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ASM_G3_Diversification Strategy (Reasons to Diversify (Alternatives…
ASM_G3_Diversification Strategy
Reasons to Diversify
Transfer or Leverage ,rent-generating assets
Transferring that expertise across different business but they have same core technology at the heart
Improve coordination among businesses
Having business under one organaztional entity
Exploit economics of scale and scope
Share resource between the functional organization
Caution
Synergies hard to in practice
Alternatives
Outsourcing
Alliances
Limits on Firm Scope
What limits firm scope ?
the reason why not form a large organization
Government and Antitrust
Reduce monopoly powers
Bureaucratic Costs
Coordinating between layers of management becomes difficult
Slow, inflexible decision-making
Be less able to adapt to market changes
Agency Cost
Organizational politics, influence games
Opportunistic behavior of managers and employees
Monitoring and sanctioning become difficult
The right degree of diversification
There is no simple answer to the right amount of diversification
Chart
Large conglomerates demonstrate lower performance
Lower diversification firms < concentrated diversified firms
Vary across industries, across time
and vary for individual firms
We need to do
fuller analysis of the industry
The strategist’s challenge
Value, opportunities and capabilities
The strategist challenge across
multiple business
Operating 4 different businesses
Synergies and value creation
Enhance competitive standing
in any individual business
Example
General Electric
Focus on large industrial business
Be able to create value through
some of their management practices
Strategic Reasons to Diversify
1.Eliminate competition by subsidising a price war
Argument
Competitors have limited access to capital
Caution
May be an antitrust violation (eg.Microsoft)
2.Raise rivals' costs (eg.vertical foreclosure)
Argument
Exert power through backward and forward integration.
Caution
A near monopoly position must be maintained in the upstream or downstream activity.
3.Reduce rivalry through mutual forbearance
Argument
Multipoint competition (competitors are in similar markets) reduces incentives to fight
Caution
Complexity makes such tacit collusion difficult
Minimise transaction costs of using market
Argument
Often costly (impossible) to write complete contract, leading to 'hold up' by partners.
Caution
Assumes that trust is difficult in market exchange.
Why firms exist: Theory of the Firm
Transactions between independent economic actors
Ownership
Ability to choose course
Create common incentives and mechanisms for coordination
Minimizes risk and friction
Relationship-specific assets and hold up.(Opportunism)
Inseparability of effort and resources expended
Contracting on information : Arrow's paradox
R&D
Private information (adverse selection)
Second-hand car
Uncertain about future contigencies
Financial reasons to diverify
unrelated market
argument
Firms can reinvest retained earnings and achieve growth targets by entering into new, unrelated markets
critique
The investors, can choose where to invest for themselves
related market
argument
Firms may have privileged information about profitable opportunities
critique
little evidence shows that internal investing is more efficient than a public capital net markets
reduce risks by diversifying assets
argument
employment cost or financial cost may cause bankruptcy
critique
combining units can compound risk across units
example
Disney
reduce volatility
example
movie companies
critique
Shareholder can diversify for themselves
argument
allows firms to reduce that volatility that's inherent in one of their industries.