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Diversification means dividing your investment among a variety of assets. Diversification helps to reduce risk because different investments will rise and fall independent of each other. The combinations of these assets more often than not will cancel out each other's fluctuation, therefore reducing risk.
Why companies diversify?
When the objectives of the firm cannot be accomplished with the present portfolio of the firm.
Diversification promise more profitability than business expansions.
When firm's cash reservoirs contain more cash than that required for present expansions.
When companies have strong and powerful brands that could be transferred to the products of other businesses.
When diversifying into a closely related business opens new avenues for reducing costs.
When companies suffer from the "other side of the grass is greener" syndrome..
| Various Actions a Firm Takes |
Product |
| Present |
New |
| Market |
Present |
Withdrawal
Consolidations
Market Penetration |
Product Development |
| New |
Market Development |
Diversification |
Diversification can be achieved mainly in two different ways: -
1. Related diversification
Related diversification strategy involves building the company around businesses whose value chains possess competitively valuable strategic fits. Related diversification is preferred for various reasons: -
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* Contributed by -
Ankit Kapoor & Gaurav Dubey,
PGDBM - 2006,
IMT Ghaziababd.
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