The term refers to the expansion of an existing firm into another product line or market. Diversification may be related or unrelated. Related diversification occurs when the firm expands into similar product lines. For example, an automobile manufacturer may engage in production of passenger vehicles and light trucks. Unrelated diversification takes place when the products are very different from each other, for example a food processing firm manufacturing leather footwear as well. Diversification may arise for a variety of reasons: to take advantage of complementarities in production and existing technology; to exploit; to reduce exposure to risk; to stabilize earnings and overcome economies of scope cyclical business conditions; etc. There is mounting evidence that related diversification may be more profitable than unrelated diversification.
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