What Is Corporate Diversification?
Corporate diversification is the process of a company expanding into different areas, such as industries and product lines. Companies typically do this in order to build the business. Diversification can involve expanding, revitalizing, or even saving a company. The different types of diversification are usually implemented with a carefully-planned strategy.
There are two primary types of corporate diversification: related or unrelated. If the company consists of an overarching structure that supports all of its different businesses, then it is engaging in related diversification. When a company consists of a series of individual businesses that do not share things such as customers and distribution channels then it has unrelated diversification.
The process of corporate diversification often involves expanding the offerings of a business by entering a new market. A company may do this because it is nearing market saturation with its current product line. It may also diversify because public demand for its primary product has declined. Some companies will undergo product diversification solely to expand the business. This process may also be called product diversification.
Corporate diversification that takes place in different locations is also referred to as geographic market diversification. This is when the company is only expanding locations. It does not involve the service or product the company offers. This kind of diversification is often used for the growth of a thriving business, and particularly when the company reaches local market saturation.
In many cases, corporate diversification consists of one company acquiring another. Some of the most common reasons this happens is because a company wants to expand quickly into another market, the company is poorly-run and needs better management in order to survive, or it is more economical for the companies to share resources. A company may also use acquisitions as a means of growth.
Corporate diversification may also be used to offset the risk of doing business. By expanding, a company is not dependent on a limited number of products, locations, or markets in order to survive. A company may pursue this diversification in reaction to or in anticipation of a change in the market.
There are some who feel that corporate diversification is an inefficient practice. These people tend to believe that a company is more likely to succeed if it specializes in one or a limited number of products or markets. From this perspective, the risk of corporate diversification is that the business will spread itself too thin.
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