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What is a Diversified Company?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 26 November 2016
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A diversified company is a company that is active in a number of different markets, rather than limiting its products and services to one. Diversification is a business strategy that has a number of advantages, although it also comes with some costs. Companies that opt to diversify tend to be more capable of weathering periods of economic uncertainty, but they are also not usually positioned to make windfall profits from progress within specific markets and industries.

In a diversified company, the company offers products and services in multiple unrelated markets. Different branches of the company are handled by unique management with the experience and skills to address specific issues that can come up. Such companies experience less turbulence when individual markets falter because their business operations are not concentrated in a single market. This allows a diversified company to make money with some branches to sustain other branches while they are struggling or growing.

There are several ways that a company can diversify. One method is simply to expand the company itself, reaching into new markets with new initiatives. Another option is to acquire a company that will diversify the parent company's activities. This may be preferred in some cases, as companies can benefit from buying an established and respected company rather than trying to start from scratch. Companies can also merge to diversify, joining with companies that focus on different markets.

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Being diversified provides a number of advantages. It assures a more steady revenue stream for the company and provides more long-term financial security. Diversification can also allow a company to keep up with changing market dynamics more quickly. Companies that are diversified are more likely to see connections between different markets that can be exploited, for example, because they are active in multiple markets and they track trends carefully.

One disadvantage is that a company can be stretched too thin as it diversifies. If a company moves too quickly, it may end up in a position where it cannot make a profit because it is struggling to pay for the diversification. This may force it to roll out products and services too soon, exposing it to the risk of consumer irritation with incomplete or poorly thought out offerings. In addition, a diversified company does not stand to dominate a single market and capture a large market share because it cannot afford to concentrate resources on this. This means that a diversified company gives up the especially large profits from a single market available to companies that choose not to diversify.

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JaneAir
Post 3

I feel like companies have to be careful how much they diversify. As the article said, if a company tries to diversify too much, they made end up stretched too thin and it could hurt them in the long run.

I think if you're going to diversify a lot, it makes sense to have several different companies under the same umbrella that operate separately. That way, each company can stay focused on what they're doing and not get distracted by what the other branches are up to.

starrynight
Post 2

@KaBoom - I think that's a good example of a company that has diversified investment in the same market. They are making the same product (cars) but targeting different segments of the market. They still can still take advantage of advances in the car industry, and aren't spread too thin trying to do completely unrelated things.

KaBoom
Post 1

When I think of companies that have diversified in a smart way, I always think of car companies. Some car companies have two or three separate brands that target completely separate markets of buyers.

For instance, Lexus, Toyota, and Scion are all made by the same company. Lexus makes luxury vehicles that target wealthy buyers, Toyota targets middle class adult buyers, and Scion target the youthful market and people who want to spend less.

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