Diversified Company: Meaning and Nature
A diversified company consists of two or more individual business enterprises. The individual enterprises (or the lines of businesses) operate their businesses under a common umbrella, called parent company. The parent company is a diversified company.
Its operations are usually carried on in a multi-industry environment, as opposed to a single-business company which operates in only one industry environment.
As a result, managers of a diversified company (i.e., corporate managers) need to formulate strategies for several different business divisions/enterprises in diverse industrial environments. They formulate ‘multi-industry, multi-business strategy.’
Examples of diversified companies;
- Johnson & Johnson.
- 3M.
- Berkshire Hathaway.
- Alphabet.
- The Walt Disney Co.
When to diversify business?
Diversification aims to build shareholder value. This becomes possible when a diversified group of businesses can perform well, under the auspices of a single corporate parent.
In fact, diversification facilitates the enjoyment of synergistic benefits (2+2=5 effect).
However, diversification does not always yield beneficial results.
It works well in certain situations.
- When a company runs out of profitable growth opportunities in its core (original) business, it may choose to diversify its business.
- When a company possesses adequate technical expertise and resources for competing in different industries, it may opt for diversification in different industries.
- When a company has adequate human, physical and financial resources and it also wishes to establish a strong institutional image, it can g6 diversification.
- When a company has the opportunities to gain a competitive advantage in complementary products; it can gainfully diversify its business into those products.
- When a company finds it useful to transfer its existing competencies to new business areas, it would be wise for the company to extend its business to the new business.
- When a company can avail of cost-saving opportunities if it extends its business, the company may decide to diversity into closely related businesses.
