Most of the specialized firms are highly vulnerable to changes in the environment especially when these changes are fast and unforeseen by the firm. Under such circumstances, firms tend to diversify their products and diversification has been identified as a tool to tide over such situations towards the latter half of 20th century (Whittington and Mayer, 2000). It is considered as a device to minimize risk from any one investment (Goold, et. al., 1993). In the case of FIAT, the process of diversification started at the time of inception itself and it was the result of the keen interest they had given on innovations. Under the leadership of Giovianni Agnelli, the process went on smoothly and resulted in fast growth of the company for over 4 decades.
A firm takes a decision to diversify under certain circumstances. These include lesser chance to increase profit in the present business, when expecting a high increase in shareholder value by diversification, when the resources and intangible assets could be easily transferred, and when the management is strong enough to consider an extension to new business. In the case of FIAT the management was strong enough until 1960's to venture into new businesses and they expected an increase in shareholder value through diversification. Most of these new businesses involved similar products and therefore the resources could be easily transferred and could be used in all these ventures. The technology and marketing strategies were also similar and could be shared.
There are two types of diversification, related and unrelated diversification. A diversification could be called as related diversification if it involves four factors (Winter, 1987). They are:
1. When new products similar to existing products are produced through the diversification process.
2. When the diversification is leading to vertical integration of all the activities of the firm.
3. When subsidiary firms, which produce similar products, are opened outside the home country.
4. When intangible assets are shared in the production. These assets might include marketing knowledge, technology that is patented, or a managerial process which is peculiar to the firm etc. In this condition the products of the diversification would be different and would sometimes be mistaken for unrelated diversification.
In the case of FIAT up to about 60 years after its inception its diversification was related diversification since the company was making similar products and the intangible assets were shared and used for production. Even in countries were they started new business the products were similar.
Related diversification itself consists of different levels based on the proportion of revenue in these ventures. These are (Lopez, 2002):
1. Non-diversification: This is the level in which although the firm has diversified its products, more than 80% of the revenue comes from the original single business.
2. Low diversification: Same as above but diversification is better than above.
3. Medium diversification: This is the level in which 70 to 80% of the revenue comes from the single business.
4. High-level diversification: In this level a single business do not account for more than 70% of the revenue.
5. Unrelated diversifi