Running head: ASSORTED REASONS FOR BUSINESSES DIVERSIFY 1

Assorted Reasons for Businesses Diversify

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Introduction

Diversification of business is attributed to various reasons of growth and sustainability in

a business firm (Freelancing | Academic Home, n.d.). The most typical forms in a firm’s

development are in form of tapping new markets and taking of beneficial positions in an existing

market. In a bid to increase a business diversity, many companies focuses on establishing of new

products and opening channels and outlets while making new partnering with others to enhance

their success through increased revenue. The above genres of diversification are applicable to

small, medium and big business enterprises around the globe. This paper will give insight on the

various assorted reasons for diversification in businesses.

Profit Motive

A vast number of organizations perform assorted diversification for various reasons.

However, when a firm decides to limit its expansion as they focus on a narrow product’s range

they have only limited access towards their customers. In profit motive, the main focus of

diversification is based on making profits. They thus standardize the cash flow throughout the

year through diversification aid. If a company is a seasonal business, the company will profit the

most during those peak season. If the company doesn't diversify as an alternative, they would

need to sell enough during high periods to make up the revenue. When a company expands it,

balances sales across the seasons.

Tax Reduction Reasons

Numerous organizations use diversifying as a resource to increase revenue. If that

organization isn't using the appropriate diversification strategy, there is likelihood of attracting

more taxes on the business investment. As a result, firms are advised to create an extensive range

of services and products that are appealing to the various taxation brackets. Simonides (2017)
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stated diversification is to reduce the risk in many areas by acting as a shield. Many investors

don't want to own too many assets that imposed the same way. Less cash flow volatility results

from merging of the several firms which entails reduced or no costs. In addition, the diversified

firms get advantaged in that they acquire greater debt capacity than undiversified firms of same

capacity. Huge capacity of debt is a significant merit to the firm as it raises the interest tax shield.

Avoidance of Anti-Trust Laws

Anti-Trust laws are legislations established by US government to shield consumers from

business exercises that are predatory (Bynum, 2019). A massive number of employees and

executives believe that the law only applies mergers and the corporate businesses. The laws

prevent firms from engaging in malicious activities thus enable fair competition from various

business entities. Avoiding conflicts with the regulations makes the firm escape attracting from

penalties thus

Low Business Performance

According to research, Hitt et al (2017) asserts that low levels of returns are attributed to

poor strategies in diversification. Improving business performance requires critical laydown of

diversification measures thus ensure prosperity of a business premise. Increasing incentives is

one of the diversified approach applied towards improving performance. Companies with low

levels of performances are often interlinked with urgency in need for diversification.

Uncertain Future Cash Flows

There are several factors that triggers the possibility of a firm to start diversification in

their operations. One of the primary causes is maturing of a product or either getting threatened.

The company has therefore to create a defensive strategy which ascertains long-term survival of

mostly the small business. Besides, if a firm is a small entrepreneurial premise in a maturing or
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mature industry, a need to diversify arises. The above strategies minimizes the uncertainties in a

company’s future cash flow.

Conclusion

In summary, diversification is one of the most essential game changer in a business

premise adaptability. Since the business environment keeps on changing with time, making

changes that will ensure the firm’s stay in the industry. If investors want to position their

portfolio for long term growth than global diversification is a must for the future.
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References

(Business Term Papers, n.d.). Freelancing | Academic Home. https://discountdealson.com/

Bynum, J. (Updated February 7, 2019). What are Antitrust Laws?. Investopedia. Retrieved from

https://www.investopedia.com/as/answers/09/antitrust-law.asp

Craig, W. (April, 2019). Business diversification. The Risk and the Reward. Retrieved

from https://www.forbes.com/sites/williamcraig/201504/24/business-diversification-the-risk-

and-the-reward.

Davidow, A. (October, 2018). Why global diversification matters. Charles Schwab:

Portfolio Management. Retrieved from https//www.schwab.com/resource-

center/insights/content/why-global-diversification-matters.

Hitt, H.A., Ireland, R.D., & Hoskisson, R.E. (2017). Strategic management: Concepts

and cases:Competitiveness and globalization, (12th ed.). Boston, MA: Cengage Learning.

Reid, B. (2016). Avoding everyday antitrust law violations. Huffpost. Retrieved from

https://www.huffington post.com/brad/reid/avoiding-everyday-antitru-b_7999742.html