What does 'diversification' mean in a business context?

In a business context, diversification refers to a strategy where a company expands into new markets or introduces new products to reduce risks associated with being dependent on a single market or product line. By doing so, firms can spread their risk, potentially improving overall profitability and stability. For instance, a business that primarily specializes in one product may choose to develop related products or enter different markets to target broader customer bases. This approach allows for adaptation to changing market conditions and consumer preferences.

The other options do not accurately capture the essence of diversification. Enhancing product quality is focused on improving existing offerings rather than expanding into new areas. Reducing workforce pertains to cost-cutting measures rather than strategic growth. Lastly, increasing the marketing budget is a financial decision that may support existing products but does not inherently involve diversification as a strategy. Thus, the correct choice highlights the core idea of pursuing growth through new opportunities, which is fundamental to the concept of diversification.