What Is a Diversified Company?

A diversified company is a type of company that has multiple unrelated businesses or products. Unrelated businesses are those that:

• Require unique management expertise
• Have different end customers
• Produce different products or provide different services

One of the benefits of being a diversified company is that it buffers a business from dramatic fluctuations in any one industry sector. However, this model is also less likely to enable stockholders to realize 🧸significant gains or losses because it is not singularly focused on one business.

How a Diversified Company Works

Companies may become diversified by entering into new businesses on its ﷽own by merging with another company or by acquiring a company operating in another field or service sector. One of the challenges facing diversified companies is the need to maintain a strong strategic focus to produce solid financial returns for shareholders instead of diluting corporate value through ill-conceived acquisitions or expansions.

Conglomerates

One common form of a diversified company is the conglomerate. Conglomerates are large companies that are made up of independent entities that operate in multiple industries. Many conglomerates are multinationals and multi-industry corporati🍒oꦡns.

Every one of a conglomerate's subsidiary businesses runs independently of the other business divisions, but the subsidiaries' management report to the senior management of the parent company.

Taking part in many different businesses help a conglomerate's parent company cut back the risks from being in a single market. Doing so also helps the parent lower costs and use fewer resources. But there are times when a company grows too big that it loses efficiency. In order to deal with this, the conglomerate may divest.

Diversified Companies in Practice

Some of the historically best-known diversified companies are General E♏lectric, 3M, Sara Lee, and Motorola. European diversified companies include Siemens and Bayer, while diversified Asian companies include Hitachi, Tosh🍸iba, and Sanyo Electric.

The general idea behind "diversifying" is the spread or smoothly of financial, operational, or geographic risk concentrations. Financial markets generally focus on two sources of risk: unique or firm-specific risk and the other, systemic or market risk. According to capital market theory, only market risk is rewarded, because a rational investor always has the opportunity to diversify, thus eliminating unique or 澳洲幸运5官方开奖结果体彩网:idiosyncratic risk.

Knowing investors vary capital costs based on risk-return profiles, businesses often use a strategy to diversify themselves from within. Critics can point to entities growing for the sake of growth und🐎er the guise of diversification. Bigger businesses generally pay executives more, enjoy more press, and can fall prey to entrenchment and status quo. Whereas one observer might see diversification; another may see bloat.