Diversification Strategy Overview

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💡 What are the main learning objectives of studying diversification strategy?

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Understand when and how diversification enhances shareholder value.

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🧩 What are the three tests to determine if diversification adds shareholder value?

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Attractiveness Test: Is the new industry profitable? Cost of Entry Test: Are barriers too expensive? Better-Off Test: Does diversification create synergy (1+1>2)?

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🔗 What does “synergy” mean in corporate diversification?

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Synergy occurs when combined firms produce more value together than separately — “the whole is greater than the sum of its parts.”

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🏦 What are the pros and cons of diversifying via acquisition?

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Advantages: Quick market entry, Avoid entry barriers, Gain complementary resources. Disadvantages: High acquisition cost (premium), Integration difficulties, Risk of overestimating value.

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🏗️ What are the pros and cons of internal development (intrapreneurship)?

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Advantages: Avoids acquisition risks, Allows gradual entry into emerging markets. Disadvantages: Slow, costly development, Resistance to change, Requires large investment.

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⚙️ When should a firm prefer internal development over acquisition?

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When: The firm has in-house skills and resources, There’s no direct competition, Acquisition costs are too high, Ample time and market stability exist.

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🤝 When is a joint venture the best diversification option?

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When: 1. The opportunity is too risky or large for one firm. 2. Broader competencies are needed. 3. Local laws require a domestic partner.

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💰 What are transaction costs and why do they matter?

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They are additional costs incurred during a business deal beyond the purchase price — e.g., searching for targets, evaluating worth, bargaining, and finalizing the deal.

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🛤️ What are the three main diversification paths?

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Related businesses (shared value chains), Unrelated businesses (dissimilar activities), Mixed strategy (combination of both).

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🔧 What’s the difference between specialized and generalized resources?

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• Specialized resources: Limited, specific uses (e.g., advanced engine design → automotive industry). • Generalized resources: Broadly applicable (e.g., marketing or HR expertise → any industry).