Short Notes: Diversification
Posted by Ripon Abu Hasnat on Tuesday, May 27, 2014 | 0 comments
The
term refers to the expansion of an existing firm into another product line or
market. Diversification may be related
or unrelated. Related diversification occurs
when the firm expands into similar product lines. For example, an automobile manufacturer may
engage in production of passenger vehicles and light trucks. Unrelated diversification takes place when
the products are very different from each other, for example a food processing
firm manufacturing leather footwear as well.
Diversification may arise for a variety of reasons: to take advantage of complementarities in
production and existing technology; to exploit; to reduce exposure to risk; to stabilize
earnings and overcome economies of scope cyclical business conditions;
etc. There is mounting evidence that
related diversification may be more profitable than unrelated diversification.
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