Corporate Diversification Strategy
A company implementing a Corporate Diversification Strategy when the company was operating in industries or markets a wide range simultaneously. Diversification strategies are implemented when they operate in industries that varied simultaneously while the Geographic Market Diversification Strategy implemented by companies that operate in markets geographically diverse simultaneously. If both are combined diversification strategy, will result in Product-Market Diversification Strategy.
There are three kinds of Corporate Diversification Types, namely:
- Diversified Corporate Limited, which occurs when all or nearly all of the company’s activities take place on a single industry and geographic market consists of two subtypes, namely: (a) a single business companies (95% or more of the company’s revenue comes from a single product market), (b) the dominant business firms (between 70% and 95% of company revenue comes from a single product market)
- Related to Corporate Diversification, which occurs when less than 70% of company revenue comes from a single product markets and business lines which are connected diverse, consisting of: (a) Related constrained i.e. less than 70% of company revenue comes from a single business and different businesses sharing relationships and attributes, (b) Related Linked i.e. less than 70% of company revenue comes from a single business and the different businesses just to share some attributes or relationships and the relationships and attributes is different.
- No Related Corporate Diversification: less than 70% of company revenue comes from a single business and there is little or relationships between attributes of business.
Economies of Scope happen to a company when the value of the products or services sold increased as a function of the number of businesses that run the company. Economies of Scope worth Economies of Scope the extents to which a company increase revenues or lower costs than if the Economies of Scope are not used.
Economies of Scope Types
Economies of Scope type there are four, namely:
1. Operational Economies of Scope
- Shared Activities, a physical activity are the same used by more than one business function at a diversified company.
- Core Competencies, a non-physical activity was used by more than one business function at a diversified company.
2. Financial Economies of Scope
- Internal Capital Allocation, business functions on a diversified company competing for corporate capital allocated to them.
- Risk Reduction, the risk level of the cash flows of diversified firms is lower than the level of risk of cash flow firms are not diversified.
- Tax Advantages, a diversified company can use losses on some of its businesses to offset profits in some other business, thereby reducing the overall tax liability.
3. Anticompetitive Economies of Scope
- Multipoint Competition occurs when two or more diversified firms simultaneously compete in markets that diverse. Multipoint Competition can lead to the emergence of the Mutual Forbearance means to refrain from competition because the present value of profits that companies compete not greater than the present value of losses suffered by companies that are competing.
- Exploiting Market Power, a company may use part of the monopoly profits of a particular line of business of the company to subsidize the operation of other business lines that were previously less profitable business lines that are subsidized so that it can generate monopoly profits as well.
4. Employee and Stakeholder incentives for Diversification
The employees, especially its managers, trying to increase the size of the company are usually measured in sales value, which also determines the amount of compensation for them. One way is through diversification particularly Corporate Diversification Strategies Not related to the form of mergers and acquisitions.
Economies of Scope Can be realized through International Operations
In the context of international corporate strategy of diversification can generate competitive advantage for companies, in addition to generating competitive advantage companies also face risks in implementing this strategy.
Two risks that will be faced by companies when deciding to implement a corporate diversification strategy in the international context can be a financial risk and political risk.
- 1. Financial risk
- Debt Currency fluctuations, which could affect the company’s investment. These fluctuations may result in additional benefits for investments and losses due to decline in value of investments due to currency fluctuations.
- Interest Rate Differentials Inflation, which requires companies to implement practices managerial a complex approach, business strategy, and complex accounting practices.
- Financial risk can be very intimidating for new companies that want to enter the international arena.
- 2. Political risk
- Political conditions can affect the value of corporate investment, both macro and micro.