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Mastrategicissuesindiversification 120403060425 Phpapp01
Mastrategicissuesindiversification 120403060425 Phpapp01
What is Diversification?
A risk management technique that mixes a wide variety of investments within a portfolio. A collection of businesses under one corporate umbrella.
A diversified company needs a multi-industry, multibusiness strategy A strategic action plan must be developed for several different businesses competing in diverse industry environments
The logic: to spread corporate risk across multiple industries to enhance shareholder value.
When do we diversify?
When a company runs out of growth opportunities in the core business and not before! When diversification results in creation of value
RISK SPREADING
--Diversification reduces variance of profit flows --But, doesn't create value for shareholdersthey can hold diversified portfolios of securities. --Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.
--For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.
PROFIT
How attractive are our current businesses? With these businesses, what is our performance outlook for X years in the future? Can the firm establish a competitive advantage within the industry to be entered? (i.e. what synergies exist between the core business and the new business?)
Basic Issues
Poor understanding of how diversification activities will fit or be coordinated with existing businesses. Differences in organizational cultures Should new business be standalone operation or should it be merged into one of the existing businesses? Problems associated with internal development of new businesses.
-Most problems due to considerable time and investment required to launch new business. -Difficult to assess the risks associated with new investment opportunity.
Creation of a new business from within (A START-UP)Appropriate when You have time to launch, Market moves slowly,
Internal entry costs lower than acquisition costs, Target industry is fragmented.
In the business world, the rearview mirror is always clearer than the windshield.
THANK YOU