What is the main reason a company may choose to pursue a related diversification strategy instead of an unrelated diversification strategy? a. The company’s competencies are applied across fewer industries.
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A company is likely to choose related diversification when it wants to benefit from transferring competences, leveraging competences, sharing resources and/or bundling resources.
One of the key advantages of related diversification is the ability to share key resources across different areas. Key resources and capabilities of the firm can be utilized in a new area – potentially giving the firm a competitive advantage relative to other firms that may not pose comparable resources.
Why do companies choose diversification?
Diversification is a risk-reduction strategy used by businesses to help expand into new markets and industries and achieve greater profitability. This can be attained by diversifying new products and services in new markets, targeting new customers and increasing profitability.
Generally, related diversification (entering a new industry that has important similarities with a firm’s existing industries) is wiser than unrelated diversification (entering a new industry that lacks such similarities).
What are the three 3 reasons firms choose to diversify their operations?
There are four most often cited reasons for diversification: the internal capital market, agency problems, increased interest tax shield and growth opportunities.
Why would an organization seeking to expand through diversification succeed more often by entering similar businesses?
Why would an organization seeking to expand through diversification succeed more often by entering similar businesses? It is seen as posing fewer risks, because it involves comparatively similar businesses of which the leaders would have relevant knowledge.
What are the major advantages and disadvantages of diversification?
Advantages and Disadvantages of Portfolio Diversification
| Advantages | Disadvantages |
|---|---|
| 1. Risk management2. Align with your goals3. Growth opportunity | 1. Increases chances of mistakes2. Rules differ for each asset3. Tax implications & cost of investment4. Caps growth |
Regarding the type of diversification, our main results show that related diversification is more value-creating than non-related diversifica- tion is, and that non-related diversification is more likely to turn into a value-destroying strategy at lower levels than related diversification.
Which of the following is an important appeal of a related diversification strategy? Offers opportunities to transfer skills, expertise, technical know-how, or other capabilities from one business to another.
Generally, related diversification (entering a new industry that has important similarities with a firm’s existing industries) is wiser than unrelated diversification (entering a new industry that lacks such similarities). Geographic diversification is another strategy to drive synergy.
An advantage of unrelated diversification is that competencies can be shared and leveraged throughout the value chain activities. 15. An appropriate reason to diversify is to pool the risk from several business ventures in order to create a more stable income stream.
Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries. Because films and television are both aspects of entertainment, Disney’s purchase of ABC is an example of related diversification.
Which one of these is the biggest reason why firms diversify?
The Reasons for diversification is to increase organizational capabilities. Diversification strategies are used to expand firms’ operations by adding markets, products, services, or stages of production to the existing business.
What are the 3 diversification strategies?
There are three types of diversification: concentric, horizontal, and conglomerate.
Why might a firm be most likely diversify into multiple markets?
Key Takeaways. Diversification reduces risk by investing in vehicles that span different financial instruments, industries, and other categories. Unsystematic risk can be mitigated through diversification while systematic or market risk is generally unavoidable.
Which of the following is the best example of related diversification? stem from cost-saving strategic fits along the value chains of related businesses.
The firms can create value by using related diversification strategy through operational relatedness and corporate relatedness. Under operational relatedness the firm share its activities; whereas, under corporate relatedness the firm relocate its core competencies.
When diversification is an effective business strategy?
Diversification is a growth strategy that involves entering into a new market or industry – one that your business doesn’t currently operate in – while also creating a new product for that new market.
Unrelated diversification allows companies to expand operations. Instead of focusing on similar markets, it helps companies exceed their existing areas. Therefore, they do not focus on similar products, markets or customers. In contrast, unrelated diversification involves exploring new areas, which can be beneficial.
What key factors need to be considered when a firm is considering diversification?
There are certain factors that you must look into before proceeding with the diversification strategy;
- Financial sense. Many people believe in taking more significant risks to achieve higher returns and hence step into diversification.
- Core competencies of the firm.
- Evaluating the assets.
- The right expertise and resources.