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"Diversification means entering product - markets different from those the firm is currently engaged in"

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Diversification "Diversification means entering product - markets different from those the firm is currently engaged in" (Aaker, 1984). As stated by Haner (1984), diversification is an expansion through additions of new product lines and services which are countercyclical, counter seasonal and/or offering opportunities to offset the impact of technological change or global competition. Internal development, acquisitions and mergers are approaches to diversification. Moreover, in the global world of today, diversification is everywhere. A lot of companies are diversified, from huge multinational corporations to small family businesses, and many of them to a huge span. There a lot of reasons why companies diversify, and some of them are the following. Diversifications help companies to convert present internal costs into future revenue producers. Moreover, as said by Aaker (1984), a basic diversification motivation is to improve ROI (Return on Investment) by moving into business areas with high ROI prospects. By this, the firm can enter a high growth area. For example, in 1979, Heinz purchased Weight Watchers International, the largest Weight-control chain and a companion firm that produces Weight Watchers Frozen Food entrees. Here, Heinz planned to exploit the Weight Watchers name by starting restaurants and health resorts and by marketing the food line aggressively, thereby achieving a profit growth substantially exceeding that of its exceeding business areas. ...read more.


This is a risk that influences a large number of assets. An example is an economic crisis that struck the country. It is virtually impossible to protect investors against this type of risk. This systematic risk is also known as nondiversifyable risk. Whereas, unsystematic risk is sometimes referred to as a "specific risk". "It's risk that affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees." (Investopedia.com, 2003). This unsystematic risk can be eliminated by diversification. It is also known as diversifiable risk There are some risks that can be faced by a company during diversification. Some form of diversification can divert attention from main product. This actually damages the original business by diverting attention and resources from it. For example, Quaker Oats embarked on an aggressive acquisition program in the early 1970s, going into toys and theme restaurants. In the process, however, the company allowed its core business areas to deteriorate. Only one major new product was introduces in the U.S. market during 1970-1978, 100% Natural Cereal. The marketing program by measures such as share and shelf facings suffered (Sample case taken from Aaker, 1984). This type of diversification cost is often overlooked. Another risk is management difficulties. ...read more.


"But, even with a large number of stocks, we cannot avoid risk altogether, since virtually all securities are affected by the common macroeconomic factors. For example, if all stocks are affected by the business cycle, we cannot avoid exposure to business cycle risk no matter many stocks we hold" (Bodie, Kane & Marcus, 2002). Since diversification affects risks of our portfolio by splitting funds, company performance is also affected. The reason is that once the risks are decreased, the portfolio of the company also gain returns, hence revenues flow smoothly into the company and increasing its assets and securities. This may lead to the betterment of the company performance for both short and long term. On the other hand, if the diversification fails to reduce risks, it may cause the company's performance to fall because rate of return is not good and might result in losses for the firm. Conclusion Diversification of portfolio may not be the best solution for investors. Still, most investment professionals agree that while it does not guarantee against a loss, diversification is the most important component to helping investors reach their long-range financial goals while minimizing risks. Diversification is possibly the greatest way to reduce the risk Achieving the right medium between risk and return might ensure investors that they can achieve financial goals. But, we should keep in mind that no matter how much diversification we do, it can never reduce risk down to zero. 1 ...read more.

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