Diversification can be briefly defined as the expansion of a firm into a range of different product areas. Firms may choose to diversify for either of two reasons. First, diversification may benefit the firm’s owners by increasing the efficiency of the firm. Second, if the firm’s owners are not directly involved in deciding whether to diversify, diversification decisions may reflect the preferences of the firm’s managers. Singapore Airlines (SIA) serves as a typical example of diversification in a certain degree as SIA dedicates to providing air transportation services of the highest quality and to maximizing returns for the benefit of its shareholders and employees via different ways of diversification since it was founded in 1972. Ways to Diversify
As is mentioned above, firms generally diversify based on two reasons: efficiency based reasons and managerial based reasons. • Efficiency based reasons
Efficiency based reasons of diversifications are able to benefit the shareholders and they are generally divided into five categories. These categories are: (a) Economies of Scale and Scope
A study by Thomas Brush supports the plausibility of scale and scope economies as a starting point for understanding the performance of diversified firms. If a merger is motivated by scale economies, the market share of the merged firm should increase immediately following the merger. And the data from manufacturing industries, conducted by Thomas Brush, show that changes in market share were as expected, which means the gains expected from mergers were substantial. Yet in the case of SIA, SIA operates passenger services to more than 60 cities in over 30 countries around the world. Within Asia, passengers can connect to over 30 cities served by SilkAir, the regional wing of SIA. The variability of routes apparently attracts more passengers to fly with SIA and therefore gain more market share for SIA. Besides, SIA also provides the online booking service; passenger can book tickets online without going to the specific selling spots of SIA. Economies of scale can be obtained through this kind of technology in the long run. Other methods such as effective advertisement and keeping smaller inventories via promotion or special offer on ticket price also distribute to obtaining economies of scale. Economies of scope can, however, come from other resources. It can be achieved by spreading a firm’s underutilized organizational resources to new areas. At any given time, a firm may possess specific resources that it cannot fully utilize in its current product market. Such resources might be effectively applied in other product markets, and doing so would give rise to economies of scope. In the case of SIA, the airline has announced plans to launch a new no-frills, low-fare airline operating widebody aircraft on medium- and long-haul routes named Scoot. The new subsidiary will begin operations on April, 2012 and will be operated independently, while being managed separately from SIA. Initial destinations singled out include China, India, Africa, the Middle East and America. (b) Economizing on transaction costs
The issue of transaction costs is relevant if diversification occurs through mergers or acquisitions which are only legal basis for combining firms. The transaction costs are more likely to arise in relationships with the independent firms when the production process involves specialized assets, such as human capital, organizational routines or other forms or proprietary knowledge. In the absence of specialized assets, transaction costs are not likely to be a problem. In this case, market coordination may provide superior incentives and flexibility. In the case of SIA, it is a member of Star Alliance member airlines. This joint venture of airlines includes separate airlines, each of which could, in principle offer flying plans contiguously but operated independently of each other. Passengers can look forward to seamless...
Please join StudyMode to read the full document