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Corporate Development (Subject) / Diversification (Lesson)
- Relatedness Two businesses are related if they share technological characteristics, production characteristics and/or distribution channels
- classification based on relatedness single business 95 % revenue of business from single activity dominant business 70-95 % revenue from principal activity related business less than 70% from primary activity unrelated business or conglomerate less than 70 % revenue from primary area and few activities related to primary area
- Entropy measure of diversification Entropy measures diversification as information content if a firm is exclusively in one line of business (pure play), its entropy is zero
- different ways for firms to diversify develop new lines of business internally joint ventures in new areas of business acquire firms in unrelated lines of business
- why do firms diversfy Economies of scale and scope economizing on transaction costs internatl capital markets shareholder's diversification identifying undervalued firms
- the risk of diversification Diversification reduces risk and smoothens the earnings stream only when shareholders are unable to diversify they do benefit from such risk reduction
- costs of diversification diversified firms may incur substantial influence costs may need elaborate control systems to reward and punish managers internal capital markets may not function well
- Diversification and operating performance Unrelated diversification harms productivity diversification into narrow markets does better than into broad markets
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