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Diversification and Synergy of the Companies - Coursework Example

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This "Diversification and Synergy" considers the various aspects of business expansion, evidence for and against synergistic expansion, and concludes that searching for synergies in business units is an appropriate perspective, in view of the potential for improved performance…
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Diversification and Synergy of the Companies
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Download file to see previous pages A business firm can hardly rest on its laurels and hope to survive in the long run. In order to remain in business and be in a profitable way, it has to literally keep looking over its shoulders all the time, and find new sources of energy – ideas that will keep it ahead of the competition. Such ideas could be in the form of expansion into related (synergistic) or unrelated products or services, thus increasing the portfolio of activities. Each type of diversification calls for a different type of management strategy to reap the benefits fully. For related diversification, benefits accrue due to economies of scale of operations, sharing/reduction in operating costs, and due to more efficient allocation of resources. In the case of unrelated diversification, the economic benefits are said to accrue due to superior internal governance mechanisms. While the downside for related diversification is limited, unrelated diversification may have its share of risks due to unfamiliarity both with the internal and external situations.

Igor Ansoff’s ‘growth-vector or the product-market matrix’ is a well-known analytical tool for planning business expansion. (Unknown, Ch. 9, Diversification and synergy, The four cells of Ansoff’s product/market matrix identify the business expansion route as growth through market penetration (cell 1), growth through new customers/markets

According to Ansoff, most companies progress through all the four stages of strategies in sequence, and hence this kind of analysis is important to formulate a strategy for diversification and to know the current status of development of a firm. It is in this process of analysis that a firm comes across options like related (synergistic) and unrelated growth. Many a time, synergistic growth into new products is justified on the basis that the existing infrastructure and skills can be utilized even in the new product offerings, and hence it would not be difficult to expand into those lines.

Michael Porter’s approach to the subject is more fundamental and analytical. ...Download file to see next pagesRead More
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