After operating a business for several years, you may decide to expand its operation. Many businesses choose to enlarge by merging with another company or by acquiring a unique company in the same industry just like Oracle Corporation. Sometimes companies choose to diversify by merging or acquiring companies in different industries just like General Electric.
However, some daring companies even go a step further to start business from scratch in entirely different companies. Example of such companies include Dangote Group, Virgin Group, etc. In retrospect, there are companies that have found success by concentrating on their core and example of these companies include IKEA, Wal-Mart, Starbucks, etc. So in this article, we will be focusing on the benefits of diversification for a business.
Diversification gives you the ability to control inputs, leading to continuity and improved quality. For example, News Corp acquired twentieth century fox and six television stations of metro media broadcasting group in the US. These acquisition provided the company with wide platform for consolidation of its related activities through access to studios for making films and television programs.
· Ability to control markets by guaranteeing distribution and sales. This can start through a combination of linkages in the value chain. For instance, where production and distribution channels are combined identity to achieve benefits in new markets. The market dominance of Dangote Group in Nigeria is a good example of this scenario.
· Ability to take advantage of already existing experts, knowledge and resources in that company when enlarging into new activities. This can result in transfer of skills, such as research and improved knowledge and sharing of resources.
· Diversification creates a platform for better risk control management because there will be no more reliance on single market. A well-diversified company like the Virgin Group, Reliance Group, General Electric and Dangote Group can never be shaken or liquidated by the failure of an arm of the business.
· Another benefit of diversification is that it helps in the provision of movement away from declining activities.
· It benefits the firm owners because it increases the efficiency of the firm.
· Diversification helps a firm to gain business synergy.
· It helps the firm make use of internal capital markets.
· It helps to diversify shareholders’ portfolios.
· It helps to economize on transaction cost.
· Diversification helps in identification of undervalued firms when there is excess capacity.
· Diversification in business helps allocate investments among the various financial instruments, industries and other categories.
· It maximizes returns because investments are made in different areas.
· It is the most important component of reaching long-range financial goals while minimizing risk.
· Diversification provides an effective, fast and sustainable growth in business.
In conclusion, the above listed information are the ways in which diversification can help a business. In addition to the points listed above, diversification can also assist an investor to manage risk and decrease the volatility of an asset’s cost movements.
However, it is re-emphasized that no matter how diversified your portfolio is, risk can never be erased completely. You can decrease the risk associated with individual stocks, but general market risks affect almost all stock, so it is very essential to diversify also among different asset classes. The key is to find a medium between risk and return; this will ensure you that you have achieved your financial goals while still getting a good night rest.