Are Product Specialization and International Diversification Strategies Compatible?

One of the more common guidelines in business is diversification of products in order to reduce risk. While the motive inherent in diversification is logical, there is some evidence of reverse product diversification (RPD) by large companies in recent years. This paper takes as its starting position the fact that management has determined, after examining the potential costs and benefits that the appropriate strategic decision is to divest. The desirability of the individual investor or the firm implementing the strategy is not considered. This paper examines whether international diversification may make reverse product diversification more desirable. The term RPD refers to divestment of non-core business or subsidiaries by a company. In 1985, several firms in the U.S. have pursued divestiture strategies. International divestment has also increased. Multinational enterprises are divesting at increasing rates for both financial and strategic reasons. The strategic motive for both domestic and international RPD appears to be an attempt to capitalize on efficiency through specialization. A firm wishing to follow this strategy is not forced to limit production to a single product.