Advantages of Diversification
Companies have increasingly adopted diversification strategy due to the following reasons:
(i) Better use of its resources. By adding up related products to its existing product portfolio, a company can more effectively utilize its managerial personnel, marketing network, research and development facilities, etc.
(ii) Reduce the decline in sales. By developing new products the sales revenue and earnings can be maintained or even increased. For example, Bajaj Scooters India Ltd. entered in the field of mopeds.
(iii) More competitive with greater resources, more products and higher profits, the diversified firm is more competitive than a single product firm.
(iv) Minimize risk. When one line of business faces recession, another line may be in high growth stage. For example, a well-diversified engineering firm like Larsen and Toubro did well even when the engineering industry was facing recession.
(v) Use of cash surplus of one business to finance another business having good potential for growth.
(vi) Economies of scale: Diversification adds to size of business which improves the competitiveness of a firm. It offers a lot of economy in operations because common facilities can be used for several products.
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