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G2 - [ABS-3] Diversification Strategy (financial reason to diversify…
G2 - [ABS-3] Diversification Strategy
introduction
firm scope
businesses that a firm operates
how do they govern those operations
corporate strategy
how a firm leverages its position across markets
business strategy's extension
financial reason to diversify
reduce volatility by diversify assets
reduce risk by diversify assets
capitalize on opportunities in related markets
capitalize on opportunities in unrelated markets
limits on firm scope
Government and Antitrust
reduce monopoly powers
Agency Costs
Opportunistic behavior of managers and employees
More political
More difficult on monitoring and sanctioning
as you become larger
increase Bureaucratic Costs
less able to adapt to market changes
decision making becomes slower and inflexible
even though you might achieve some synergies
4 kinds of diversification
high
related
multiple business
share value chain
e.g. disney
synergy
unrelated
conglomerate(popular in the 1970s)
e.g. GE
low
single business(>95%)
predominately in one business
e.g. google, coca cola
dominant business(70%~95%)
portfolio
having other business as well that contribute to their revenues
e.g. pepsi
operational reason to diversify
transfer/leverage rent-generating assets
improve coordination among businesses
exploit economic of scale and scope
strategic reason to diversify
Raise rival's cost
Reduce rivalry through mutual forbearance
Eliminate competition by subsidizing a price war
Minimize transaction costs by using markets
good job