Corporate Diversification

2256 WordsNov 13, 201010 Pages
TYPES OF CORPORATE DIVERSIFICATION When a firm chooses to diversify, it faces a decision as to how related the new business(es) is(are) to the existing businesses of the firm. When Charles Bluhdorn was CEO of a company called Gulf+Western in the 1950s, he diversified into a host of industries: motion pictures (Paramount Pictures, the makers of The Godfather, Chinatown, and other movies), clothing, cigars, zinc mines, auto parts, and sugar, among others! In contrast, a company such as Cooper Industries is more careful in diversifying into related industries. Five types of diversification: Single-business 160 Part II Dominant-business Related-constrained Related-linked Unrelated Limited Corporate Diversification A…show more content…
Interestingly, conglomerates were very much in vogue in the 1960s and 1970s, as the earlier example of Gulf +Western points out. At one point, ITT owned 250 or more unrelated businesses! THE VALUE OF CORPORATE DIVERSIFICATION Strategic actions are aimed at creating value for the organization. Therefore, it is important to look at the value creation rationale of diversification. Diversification moves create value when: economies of scope exist among the multiple businesses in the organization, and exploiting these scope economies can be done more efficiently by the firm than by shareholders on their own. The general discussion on value creation in diversification sets the stage for the next important pasture for the instructor – outlining the key elements of economies of scope. What are Valuable Economies of Scope? It is important to define economies of scope first and clarify what it means with the help of examples. Since scope economies are at the heart of successful diversification moves, its definition is vital. The concept of “economies of scope” and eight potential economies of scope a diversified firm might try to exploit. Economies of scope exist in a firm when the value of the products or services it sells increases as a function of the number of businesses that firm
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