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. 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)- VALUE CHAIN. 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...
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