1.   Diversification must do more for a company than simply spread its risk across various industries.


2.   In principle, diversification makes good strategic and business sense only if it results in added shareholder value – value shareholders cannot capture through their ownership of different companies in different industries.

3.   For there to be reasonable expectations that a diversification move can produce added value for shareholders, the move must pass three tests:

a.   The industry attractiveness test – The industry chosen for diversification must be attractive enough to yield consistently good returns on investment.

b.   The cost of entry test – The cost to enter the target industry must not be so high as to erode the potential for profitability.

c.   The better-off test – Diversifying into a new business must offer potential for the company’s existing businesses and the new business to perform better together under a single corporate umbrella than they would perform operating as independent stand-alone businesses.

4.   Diversification moves that satisfy all three tests have the greatest potential to grow shareholder value over the long term. Diversification moves that can pass only one or two tests are suspect.

The following two tabs change content below.
We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected]

Leave a reply

Your email address will not be published. Required fields are marked *



BMS.co.in is aimed at revolutionising Bachelors in Management Studies education, also known as BMS for students appearing for BMS exams across all states of India. We provide free study material, 100s of tutorials with worked examples, past papers, tips, tricks for BMS exams, we are creating a digital learning library.

Disclaimer: We are not affiliated with any university or government body in anyway.

©2019 BMS - Bachelor of Management Studies Community 

A Management Paradise Venture

Ask Us On WhatsApp

Log in with your credentials


Forgot your details?


Create Account