LECTURER WEEK 10 (19/11/2013)

Chapter 8: Corporate Strategy: Diversification and The Multi-business Company

Assalamualaikum,  

The purpose of diversification is to build shareholder value. There are 3 testing whether diversification adds value for shareholders:

   1.  The Attractiveness Test: 

   Are the industry’s profits and return on investment 

as good as or better than present business?

   2.  The Cost of Entry Test: 

   Is the cost of overcoming entry barriers so great 

as to long delay or reduce the potential for profitability?

   3.  The Better-Off Test: 

   How much synergy (stronger overall performance) 

will be gained by diversifying into the industry?

I can know how the important of better performance is through synergy, which is the goal is to achieve the important 1+1= 3 performance benefit rather than just a 1+1= 2 result. When we work together the performance become more benefit to each other.

We also can gain an understanding of how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage. Related diversification can provides a stronger foundation for creating shareholder value which is the specialized resources and capabilities that are leveraged in related diversification tend to be more valuable competitive assets than the generalized resources and capabilities underlying unrelated diversification.