Diversification strategy refers to the strategy that a firm adopts to enter into new markets or industry with new products. Product diversification is what a company uses to widen its profitability and scope and achieve higher sales volume from new products. The diversification strategy allows the organization to grow in its business. However, the act of diversification does not come without rules and regulations that industries must follow. (Corporate Finance Institute, 2020; Gulati et al., 2017)
The strategy can be related or unrelated to the current business of the organization. Diversification can occur at the business level or at the corporate level. At the business-level of diversification the industry expands into a new segment of the industry that they already are involved with. In corporate-level diversification the industry expands into a new industry that is beyond how the current company is conducting business. (Corporate Finance Institute, 2020)
The government does play a part in regulating and overseeing the way which firms pursue diversification strategies. Basically, they tell you what to do and you have to do because they say so. The government has set many business regulations in order to keep corporations accountable for the amount of power they have in such a business driven industry. One such way the government gets involved is by encouraging diversification in the industries in which a different companies have a monopoly. Second, the government should regulate the diversification done by the companies so that it isn’t just for tax or other benefits and actually benefits the market or the industry. If the diversification strategy is unrelated, the government should regulate the level of how much diversification can be done by the company. (Government Regulations of Business, n.d.; Gulati et al., 2017)
In today’s current conditions, the level of regulations on industries may be too little. The government hardly regulates the diversification by companies. Most of the regulation exists if the company diversifies to another geographical location outside the country boundaries such as trade policies, import and export taxes, etc. The government regulates the corporate-level strategies to oversee things such as fair labor practices and correct financial reporting. (Gulati et al., 2017)
Opinions vary among industries about whether there is too much or too little governmental regulations on organizations that are looking to diversify. Regardless of their beliefs, all industries are held to the same standards of compliance and adherence to the rules. However, if there were increased regulations on the diversification of companies it could benefit all the stakeholders and society as well. Why do you have to follow the rules? Because the government said so. (Government Regulations of Business, n.d.; Gulati et al., 2017)
Corporate Finance Institute. (2020, July 14). Product Diversification. https://corporatefinanceinstitute.com/resources/knowledge/strategy/product-diversification/
Government Regulations of Business. (n.d.). Epiq Thinking. Retrieved September 5, 2021, from https://www.epiqglobal.com/en-us/thinking/class-action-mass-tort/faq/government-regulation-business-faq#:~:text=The%20Purpose%20of%20Government%20Regulation,a%20very%20business%2Ddriven%20society.
Gulati, R., Mayo, A., & Nohria, N. (2017). MindTap – Cengage Learning. Cengage.Com. https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentId=557615113112872025758405199&eISBN=9781305643673&nbId=2485825&snapshotId=2485825&dockAppUid=16&