Question

Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk.

Answer 1

Diversification is a strategy for company growth through starting up or acquiring businesses outside the company's current products and market.

In a layman language, when we divide our investment in several things , we can reduce the risk of loss to the some extent. Suppose Mr Smith has 1 million dollar and he wants to invest the amount somewhere so, he invested whole money in the stock market. After 1 year , his money reduced by 20%. Now, he is in loss by 20%. He gets depressed and take out his whole money from the market.

Now take another example, Mr Smith has 1 million dollar which he wants to invest. So, he invested 40% in stock market, 40% in real estate ,10% in gold market and 10% in mutual funds.

After one year he observed, he had a loss in stock market but bumper profit in gold market and real estate so, he earned profit and bear loss simultanously. But profit is bumper so his investment is safe. Gold market and Real estate covered his whole loss which he incurred in the stock market. So, Mr Smith had a right choice for investing in different different segment. This process of investment is called Diversification

So, there are three key advantage of diversification include: Minimising risk of loss-if one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment

Preserving Capital-not all investors are in the accumulation phase of life; some who are close to retirement have goals oriented towards preservation of capital, and diversification can help protect your savings.

Generating Returns- Sometimes investments don't always perform as expected, by diversifying you are not merely relyong upon one source for income.

Operational Diversification

Diversification Strategies are used to expand firms' operations by adding markets, products, services or stages of production to the existing business. The purpose of diversification is to allow the company to enter lines of business that are different from current operations. When the new venture is strategically related to the existing lines of business, it is called Concentric Diversification.

Conglomerate Diversification occurs when there is no common thread of strategic fit or relationship between the new and old lines of business; the new and old businesses are unrelated

Lets take an example of Operational Diversification: Suppose Ventura is big burger king in the market. There is no comparison with taste with another brands. But in analysis , owners observed visitors like to have a coke also with the burger; so; most of the time they ask . So, Ventura decided to launch Vcoke product. Now, Ventura is king in burger as well as coke too. Therfore, by initiating this operational activity it added and enhanced its market. And it reduced also its consumer losing risk.