Diversified Firms

Essay specific features

 

Issue:

Business

 

Written by:

Janet D

 

Date added:

August 12, 2012

 

Level:

University

 

Grade:

A

 

No of pages / words:

3 / 674

 

Was viewed:

9898 times

 

Rating of current essay:

 
Essay content:

Philips produces a range of electronic home equipment • Some firms produce unrelated products – unrelated diversification e.g. Saab produces motor cars and fighter aircraft • Seek to explain why related and unrelated diversification occurs and assess the performance of such diversification MOTIVATIONS Economies of scope • Exist where it is cheaper to produce two or more products within one firm rather than independent firms producing each product • Other sources of economies of scope come from using firms’ underutilised resources ? Exploit common technologies, assets, distribution channels • Dominant general management logic ? managers that have invested in management skills believe they can use them across a variety of product markets Synergy • A Resource has greater utilisation when used in conjunction with a complementary resource • Complementarity between resources exist when revenues (costs) are higher (lower) when two resources are owned by one firm rather than two owners • These resources can be physical but also include non-physical resources as suggested by the RBV Financial synergies (internal capital market) • A cash-rich business can cross-subsidise a cash constrained business ? Only successful if profitable investments are made that would not otherwise be made • Predicated on failure of capital markets to finance profitable projects Diversifying shareholders’ portfolio • Diversification ensures a stable cash flow for shareholders ? Managers who have invested in firm-specific skills have more to gain from this than shareholders ? Shareholders can diversify their portfolio of equity holdings Economising on transactions costs • The multi-product firm exists where it economises on transactions costs ? alleviate coordination problems ? alleviate ‘hold-up’ problem • Detrimental effects of vertical integration ? Influence costs ? Costly control systems used to reduce opportunistic behaviour Managerial reasons • Corporate governance concerned with ensuring managers act in shareholders’ interests • Managers use diversification to pursue growth ? buy growth that cannot be achieved internally ? pecuniary and non-pecuniary benefits to managing large firms • Unrelated diversification may be pursued if limits to related diversification are reached • Managers invest in firm-specific skills that have lower value outside the firm ? unrelated diversification spreads risk and lowers risk of firm failing • Manager-specific investments used to entrench incumbent management STRATEGIES TO ACHIEVE DIVERSIFICATION • Internal development - invest in resources to allow production of new output ? Managers do not have to share specialised knowledge ? Managers maintain control of firms’ activities • Mergers and acquisitions - purchase another firm ? Internal development of resources might not be possible or too costly ? Quick method of diversification relative to internal development • Joint ventures and alliances – two or more organisations share resources and activities ? Pursue common strategy without formal integration ? exploit complementary assets without integration ? learn from partner(s) with intention of bringing activities ‘in-house’ • Licensing – right to manufacture patented product for a fee ? Do not bear costs of developing resources and capabilities for development, production, and distribution ? Difficult to maintain quality control e...
displayed 300 characters

Custom written essay

All essays are written from scratch by professional writers according to your instructions and delivered to your email on time. Prices start from $10.99/page

Order custom paper

Full essays database

You get access to all the essays and can view as many of them as you like for as little as $28.95/month

Buy database access

Order custom writing paper now!

  • Your research paper is written
    by certified writers
  • Your requirements and targets are
    always met
  • You are able to control the progress
    of your writing assignment
  • You get a chance to become an
    excellent student!

Get a price guote

 
 

DuPont licensed Teflon production to Chinese firms PERFORMANCE OF DIVERSIFIED FIRMS Accounting data • Firm performance higher with moderate levels of diversification ? Especially when diversification is within a narrow range of markets ? Consistent with exploiting economies of scope and resource complementarity • High levels of unrelated diversification result in poor performance ? Consistent with managerial motivation Share price studies • Performance gains are realised only with related diversification • When parent firms’ contribute specialised resources performance is superior to firms that diversify using unspecialised resources (e...
displayed 300 characters

General issues of this essay:

Related essays:

x
Services