What Is Firm Diversification?

Also known as business or corporate diversification, firm diversification is the intentional activity of companies choosing to create a presence in more than one market or industry, using a series of strategies to establish a place in those markets and generate a profit from each of the endeavors. The purpose behind this type of diversification is to ensure that the business is able to withstand changes in the economy as well as consumer tastes by offsetting any declines in revenue associated with one market with gains in others. There are several ways to go about firm diversification, including the establishment or acquisition of subsidiaries as well as marketing a wider range of goods and services in several markets under the same brand name.

One approach to firm diversification involves establishing a presence in a market by making products that actually use waste or byproducts created while manufacturing goods and services that are sold in other markets. One example would be a petroleum company that has a strong presence in the production of oil and gasoline products designed for individual as well as commercial use. Instead of disposing of the waste that is left after preparing those products, the company may choose to set up a textile plant that manufactures fiber created using the residue or waste from the refining of the ingredients in the petroleum products. With this approach, the firm is able to not only maintain a presence in the original market, but use something that was essentially of no value to create new products sold in a different market in order to generate additional revenue.

In some cases, firm diversification calls for a strategy that includes ownership of a series of business entities that have no apparent connection other than the fact they are all owned by a parent. Using this approach, a company may be in a position to produce food products that sell in one market, electrical appliances that meet the demand in a different market, and also produce a clothing line that attracts attention in still another market. All of the products may be marketed under a common brand name, or they could be sold under names unique to each market, with or without an indication of the connection of those brands with the parent company.

Firm diversification is utilized by a number of corporate entities, often without the general public being aware of the connections between different brands sold in various markets. For the firm itself, diversification is often attractive, since it helps to ensure that there are multiple revenue streams associated with a multiplicity of markets. If sales suffer in one market based on factors such as shifts in consumer tastes, changes in the economy, or even advances in technology that render a product line obsolete, the firm remains viable thanks to the continuing success in the other markets. This effectively buys time to make adjustments and possibly improve conditions in the market sector that is no longer profitable, or even replace that market with a different one that shows more promise.