“ Diversification" a discussion of M.Azim Ulfati

"Take a position as to whether or not your believe diversification increases shareholder value in a given company."

Diversification is a corporate strategy decision matter and is an essential tool available to investors. It is a decision taken at the highest level those impacts on the fundamental direction of firm and enables them to capture broad market forces while reducing the uncompensated risk associated with individual risk. Moving towards diversification has sometimes been compared while some firms succeed, many others get lost forever. In fact, in no other area of corporate strategy do so many companies made such disastrous decisions. Nonetheless, the attraction of growth and new opportunities continues to be irresistible for most companies.

We all know that many companies are diversified companies, like Apple, Microsoft, Walt Disney and Nokia.

What is vital is that each of these firms seeks to find a coherent path of profitable growth as it takes on new challenges.

If I was an investor, I would use diversification corporate strategy. I will picture a diversified firm as a collection of individual businesses to compete in diverse industry environments; I will have multi business and multi industry corporate strategy.

For instance I will open multi restaurant businesses. I will do business in each restaurant differently from what I do in other restaurants.

Diversification tends to spread through industries where growth and profits decline.

For example, I had stock shares of Oil Company few years ago and there was a declining demand for oil in that year and I was not able to sustain growth and profit in oil stock shares in the stock market.

I was using diversification strategy and I had shares from many different companies like bank of America, AT&T, Fort Motor and so on. I lost in oil stock shares but because of my good diversification strategy and increasing demands in AT&T and Bank of America stocks in the market, I benefited from my shares with these two other companies.

I had a friend who had also stock shares of Oil Company and he lost four hundred thousand USD and was left broke. He lost his house and whole almost every thing in his life and was so miserable because he did not have any previous diversification strategy.

"Given a company that is already diversified, suggest how senior management may determine the most effective strategy and how it should be evaluated."

Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks will yield the most cost-effective level of risk reduction. Investing in more securities will still yield further diversification benefits.

I think senior management needs to have a clear strategic vision and the commitment of an effective top management team to determine the most effective strategy and to evaluate it.

The best way to make sure that there is a clear strategic vision is to probe and question.

Also the senior management needs to spread business risk over a variety of industries, achieve greater earnings stability over the business cycle, and take advantage of opportunities for quick financial gain, frequently termed corporate turnaround. Further more it is important to avoid pitfalls of unrelated diversification, select capable manager and have the time to monitor what is going on.