Industrial diversification is a strategy that involves choosing to structure a company operation in a manner that promotes involvement in a wide range of revenue producing activities. An approach of this type may have to do with the production of goods and services associated with the business, or may focus more on how the company chooses to arrange its investment portfolio. The goal of any type of industrial diversification is increase the chances of returns by diversifying or spreading assets over a wider range of activities, while also helping to minimize the potential for failure or loss.
As it relates to production operations, industrial diversification has to do with providing goods and services that appeal to multiple markets rather than focusing on a product line that appeals to mainly one market. For example, a company may operate plant facilities that produce clothing items at one location, while also manufacturing bedding and other types of household textiles at another. At times, the diversification may involve completely unrelated products, such as a company that produces a line of office supplies but also has a division focused on the production of televisions and other electrical entertainment devices. The degree of industrial diversification will often be influenced by what owners believe will provide the best possible protection from declines in one market by enjoying corresponding increases in demand in another market.
Industrial diversification may also be employed when choosing assets for a corporate investment portfolio. In this scenario, the portfolio manager will seek to not only vary the type of holdings included in the investments, but also the range of variety within those sub-groups of holdings. This means that if the goal is to make sure the portfolio uses stock holdings to make up 50% of the total investments, he or she may allocate 10% to retail stocks, 20% to computer stocks, and another 20% to stocks associated with entertainment companies. The remaining assets in the portfolio may include several different kinds of bond issues, commercial real estate, and possibly even some commodities.
With either application, the idea behind industrial diversification is to increase the stability of the company by making it possible to enjoy revenue from more than one particular source. With a diversified line of products, the company stands a better chance of surviving if a slump in demand for its household appliances is offset by increased sales for its line of canned goods. In like manner, using industrial diversification to add variety to the corporate investment portfolio means that if stocks associated with a given industry undergo a slump, there’s a good chance that increases in the value of the other holdings will cover that loss and make it possible to still enjoy a net increase in returns.
