UW–Madison study finds horizontal diversification may fortify small businesses  

According to a press release, a new study from UW–Madison has found small businesses need to diversify to avoid risk and remain resilient during tough times, but that diversification must be in the right direction. 

The study surveyed leaders of nearly 900 businesses — firms in agricultural production, food processing and manufacturing, grocery wholesaling, food and beverage retailing, and restaurant dining — in Wisconsin, California, Florida, and Minnesota during the spring of 2021 and sorted them by the extent and dimension of their diversification.  

One hypothesis stated that diversification would fortify small businesses; the other was that diversification is dangerously inefficient, stretching resources and dragging down productivity. The study also compared the effects of vertical diversification — participating in many different links of the supply chain — and horizontal diversification — spreading efforts across a single supply chain link.  

The vertically diversified firms that participated in the survey were roughly four times more likely to have closed during the first year of the pandemic than undiversified businesses. The horizontally diversified firms were only half as likely to have closed as undiversified companies and less likely to experience labor shortages.   

While there were large differences in resiliency, neither the horizontally nor vertically diversified businesses were less likely to have laid off employees during the pandemic.