Economic of Industry
Consider the reasons why firms may want to diversify and provide a critical assessment of the economic validity of their reasons for diversifying.
Abstract
Despite the different degree of competitions and the level of development in the market across the various types of industries, most firms are continuously and consistently looking for ways and opportunities to enhance their ability to grow or even to just maintain sustainability and survival in the industry.
Firms carry out diversification such as developing new lines and products, joint ventures and acquiring firms in unrelated lines of business, to improve on their corporate efficiency and benefits of the shareholder. For example, if a firm’s business focuses on seasonal products such as selling heating equipment, sales will do well during the autumn and winter months. However, to ensure the firm’s survival and maintain its business during the summer, it will need to carry out diversification such as establishing new product lines (i.e. Air conditioners). Therefore, firms diversify to achieve economies of scales and scope, to economize on transaction costs, improving shareholder’s diversification by reducing risks, as well as identifying undervalued firms. This paper will look at the different advantages and drawbacks of diversification as well as their economic validity.
Diversification for Economies of Scales and Scopes
It has been said that when a firm is able to achieve economies of scale, the production levels becomes more efficient as the number of goods being produced increases. With the increase in production levels, firms will then able to lower their average cost per unit as the fixed cost are able to spread out over a large number of goods. For large firms, this will be a great advantage to them as it allows these firms to be able to gain access to a larger market. Furthermore with a lower average cost in production, they will be able to position their products at a more cheaply and affordable
Abstract
Despite the different degree of competitions and the level of development in the market across the various types of industries, most firms are continuously and consistently looking for ways and opportunities to enhance their ability to grow or even to just maintain sustainability and survival in the industry.
Firms carry out diversification such as developing new lines and products, joint ventures and acquiring firms in unrelated lines of business, to improve on their corporate efficiency and benefits of the shareholder. For example, if a firm’s business focuses on seasonal products such as selling heating equipment, sales will do well during the autumn and winter months. However, to ensure the firm’s survival and maintain its business during the summer, it will need to carry out diversification such as establishing new product lines (i.e. Air conditioners). Therefore, firms diversify to achieve economies of scales and scope, to economize on transaction costs, improving shareholder’s diversification by reducing risks, as well as identifying undervalued firms. This paper will look at the different advantages and drawbacks of diversification as well as their economic validity.
Diversification for Economies of Scales and Scopes
It has been said that when a firm is able to achieve economies of scale, the production levels becomes more efficient as the number of goods being produced increases. With the increase in production levels, firms will then able to lower their average cost per unit as the fixed cost are able to spread out over a large number of goods. For large firms, this will be a great advantage to them as it allows these firms to be able to gain access to a larger market. Furthermore with a lower average cost in production, they will be able to position their products at a more cheaply and affordable