This occurs when a firm undertakes production of a new product without ceasing production of its existing products. Diversification may take place for one or more reasons: (a) from a desire to spread risks or compensate for seasonal or cyclical fluctuations in demand, (b) because of the existence of spare management or productive capacity, (c) from a desire to grow faster and earn greater profits than are possible in existing markets, which may be declining or expected to decline, (d) following a decision to exploit to the full an innovation or research result, or (e) as a result of some specific opportunity which, though not necessarily planned for, may seem too good to miss. Diversification will often take place by merger with a firrn in the industry into which the firm is diversifying, though this need by no means always be the case. Writers on diversification have stressed the fact that there are usually close links between existing products and products into which firms diversify – similarities of underlying technological characteristics, marketing techniques or very strong research and development expertise in the relevant areas of technology. In contrast to this is the pattern ofdiversification shown by holding companies, financial trusts and some so-called conglomerates, where the only common area of expertise is in financial management and control and there is considerable diversity of products and technologies.
Reference: The Penguin Dictionary of Economics, 3rd edt.