Diversification of Activities

Abstract

Diversification is the process by which the modern corporation extends its activities beyond the products and markets in which it currently operates. It is a major determinant of the structure of modern industrial economies and has important implications for competition and efficiency. Robinson (1958, p. 114) defines diversification as ‘the lateral expansion of firms neither in the direction of their existing main products, as with horizontal integration, nor in the direction of supplies and outlets, as with vertical integration, but in the direction of other different, but often broadly similar, activities’. The extent of diversification can be measured in a number of ways, but is hampered by the difficulty of precisely defining the boundaries between different products, markets and industries. It is not a simple task to assess the degree to which a firm spreads its operations over different activities. The more narrowly defined are these activities the greater will be the apparent degree of diversification. These problems are not unique to the measurement of diversification and similar difficulties arise in the measurement of concentration in industry. Indeed the process of diversification itself has played a major part in blurring the distinction between industries and in creating these measurement problems. However, it is clear that diversification must involve the firm in producing new products which are sufficiently different from its existing products to involve the firm in new production or distribution activities. Diversification may therefore involve only a small change of direction, or a dramatic switch into an entirely new line of business. In the literature the former is referred to as related, or narrow spectrum diversification and the latter as unrelated, or broad spectrum diversification.