Diversification of Firms Essay Example | Topics and Well Written Essays - 2000 words

Diversification of Firms - Essay Example The needs of the customers constantly changes and the firms are often challenged to keep pace with the changes. In order to reduce these risks, a firm needs to diversify its portfolio of stocks (Solnik, 1995, p.89). In the current market, firms should not only focus on how to produce their goods and services and avail them to the clients in the market. Rather, the market dynamics require the firms to develop corporate strategies and respond to these market forces will providing balance to the objectives and goals of the firm (Thinking Made Easier, 2011). In response to the changing market trends, some firms have opted to diversify their operations. Diversification is a business strategy that has experienced significant growth in the recent past. Diversification involves the production and delivery of new products and service. It is mainly aimed at ‘increasing market profitability, smoother earnings, and greater capital markets and accumulating diverse expertise in diverse envir onments’ (Thinking Made Easier, 2011). However, it may be noted that these objectives of diversification are not often met. Diversification is a way of hiding from the inability by a firm to acquire and maintain competitive advantage over its competitors producing similar products. This paper asserts that diversification is not an effective strategy in the current market by focusing on the challenges associated with this business strategy. Types of diversification Diversification in business organizations can be considered in terms of the business processes or in terms of the products ad services involved. In the first respect, there are three types of diversification namely: vertical integration, horizontal diversification, and geographical diversification (Kotelnikov, 2011). Vertical integration refers to bringing together two or more businesses that are at different production stages to add on to the value chain (The Economist, 2009). Horizontal diversification involves ex tending operations to new business industries to produce new products in order to reduce the risks that are specific to a given industry sector (The Investor, 2009). On the other hand, geographic diversification involves moving into new markets to make use of the opportunities in these regions (Kotelnikov, 2011). In terms of the product, diversification can be grouped as related or unrelated (Kotelnikov, 2011). Related diversification occurs when a firm extends its operations to produce products and services that are still in the same production line as the existing products and services. On the other hand, unrelated diversification is a situation in which the firms extend to produce products and services in a completely different production line (Thinking Made Easier, 2011). Objectives of diversification Business organizations diversify their operations with certain fundamental objectives. Firstly, diversification is aimed at improving the implementation of the organizational proce sses and strategies (Kotelnikov, 2011). It enables the management of organizations to create some value for the shareholders of the organization. In this way, diversification is also aimed at improving the organizational structure and enhancing the structural position of each business unit in the organization (Kotelnikov,