Benefits And Costs Of Related Diversification Pdf

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Related Diversification is the most popular distinction between the different types of diversification and is made with regard to how close the field of diversification is to the field of the existing business activities. Related Diversification occurs when the company adds to or expands its existing line of production or markets. In these cases, the company starts manufacturing a new product or penetrates a new market related to its business activity. Under related diversification the company makes easier the consumption of its products by producing complementing goods or offering complementing services.

Related diversification, core competences and corporate performance

Corporate strategy, the overall plan for a diversified company, is both the darling and the stepchild of contemporary management practice—the darling because CEOs have been obsessed with diversification since the early s, the stepchild because almost no consensus exists about what corporate strategy is, much less about how a company should formulate it. A diversified […]. A diversified company has two levels of strategy: business unit or competitive strategy and corporate or companywide strategy.

Competitive strategy concerns how to create competitive advantage in each of the businesses in which a company competes. Corporate strategy concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units. Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts. The track record of corporate strategies has been dismal.

I studied the diversification records of 33 large, prestigious U. The corporate strategies of most companies have dissipated instead of created shareholder value. The need to rethink corporate strategy could hardly be more urgent.

By taking over companies and breaking them up, corporate raiders thrive on failed corporate strategy. Fueled by junk bond financing and growing acceptability, raiders can expose any company to takeover, no matter how large or blue chip. Recognizing past diversification mistakes, some companies have initiated large-scale restructuring programs. Others have done nothing at all. Whatever the response, the strategic questions persist. Those who have restructured must decide what to do next to avoid repeating the past; those who have done nothing must awake to their vulnerability.

To survive, companies must understand what good corporate strategy is. While there is disquiet about the success of corporate strategies, none of the available evidence satisfactorily indicates the success or failure of corporate strategy.

Most studies have approached the question by measuring the stock market valuation of mergers, captured in the movement of the stock prices of acquiring companies immediately before and after mergers are announced. These studies show that the market values mergers as neutral or slightly negative, hardly cause for serious concern. Studying the diversification programs of a company over a long period of time is a much more telling way to determine whether a corporate strategy has succeeded or failed.

My study of 33 companies, many of which have reputations for good management, is a unique look at the track record of major corporations. We studied the — diversification histories of 33 large diversified U. They were chosen at random from many broad sectors of the economy. To eliminate distortions caused by World War II, we chose as the base year and then identified each business the company was in. We tracked every acquisition, joint venture, and start-up made over this period—3, in all.

We classified each as an entry into an entirely new sector or field financial services, for example , a new industry within a field the company was already in insurance, for example , or a geographic extension of an existing product or service.

We also classified each new field as related or unrelated to existing units. Then we tracked whether and when each entry was divested or shut down and the number of years each remained part of the corporation.

In a few cases, we asked the companies specific questions. It is difficult to determine the success of an entry without knowing the full purchase or start-up price, the profit history, the amount and timing of ongoing investments made in the unit, whether any write-offs or write-downs were taken, and the selling price and terms of sale. Instead, we employed a relatively simple way to gauge success: whether the entry was divested or shut down.

The underlying assumption is that a company will generally not divest or close down a successful business except in a comparatively few special cases. Companies divested many of the entries in our sample within five years, a reflection of disappointment with performance.

Of the comparatively few divestments where the company disclosed a loss or gain, the divestment resulted in a reported loss in more than half the cases. The data in Exhibit 1 cover the entire — period. However, the divestment ratios in Exhibit 2 and Exhibit 3 do not compare entries and divestments over the entire period because doing so would overstate the success of diversification.

Companies usually do not shut down or divest new entries immediately but hold them for some time to give them an opportunity to succeed.

Our data show that the average holding period is five to slightly more than ten years, though many divestments occur within five years. To accurately gauge the success of diversification, we calculated the percentage of entries made by and by that were divested or closed down as of January If we had included more recent entries, we would have biased upward our assessment of how successful these entries had been.

As compiled, these data probably understate the rate of failure. Companies tend to announce acquisitions and other forms of new entry with a flourish but divestments and shutdowns with a whimper, if at all. We have done our best to root out every such transaction, but we have undoubtedly missed some. There may also be new entries that we did not uncover, but our best impression is that the number is not large.

Exhibit 1 Diversification Profiles of 33 Leading U. Their data cover the period up through takeover but not subsequent divestments.

My data paint a sobering picture of the success ratio of these moves see Exhibit 2. Even a highly respected company like General Electric divested a very high percentage of its acquisitions, particularly those in new fields.

Companies near the top of the list in Exhibit 2 achieved a remarkably low rate of divestment. Some bear witness to the success of well-thought-out corporate strategies. Others, however, enjoy a lower rate simply because they have not faced up to their problem units and divested them.

Their data cover the period up through takeover, but not subsequent divestments. I calculated total shareholder returns stock price appreciation plus dividends over the period of the study for each company so that I could compare them with its divestment rate.

While companies near the top of the list have above-average shareholder returns, returns are not a reliable measure of diversification success. Companies like CBS and General Mills had extremely profitable base businesses that subsidized poor diversification track records. I would like to make one comment on the use of shareholder value to judge performance. Linking shareholder value quantitatively to diversification performance only works if you compare the shareholder value that is with the shareholder value that might have been without diversification.

Because such a comparison is virtually impossible to make, measuring diversification success—the number of units retained by the company—seems to be as good an indicator as any of the contribution of diversification to corporate performance. My data give a stark indication of the failure of corporate strategies. Only the lawyers, investment bankers, and original sellers have prospered in most of these acquisitions, not the shareholders. Any successful corporate strategy builds on a number of premises.

These are facts of life about diversification. They cannot be altered, and when ignored, they explain in part why so many corporate strategies fail. Diversified companies do not compete; only their business units do. Unless a corporate strategy places primary attention on nurturing the success of each unit, the strategy will fail, no matter how elegantly constructed.

Successful corporate strategy must grow out of and reinforce competitive strategy. Obvious costs such as the corporate overhead allocated to a unit may not be as important or subtle as the hidden costs and constraints.

A business unit must explain its decisions to top management, spend time complying with planning and other corporate systems, live with parent company guidelines and personnel policies, and forgo the opportunity to motivate employees with direct equity ownership. These costs and constraints can be reduced but not entirely eliminated. Shareholders can diversify their own portfolios of stocks by selecting those that best match their preferences and risk profiles.

These premises mean that corporate strategy cannot succeed unless it truly adds value—to business units by providing tangible benefits that offset the inherent costs of lost independence and to shareholders by diversifying in a way they could not replicate. To understand how to formulate corporate strategy, it is necessary to specify the conditions under which diversification will truly create shareholder value. These conditions can be summarized in three essential tests:.

The attractiveness test. The industries chosen for diversification must be structurally attractive or capable of being made attractive. The cost-of-entry test. The cost of entry must not capitalize all the future profits.

The better-off test. Either the new unit must gain competitive advantage from its link with the corporation or vice versa. Of course, most companies will make certain that their proposed strategies pass some of these tests. But my study clearly shows that when companies ignored one or two of them, the strategic results were disastrous. In the long run, the rate of return available from competing in an industry is a function of its underlying structure, which I have described in another HBR article.

An unattractive industry like steel will have structural flaws, including a plethora of substitute materials, powerful and price-sensitive buyers, and excessive rivalry caused by high fixed costs and a large group of competitors, many of whom are state supported. Diversification cannot create shareholder value unless new industries have favorable structures that support returns exceeding the cost of capital. An industry need not be attractive before diversification.

In fact, a company might benefit from entering before the industry shows its full potential. Unless the close fit allows substantial competitive advantage, however, such comfort will turn into pain when diversification results in poor returns.

Royal Dutch Shell and other leading oil companies have had this unhappy experience in a number of chemicals businesses, where poor industry structures overcame the benefits of vertical integration and skills in process technology.

Another common reason for ignoring the attractiveness test is a low entry cost. Sometimes the buyer has an inside track or the owner is anxious to sell. Even if the price is actually low, however, a one-shot gain will not offset a perpetually poor business. Almost always, the company finds it must reinvest in the newly acquired unit, if only to replace fixed assets and fund working capital.

Many that rushed into fast-growing industries personal computers, video games, and robotics, for example were burned because they mistook early growth for long-term profit potential. Industries are profitable not because they are sexy or high tech; they are profitable only if their structures are attractive. Diversification cannot build shareholder value if the cost of entry into a new business eats up its expected returns. Strong market forces, however, are working to do just that.

A company can enter new industries by acquisition or start-up. Acquisitions expose it to an increasingly efficient merger market.

Shareholder wealth effects of diversification strategies: A review of recent literature

The effects of diversification on financial performance are well-established, less so the way in which diversification influences company behaviour towards stakeholder demand and social concern. This paper investigates the relationship between business diversification and corporate social performance CSP in an industrial setting, in Indonesia. CSP is measured with an index constructed from content and disclosure analysis of annual company reports in line with global reporting initiative standards. A sample of listed manufacturing companies from the Indonesian Stock Exchange is used to estimate a lagged multiple regression model to show that industry-level diversification does not have an effect on CSP. However, distinguishing between related and unrelated diversification produces a different outcome whereby, related diversification is negatively and statistically significantly correlated with CSP. Unrelated diversification, on the other hand, shows a positive and statistically significant relationship. It means the relationship between unrelated diversification and CSP is more positive than the relationship between related diversification and CSP.

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Corporate strategy, the overall plan for a diversified company, is both the darling and the stepchild of contemporary management practice—the darling because CEOs have been obsessed with diversification since the early s, the stepchild because almost no consensus exists about what corporate strategy is, much less about how a company should formulate it. A diversified […]. A diversified company has two levels of strategy: business unit or competitive strategy and corporate or companywide strategy. Competitive strategy concerns how to create competitive advantage in each of the businesses in which a company competes. Corporate strategy concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units.

Request PDF | Benefits and Costs of Diversification for Firms in Chapter 11 | Abstract This Prior research shows that diversification may benefit both firms and optimism in analysts' forecasts of earnings is related to the costs and benefits to.

Related Diversification

Diversification strategies, in particular those associated with acquisition activity, offer companies an opportunity for growth in a less restricted en. Limmack, R. Emerald Group Publishing Limited.

Diversification, resource concentration, and business group performance: Evidence from Taiwan

From Competitive Advantage to Corporate Strategy

This article proposes a new explanation for the large cross-sectional variation in the excess values of diversified firms. The model applies the idea of shareholders' limited liability affecting firms' output market strategies to the analysis of financial and operating choices of conglomerates. The inability of conglomerates to commit to unconstrained optimal operating strategies, following from the lack of flexibility in choosing their divisions' capital structures, reduces their value. Thus, the model highlights a new type of inefficiency of the conglomerate organizational structure, which is suboptimal financing. The predictions of the model are generally supported by the data. Most users should sign in with their email address. If you originally registered with a username please use that to sign in.

This study examines the impact of resource configuration, specifically diversification and resource concentration, on the performance of business groups in an emerging economy. Based on the data collected from Taiwanese business groups from to , this study finds that resource concentration positively influences the performance of business groups, while diversification has a negative impact on the performance of business groups. The findings of this study provide support to the resource-based view and the market power perspective of business groups. This study also finds that the appropriate organizational form may change over time, confirming the institution-based view of business groups in emerging economies. This is a preview of subscription content, access via your institution. Rent this article via DeepDyve. Generally speaking, a multibusiness firm is a legally independent firm with various business units regardless of its origin, whether the unit is as a result of internal development or acquisitions; all of the business units are the same company in law, coordinated by central ownership, and formal authority.

Key words: BIS group, diversification, value chain, competitive advantage One of the biggest benefits of company growth is the reduced costs through economies Both the related and unrelated types of business diversification have ad- vantages​

Small Enterprise Strategic Development Training

Diversification is the art of entering product markets different from those in which the firm is currently engaged in. A related diversification is one in which the two involved businesses have meaningful commonalties, which provide the potential to generate economies of scale or synergies based upon the exchange of skills or resources. In a related diversification the resulting combined business should be able to achieve improved ROI because of increased revenues, decreased costs, or reduced investment, which are attributable to the commonalties. An important issue in any diversification decision is whether, in fact, there is a real and meaningful area of commonality that will benefit the ultimate ROI. If such a meaningful commonality is lacking, the diversification may still be justifiable, but the rationale will need to be different. Related diversification provides the potential to attain synergies by the exchanged or sharing of skills or resources. The second condition is to find a partner or business unit that can either provide or use them.

 Спасибо. Джабба выдавил из себя смешок и попытался обратить все в шутку. - Если только Стратмор не придумал что-то особенное и не обошел мои фильтры. Повисла тягостная тишина. Когда Мидж заговорила, ее голос был мрачным: - Стратмор мог обойти фильтры. Джабба снова вздохнул. - Это была шутка, Мидж.

Я из канадского консульства. Я пришел, чтобы убедиться, что с вами все в порядке. Внезапно в гимнастическом зале, превращенном в больничную палату, повисла тишина. Старик внимательно разглядывал подозрительного посетителя. Беккер перешел чуть ли не на шепот: - Я здесь, чтобы узнать, не нужно ли вам чего-нибудь.

Он пристально посмотрел на нее и постучал ладонью по сиденью соседнего стула. - Садись, Сьюзан. Я должен тебе кое-что сказать.

Лучшее, что мог сделать директор, - не мешать ему работать и наблюдать за тем, как коммандер творит свое чудо. Стратмор разработал план… и план этот Фонтейн не имел ни малейшего намерения срывать. ГЛАВА 75 Пальцы Стратмора время от времени касались беретты, лежавшей у него на коленях. При мысли о том, что Хейл позволил себе прикоснуться к Сьюзан, кровь закипела в его жилах, но он помнил, что должен сохранять ясную голову, Стратмор с горечью признал, что сам отчасти виноват в случившемся: ведь именно он направил Сьюзан в Третий узел.

По выражению лица панка Беккер понял, что тот знает, о ком идет речь. Мелькнул лучик надежды. Но уже через минуту парень скривился в гримасе. Он с силой стукнул бутылкой по столу и вцепился в рубашку Беккера.

Сквозь строй - надежная система, но ведь АНБ - ненасытный пожиратель информации, высасывающий ее из разнообразнейших источников по всему миру. Поглощение огромных объемов информации сродни беспорядочным половым связям: какие меры предосторожности ни принимай, рано или поздно подхватишь какую-нибудь гадость. Чатрукьян просмотрел список и изумился еще. Все файлы прошли проверку, в них не было обнаружено ничего необычного, а это означало, что ТРАНСТЕКСТ безукоризненно чист.

Diversification Strategies: Related and Unrelated Diversification


Урчащий мотор шумным эхо отражался от стен, и он понимал, что это с головой выдает его в предутренней тишине квартала Санта-Крус. В данный момент у него только одно преимущество - скорость. Я должен поскорее выбраться отсюда. - сказал он. После множества поворотов и коротких рывков Беккер оказался на перекрестке трех улочек с табличкой Эскуина-де-лос-Рейес и понял, что уже был здесь минуту-другую .

Потом он подумал о вирусе, попавшем в ТРАНСТЕКСТ, о Дэвиде Беккере в Испании, о своих планах пристроить черный ход к Цифровой крепости. Он так много лгал, он так виноват. Стратмор знал, что это единственный способ избежать ответственности… единственный способ избежать позора. Он закрыл глаза и нажал на спусковой крючок.

Шаги приближались. Он услышал дыхание. Щелчок взведенного курка.

 Очень важно, - сказал Смит.

Я заплачу ему десять тысяч долларов за один день работы. Он заберет личные вещи Танкадо и вернется домой. Разве это не услуга.

Затем он снял наружную защелку в форме бабочки, снова огляделся вокруг и потянул дверцу на. Она была небольшой, приблизительно, наверное, метр на метр, но очень тяжелой. Когда люк открылся, Чатрукьян невольно отпрянул. Струя горячего воздуха, напоенного фреоном, ударила ему прямо в лицо.

Я поняла так, что весь смысл в том, чтобы его уничтожить. - Верно. Но я хочу иметь копию. Я хочу открыть этот проклятый файл и ознакомиться с созданной Танкадо программой. Сьюзан была столь же любопытна, как и ее шеф, но чутье подсказывало ей, что расшифровка алгоритма Цифровой крепости неразумна, какой бы интерес это ни представляло.

Ради всего святого, зачем вы это сделали. Чтобы скрыть свою маленькую тайну.


  1. Michelle A. 13.01.2021 at 20:57

    Related diversification, unrelated diversification, executive leadership style, ultimately to cost advantages (Teece, ; Wan et al., ).