Due to shared activities
Average 13-15%
Raw material supply
Market saturation
Product complexity
Long-Run Average Costs
increase after a certain
level of output
Usage developed
elsewhere already
e.g. Pharmaceutical Fixed costs spread over
companies large volume
e.g. raw materials,
processes,
competencies
(management/strategic
skills/brand value)
Product extension
Synergies in brand
Disney business rely on
Synergies in
management and
leadership
new market entry
competitive reaction
resource acquisition
etc.
Empirical evidence
Aggressiveness is
reduced if there's Muti-
market contact.
Regulators won't like
this.
If there's a superior
financial structure
CONS seem stronger...
internally, might be
better.
Internal audit produces
better info.
Divisional managers
incentivised to reveal.
Incentive to detect
problems.
Less hesitancy about
confidentiality.
Bureaucracy
e.g. if you're closer to
Malign influence
the CEO
Weak incentives
Budgetary pressure.
and competencies
diversification discount
Samples of
(Berger et al, 1995)
conglomerate firms and
calculated values for
nn-conglomerates in
LIMITS TO SCALE
same industries and
ECONOMIES
found value different.
FOR: LVMH-- dominate
Consequences
the luxury goods
industry by diversifying
There's an optimal
into a wide spread of
When a single firm can point of diversification.
industries (e.g. Möet
jointly produce X and Y Hennesy for
(Palich et al., 2000)
at a lower cost than 2 Champagne and
Diversify into related
separate firms can do Tiffany&Co. for luxury
industries NOT EXAMPLES
separately. jewellery)
unrelated ones.
Economies of scale and AGAINST: Unilever-- not
scope doing well recently,
Lipton Tea sold off, have
a key shareholder
trying to break it up.
Central decision-
making incentivises
Scope: Size requires
Influence spending time on
politics instead of standardisation
Costs management.
Central control
Bureaucracy
Occurs when resources
can be shared among a Can be avoided, but this
firm's various may neutralise the
businesses. benefits of scale and
Costs and Problems Poor performance = low
scope.
consequences for firm
Hedging poor overall
performance.
Incentives and Budget
pressures
Rationales Uncertainty about
future cash flow
diversification
Strengthen Bargaining incentives not always in
Compensating for risk
Power (against firms interest
Diversification in one business with
suppliers and buyers) returns in another
Having lots of money Trying to increase
allows for necessary Leverage existing managerial
expenditure and strength compensation.
investment on...
Market power
Joint Venturting,
Licensing, Outsourcing,
Partnering.
Other Options Transaction costs
Mutual Forbearance Assets 'tied up' in
(Tieying, et al., 2009) These can be difficult
(reduced rivalry) specific ways
due to..
(loss of fungibility)
Contract Dependency
Diversification decision
Endogeneity independent of past
performance
Methodological & Undersampling of Few studies are entirely
failure comprehensive
Conceptual Challenges
Diversification is not
always the only cause
Causaity
of increased/decreased
PROS Leveraging internal profitability.
Superior internal
resources with external
financial structure
capital
CONS
Because their human
For some stakeholders
capital is tied to the
(employees, managers)
firm.
Risk reduction
Already reduced risk
through stock market NOT for shareholders.
diversification.