Question

Diversification is the process of firms expanding their operations by entering new businesses. As a strategist, critically discuss some of the various means that firms can use to diversify. What are the Advantages and disadvantages associated with each of these? Support your answer with examples. ( 570 Words)

Answer 1

Firms can diversify using mergers and acquisitions, strategic alliances and joint ventures, or internal development. Mergers and acquisitions involve joining two separate firms into one. Mergers and acquisitions enable firms to fully integrate operations; acquire valuable resources and exploit them through leveraging core competencies, sharing activities, and building market power; consolidate the industry, and enter new market segments. The cons of mergers and acquisitions include the financial costs of the diversification, which is especially true for acquisitions. The resulting benefits can be easily imitated by the competition. Managers' credibility may be associated with mergers and acquisitions, which may result in escalating commitment to making the diversification work and thereby sub optimal decision-making. And mergers and acquisition involve the combination of two corporate cultures, which may lead to issues that are costly to resolve.

Strategic alliances and joint ventures are a method of diversification that involves collaboration with partner firms. They are a method of gaining the advantages of mergers and acquisitions without the financial costs. The benefits of strategic alliances and joint ventures are that they enable firms to achieve strategic objectives such as entering new markets, reducing manufacturing(or other) costs in the value chain, and developing and diffusing new technologies. The cons of strategic alliances and joint ventures include working with a partner that is unwilling or unable to invest adequate resources to achieve the objectives, the necessary investment in nurturing close working relationships with partner executives, and the investment in human and social capital needed to forge a successful partnership.