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 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 corporations 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 practicesome of the historically best known diversified companies are general electric 3m sara lee and motorola european diversified companies include siemens and bayer while diversified asian companies include hitachi toshiba 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 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 under 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 