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;... [continues]
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