Why is diversification such an important component of a firm's strategy?

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The Answer is Diversification is basically about the question of "what business we are in".
It is a conundrum, because diversification can prove to be a very valuable strategy for achieving success or, conversely, for decreasing stockholder value.
The decision to diversify or not should be based on two fundamental questions:
1-How attractive is the industry in which a firm would like to enter?
2-Can a firm establish a competitive advantage in that new industry?
Therefore, a decision regarding diversification may be justified by a potential superior profit of the industry to be entered, or by the ability of a firm to create a competitive advantage, which largely relies on the fit between the industry environment and a firm's resources and competencies.
To determine if diversification would create shareholder value, Porter proposes three tests:
a) the attractiveness test, where the new industry must be attractive (level of competition, growth, profit, etc.)
b) the cost-of-entry test, which assesses the cost for entry, taking into consideration the barriers to entry
c) the better-off test, which evaluates the extent to which the entry into a new industry will benefit existing businesses, and the extent to which the new business will benefit from a firm's existing businesses. In other words, each one must benefit from the other, and the addition of that new business must generate synergies within the firm.

Why Is Diversification Such an Important Component of a Firm's