diversification.pdf

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Department
Economics for Management Studies
Course
MGEC40H3
Professor
Victor Yu
Semester
Fall

Description
DiversificationThis chapter examines the numerous rationales for diversification While all reasons for diversification may logically follow the managers perspective as an agent to company shareholders some reasons make more economic sense than do othersDiversification has no doubt played an important role in shaping the landscape for American businesses Over the last century firms have experienced four waves of diversification including the beginning of the th20 century with the creation of trust and holding companies the 1920s after the passage of antitrust laws the 1960s when conglomerates diversified into unrelated businesses and the 1980s when conglomerate organizations used heavily leveraged investments to buy undervalued businessesEconomies of scope provide the primary rationale for diversification These economies can be derived by selling similar products For example products with similar production technology similar raw materials or similar engineering fit into this group Economies can also be derived by selling to similar markets such as selling products in different geographical regionsDominant general management logic can also motivate diversification Some business analysts argue that the way in which managers conceptualize business and make critical resource allocations can generate economies of scope in merged companies This argument is typically difficult to defend however since many variables may contribute to the differences and scale and scope economies found in merged companiesSome argue that financial synergies between firms can also inspire diversification This is a weak argument since the market can
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