What is a potential risk of diversification?

The correct identification of the potential risk of diversification lies in the lack of expertise in new markets. When a company expands its operations into new areas or industries, it often encounters challenges that stem from its limited understanding and experience within those markets. This could include unfamiliarity with customer preferences, competitive dynamics, regulatory environments, and operational practices that differ significantly from those in the company's core business.

Entering new markets without adequate knowledge and expertise can lead to poor strategic decisions, inefficiencies, and ultimately financial losses. Companies may struggle to compete effectively, and the benefits of diversification—such as spreading risk and leveraging new opportunities—can quickly be overshadowed by the downsides of navigating unfamiliar territories without the right capabilities in place.

In contrast, other options outline benefits or neutral scenarios rather than risks. For instance, increased staff retention, consolidation of brand identity, and improved operational efficiency are generally viewed as positives resulting from well-managed diversification strategies rather than potential pitfalls.