed |
The numbers tell the story. Concentrated portfolios, typically holding 5–30 stocks, have historically outperformed diversified mutual funds and benchmarks but come with greater fluctuations in performance[1]. This trade-off highlights the importance of aligning strategy with your company’s goals.
Timing plays a crucial role. For example, during the 2008 financial crisis, diversified portfolios outshone concentrated strategies by offering more protection. However, in booming markets, concentration often wins out, as it avoids being diluted by underperforming sectors. Companies with strong confidence in their market position often lean toward concentration, while those seeking stability tend to favor diversification.
Supporting this, Tobin's Q ratio data reveals that companies focusing their resources saw their ratio rise from 1.5× to 1.7×, whereas those that diversified experienced declines[2]. This underscores how concentration can amplify competitive advantages, while diversification provides a safety net.
For growth-stage companies, the decision often depends on timing and objectives. A business with a breakthrough product might embrace concentration to maximize its edge. On the other hand, a more mature company preparing for significant transitions may find diversification a safer route.
One practical guideline is the "25–30 rule." This principle suggests that once a portfolio or strategy includes 25–30 positions, it captures most of the benefits of diversification without adding unnecessary complexity[1]. Businesses can use this benchmark to strike a balance between focus and flexibility.
Ultimately, these comparisons help growth-stage companies align their strategies with their specific goals and market conditions.
Match How You Work With Where You Want to Go
When you pick the way you want to grow, you have to match it with your main goals. Do you go deep in one thing? Or try more than one thing at once? There is no easy answer. You must link your plans to what helps your business the most. The way you pick can help you get big fast, or, if you pick wrong, hold you back and keep you stuck.
What Changes How You Pick
A big thing that decides your path is where your business is now. If you just start out, you often must stick with your best skill to show what you can do. This proof helps bring in money and trust from people who fund you. If your company is old, like in Series B or even past that, you have more tools and you can look at new things, new places, new buyers.
How fast your field moves also shapes your choices. If things change quick in your area, trying more things may help you stay safe. It helps if laws change or if prices jump up and down. If your field does not change much, staying sharp in one spot helps you know a lot and beat those who also try to win in that small space.
Your team and what they know also change what works best. If your team is strong in one task, you may earn more by going deep, not wide. If you have many people who know a lot of things, or if you do not want to take many risks, then trying more things can work. How much cash you have matters a lot. If you have a lot, you can take big risks and try to win big with one thing. If you have less, you might want lots of small wins, which you get by doing more things and making safe picks.
From the year 2000 to 2023, the count of companies that do many things fell from 57 in 100 to 45 in 100. This means most now pick one main thing and stick with it. In those years, ones who focused more had their "diversity penalty" go down 7.9 points. Ones who spread out over more things had a small rise of 1.1 points in their penalty.
All this shows picking how you work needs care. You must think and not rush to pick.
How Phoenix Strategy Group Helps
You do not just trust a guess when you pick your way. You must look close and plan well. That is where Phoenix Strategy Group comes in. They help you make good choices from facts.
They start with money plans, risk checks, and cash checks. These give you clear facts about the risk and gain from each move. By using tests and checks on what could happen in the world, you can see how your picks might turn out, so you are less lost and guess less.
Phoenix Strategy Group has helped many grow strong. They have helped more than 240 companies and have worked on more than 100 deals where one buys another. Their skills in data work and finding facts let them see all parts of the market, what makes you strong, and what makes your rivals tick.
If you want to raise more cash or get ready to sell, you have to match your plan to what money folks like to see. Phoenix Strategy Group helps you make money maps that show how your picks will shape your growth and what you are worth. This lets you bring in new money or sell for a good deal.
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"PSG saved my dream. They helped us get our financials in order and renegotiate our lending agreements, navigating a severe financial challenge." - Norman Rodriguez, Founder/CEO, ElevateHire
After you pick a plan, it is key to watch how it grows. Phoenix Strategy Group helps with making and keeping track of key numbers and results, so you know if what you do works or not. For plans that focus on one thing, you may check how much of the market you get. For wide plans, you look at how much you grow in all parts.
When things change in the market, your plan should change too. Phoenix Strategy Group gives help over time to make sure you can change what you do when new facts or new rivals come up. This stops you from being stuck with a plan that does not help you meet your aim. They help you keep moving toward your goal, even when things shift.
"If you want to sleep better at night, hire Phoenix Strategy Group." - Patrick Wallain, Founder/CEO, ABLEMKR
Conclusion: Picking the Best Way to Grow
When you have to pick between keeping things simple or spreading out, it comes down to what your business wants and where it stands right now. Both choices bring good and tough points, and past results show that neither is always better - what works depends on your own case.
If you are just starting and don’t have much to spend, working on just one thing or one group is often smart. It helps you show what you can do and get better at it. But if you already have a stable place in the market and want to handle surprises, reaching out into new spots can make you safer and help you deal with changes.
There is not one plan that works for all. The best way forward will change with how big your company is, how much risk you want, and what place in the market you take. For example, a new tech group in a rush to get bigger may do well if it puts all its work in one spot. In contrast, a maker of goods might need to take on more types of work to stay strong and keep growing.
It is smart to trust numbers and facts when you decide, not just how you feel. That’s the help that Phoenix Strategy Group gives. They use numbers, make models, and plan with your funds in mind. With years spent working with more than 240 businesses and more than 100 deals, they know how to look at pros and cons in the real world and in real cases.
"To achieve sustainable growth, businesses must align their strategy with their core competencies and market conditions." - Phoenix Strategy Group
A clear plan can help you match your work with big goals for future growth. Many companies start out small and look for their own space. As they grow and get more people and money, they move out and try new things.
It is key to watch numbers, such as how much money comes from one spot and how much of the market you own. This lets you change course when you need to.
No matter if you wish to keep your plan tight or make it bigger, you should make sure it fits the place you see your business in three to five years. A good and smart plan can help you stand strong in a busy market so you grow for many years. When you pick the right path and put it to work well, you will have the edge over others.
