Economics of Industry Essay

1700 Words Nov 26th, 2013 7 Pages
Economics of industry

According to Daniel O. Klier, diversification is defined as a process when the firm enters into a new product category than the industry that it is currently working in. Thus, diversification leads to the firm entering into new markets by offering new product range. Currently, many companies have been initiating to enter into diversification since it helps to reduce their dependency on a single product range and its limited market. Over a period of time, many companies have been diversifying to reduce their risks. For instance, Wipro which is an IT firm few years back diversified into fast moving consumer goods industry, Giorgio Armani which is a fashion luxury goods brand diversified into hotel industry, Hindustan
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Reasons for diversification by companies:
Companies have been diversifying for various reasons such as:
In order to reach Economies of scale and of scope: economies of scale means when the firm produces more number of similar goods to reduce the average cost of the goods. An economy of scope means when goods are produced together, then the overall cost of production is reduced. Thus for either of the above reasons many firms would like to diversify and it leads to economic gains for the firm in the long run. An example of a firm which have diversified to meet economies of scale or scope is airtel which diversified into broadband services, DTH services along with its existing business of providing network service provider. Thus, the technology required for airtel is similar with similar investment but the returns from diversification are increased manifolds.
Increasing growth opportunities: many companies which have attained a considerable high market share and are looking for more growth opportunities would generally like to enter into new product categories since the scope of growth with the existing product range remains less. Thus, with the expertise of the market and knowledge about the existing trends in the market and skilled employees, the companies tries to pursue growth by diversifying into a new product category. For example: when dabur foods limited attained 55% of the market share with real juices, it realized that it was already a

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