what is the impact of diversification on firm performance?give generic answer

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readerofbooks eNotes educator| Certified Educator

This is a good question. When a firm diversifies, there is a distinct strategy that a firm is employing. A wise firm will not put all their money in one area or one company. Too many things can go wrong. So, for example, through a natural disaster if a company is destroyed, then a firm will lose all its money. Sectors are a little safer, but even then, a sector could be hit hard in any given year. This, too, will hurt a firm. 

In light of this, if a firm diversifies, then it will be safer. Moreover, it can sell when certain sectors or companies are doing well. This can offset any weakness in another sector. And when those sectors, which are weak, are faring better, then the firm will be able to sell, perhaps even for a profit. This strategy allow a firm to hold and not sell until there is a bounce back up.