Diversification strategy is used to increase the firm’s value by improving its overall performance. Value here is created here either through related diversification ( my report) or through unrelated diversification ( which will be discussed further) when the strategy allows a company’s business to increase revenues or reduce cost while implementing their business –level strategies In some case, using diversification strategy may have nothing to do with increasing the firm’s value; in fact it can have neutral effects or even reduce firm’s value.
Value neutral reasons for diversification include those of a desire to match and thereby neutralize a competitor’s market power ( such as to There are 2 ways diversification strategies can create value. One is operational relatedness (sharing activities)the other one is corporate relatedness ( transfer of core competencies).
Economies of scope- are cost savings that the firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its business.
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To created economies of scope, tangible resources such as plant and equipment or other business unit physical assets, often must be shared. Less tangible resources, such as manufacturing know –how, also can be shared. However, know-how transferred between separate activities with no physical or tangible resource involved is a transfer of a corporate-level core competencies, not an operational sharing of activities.
Operational Relatedness: Sharing Activities Firms can create operational relatedness by sharing either a primary activity (such as inventory delivery systems) or a support activity (such as purchasing activities).
Firms using related constrained diversification strategy share activities to create value. Example: Procter and Gamble uses their corporate level strategy because P&G paper towel business and baby diaper business both use paper products as a primary inputs for both business and is an example of shared activity. In addition, because they both produce consumer products, these two businesses are likely to share distribution channels and sales networks. Another example is Unilever- Clear Shampoo and Cream Silk. Read also about network level strategy
Advantage: Disadvantage: Corporate Relatedness: Transferring of Core Competencies
Corporate level core competencies-are complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience and expertise. The ability to successfully price new products in all of the firm’s businesses is an example of what research has shown to be value-creating, corporate level competence. Firms seeking to create value through corporate relatedness used the related linked. diversification strategy Example: Virgin Group Ltd transfers its marketing core competencies across travel, cosmetics, music, drinks, mobile phones and even health clubs.
Virgin Casino, Virgin Balloon Flights, Virgin Atlantic Airways, etc. In the Philippines, the famous SM. With the acquisition of SM Group of Companies to banking, real estate, consumer goods, SMDC, BDO. Virgin Group Limited is a British branded venture capital conglomerate organization founded by business tycoon Richard Branson.  The core business areas are travel, entertainment and lifestyle. Virgin Group's date of incorporation is listed as 1989 by Companies House, who class it as a holding company; however Virgin's business and trading activities date to < the 1970s. Read about Ball and Brown Study
The net worth of Virgin Group Ltd as of September 2008 is ? 5. 01 billion. It consists of more than 400 companies around the world. Market Power-exist when a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level or both. Example: Federated Department Stores Inc- parent of Macys acquired May Department) Stores Company( parent of Foley) in part to give the combined company the clout it needs to reduce various costs such as purchasing and distribution below those of competitors.
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