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IIMB (https://swayam.gov.in/explorer?ncCode=IIMB)
»
Advanced Corporate Strategy (course)

Week 2 Summary
Course
outline

Let us now summarize what we have discussed so far.

About Course

1. A company is said to be diversified if it operates in more than one product

Week 1: market. When the product markets are related – that is they share certain
Corporate activities or capabilities, the company is said to be related diversified.
Advantage
Otherwise, if the products do not share activities or capabilities, then such
diversification is called as unrelated diversification 

Week 2:

Product
2. Companies diversify for several reasons, some which lead to improved
Diversification
performance and some which actually hurt performance.

2.1.1 What is

product 3. Of all the reasons for diversification, the most defendable is gaining
diversification? economies of scope. That is, a company faces lower costs as it can share some
(unit?
fixed costs – such as the cost of engaging in an activity or developing a
unit=24&lesson=25)
capability across two or more related products.

2.1.2 Types

of product
4. Often, firms also diversify for the wrong reasons. Managerial entrenchment
diversification
(unit?
and hubris and empire-building may lead managers to diversify companies for
unit=24&lesson=26) their own personal benefit while leading to the destruction of shareholder value.

2.2.1
5. The value that diversification can add also has to be balanced by the
Leveraging
economies
additional costs of diversification. Diversification can lead to higher bureaucratic
of scope and coordination costs and increase the complexity of managing the firm.

(unit?

unit=24&lesson=27) 6. Overall, there seems to be some empirical evidence that related

diversification can improve a firm’s performance.  However, one must carefully
2.2.2 evaluate the benefits and costs of diversification and not simply assume that
Increasing diversification always leads to value creation. 

and

sustaining
7. In the context of developing economies, we see a lot more diversification than
market
power (unit?
what we see in developed economies. This is because of the institutional voids
unit=24&lesson=28) that exist in developed economies.

2.2.3
8. For many years, institutions related to product markets, capital markets and
Leveraging
financial
labor markets have not worked well in many developing economies. Diversified
economies business groups such as the Tatas can then fill in these institutional voids.

and

managing 9. To repeat a point that was made earlier: diversification is one of the most
risk (unit?
important strategic decisions made by a firm because not only does it define
unit=24&lesson=29)
what the firm is all about, it has important performance implications as well.

2.2.4

Managing 10. Successful diversification can put a firm on a path of high growth and high
tax burden
profits. Unsuccessful diversification can destroy a company’s profits and even
(unit?
unit=24&lesson=30)
threaten its survival.

2.2.5 Low
performance
in existing
business
(unit?
unit=24&lesson=31)

2.2.6
Diversifying
managerial
employment
risk (unit?
unit=24&lesson=32)

2.2.7
Managerial
agency &
Hubris (unit?
unit=24&lesson=33)

2.3.1 How
does
diversification
add value?
(unit?
unit=24&lesson=34)

2.3.2 How
does
diversification
destroy
value? (unit?
unit=24&lesson=35)