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DIVERSIFICATION
This is when you buy a company in a market sector unrelated to your own.
Advantages include the following:
- It gives you the opportunity to enter an industry that offers better growth prospects than your own.
- You can balance cash flows. For example, a manufacturer of auto parts (which tends to be a very cyclical industry sector) might choose to buy a company in the healthcare field (which is a steady-state growth sector) to offset periodic slackening in auto-part demand.
Disadvantages include the following:
- It can be difficult to manage two different types of businesses.
- Historically, diversification has generally proved to be a failure. During the 1960s, the U.S industry underwent a massive diversification spree. But during the 1970s, these companies suffered.
