• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

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

Extracts from this document...

Introduction

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.

Middle

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.

Conclusion

"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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level ICT in Business section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level ICT in Business essays

  1. Starting a Small Firm.

    Patents and Copyrights An entrepreneur can use patents and copyrights to protect a new product, process, invention or information against copying and reproduction by other people without the entrepreneur's permission. A patent gives an entrepreneur or a business the legal right to be the sole owner or user of a particular production process or of a new product.

  2. Human resources

    Health, old age, and financial problems are some of the situations that may dictate the end of an entrepreneur's involvement with his or her business. A large number of small businesses are family owned and managed. So it is appropriate to begin by considering the common situation of a business

  1. Executive Summary - Ice Dreams

    This is where the money was spent: DISPLAY ADVERTISING �M CLASSIFIED ADVERTISING �M Television 4029 - National Newspapers 1351 442 Regional Newspapers 826 1563 Consumer Magazines 553 157 Business and Professional Journals 756 453 Directories (Including Yellow Pages) - 780 Press Production Costs 610 - Outdoor and Transport 563 -

  2. E-commerce and its effects in Ireland

    3.1.6 Defamation In theory, defamation cases on foot of defamatory material posted on the Internet can be taken in any country in which it can be viewed. From Ireland's perspective, the liability of companies hosting such material on mirror sites or acting as mere conduits for such material, requires clarification.

  1. Fusions Acquisitions: Compaq - HP Merger.

    Enterprise Storage earns No. 1 ranking from leading network storage users. In April, Compaq and Siebel extend relationship into Global Strategic Alliance and was ranked No. 1 vendor in Linux server market. At the same time, it was recognised by President Clinton as the leader in bringing the digital divide.

  2. Dell - The reason for selecting Hong Kong.

    , limited number of larger supplier (good reputation in the past co-operation) and short channels (high speed) , critical to success customer service (on going information service and after sales service , personal selling approach, Current relationships: strong relationship on existing customer, longer term and closer relationship with fewer suppliers,

  1. The Different Theorists And Their Theories - FW Taylor.

    This became known as the two factor theorem and is shown below: Motivators Hygiene factors Achievement Company policy Recognition of achievement Supervision Meaningful and interesting work Pay Responsibility Interpersonal relations Advancement Working conditions Herzberg strongly advised against giving payment incentives as he described that as a bribe.

  2. For my GCSE business studies I have to make a portfolio investigating two contrasting ...

    - More expensive to start off a company - The profits are divided in the shareholders Aims and Objectives Aims - are the long-term goal of a business Objectives - are the targets that help firms to achieve their aims Aims Tesco's aims are to be the best supermarket in the whole world and provide better services than its competitors.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work