Advantages And Disadvantages Of A Corporation Diversifying Essay

Advantages And Disadvantages Of A Corporation Diversifying Internationally - Essay Example Diversification may be used to refer to the variation between businesses within a company. This variation may be by products and/ or services. Diversification meaning varies across businesses, as what stands as diversification in one organization may not have significance in another. Thus, the definition of diversification is subjective. Nonetheless, business diversification may be in the dimension of cost leadership, production of commodity products, new product development, market leadership, strong brand names, high value added products, niche markets served, customers shared, advertisement emphasis, customer service emphasis and product design. Other dimensions may be emphasis on research and development, raw materials used, quality emphasis, distribution networks, company size. International diversification entails diversifying an investment portfolio across diverse geographic regions in order to lessen the overall peril and enhance returns on the portfolio. Corporations embrace international diversification by locating their operations in diverse nations and regions so as to reduce operational and business peril. There are three types of international diversification that is, related diversification, unrelated diversification and single product strategy. ... pany level tactic founded on a multibusiness model with the aim of increasing profitability through the use of common organizational capabilities to augment the performance of all the company’s business units. Firms that pursue this mode of diversification strategy are referred to as conglomerates, implying business organizations that function in numerous diverse industries. Advantages of international diversification Diversification and profit stability The assertions associating diversification on profit stability revolve around the portfolio concept, which holds that investing in diversified stock with non related profits may lower the precariousness of a corporation’s total gains. The idea of portfolio relates to product diversification, which may lower the variance of a company’s total profits. The reason is that the unpredictability of various profit schemes merged is nearly always less than the unpredictability of every profit stream independently, on cond ition that the profit streams are negatively related. Researches establish that product diversifiers actually enjoy higher profits than non diversifiers. The degree of risk reduction through unrelated diversification may exceed that which may be attained through related diversification. The reason is that unrelated diversification could lower industry specific systematic risk because it entails diversification across numerous industries. On the other hand, related diversification may not lower industry specific systematic risk happening within an industry. Industry specific systematic risks are the risks universal to all businesses in a certain industry (Kim, Hwang & Burgers, 1989, p 47). Rugman observed the same view, that geographical diversification through direct overseas investments evens out a