Diversification

Question 1

Barney

Answer 1

2001: Benefits of diversification are synergies and economies of scope - operational (shared activities, core competencies), financial (internal capital market, information), anti-competitive (power) Problem that diversification is more attractive for agents than principles (e.g. empire building), so agents need to be tied to principles’ interests (e.g. through payment)

Question 2

Montgomery

Answer 2

1994: Reasons for diversification: 1) Market power - cross-subsidies help with uncertainty or to undercut incumbents (e.g. P&G - if you won’t sell razors, you don’t sell anything) 2) Agency - self-interest of managers 3) Resources - excess capacity in untraceable productive resources (e.g. Amazon’s warehouses)

Question 3

Taleb

Answer 3

2013: Barbell strategy - mix high risk and strongly conservative actions

Question 4

Williamson

Answer 4

1981: Transaction costs mean that there’s an optimal range of growth - shouldn’t diversify too much

Question 5

Palich et al.

Answer 5

2000: Curvilinearity: performance increases as firms shift from single-business strategies to related diversification, but then decreases as they change from related diversification to unrelated diversification

Question 6

Markides

Answer 6

1992: In the 1980s, conglomerates reduced diversification and refocused on their core businesses, increasing profitability in doing so

Question 7

Hamel & Prahalad

Answer 7

1994: A firm is most profitable at its core business However…e.g. Tata, trust in brand, Tata Tea!; Samsung have electronics, finance, tanks, ships, theme parks!

Question 8

Goold & Lusch

Answer 8

1993: ‘Stick to the knitting’ - e.g. P&G are all household products (selling off food businesses) Down to the management and what they’re capable of - e.g. Tesco management is very experienced in diversification - hire people who know what they’re doing!

Question 9

Rumelt

Answer 9

1982: Through diversification you lose focus on the original activity and the profitability it brought Brings bureaucracy, slower, lose brand identity E.g. Cadbury expanding by buying Adams gum

Question 10

Levinthal & Wu

Answer 10

2010: Interchangeability of resources across domains: diversification decision should consider the opportunity cost of the use of capabilities in one domain vs another; the more you spread your capabilities across segments, the lower the average return E.g. Whittington Investments (ABF) own Primark / Fortnum & Mason as well as all the Ingredients and Grocery brands

Question 11

Barney (acquisitions)

Answer 11

1988: Acquisitions only generate abnormal returns if the target is worth more to one bidder (inimitable synergies) than another - otherwise they are competed away

Question 12

Jemison & Sitkin

Answer 12

1986: Process of acquisition is just as important as choice of what is acquired. Premature signing means you don’t fully consider the consequences - e.g. P&G buying Gillette