Evaluting benefits of diversification

Diversification creates value for shareholders.The benefits of diversification should be evaluated in

terms of the following factors.

· Core competency :Diversification should capitalize on core competencies that create value.

It should intangible resources it should meet the following requirements.

a.Competitive advantage:It should provide strength in relation to competitors.

b.Similar of existing business :The new business should have similarity to existing business to

capitalize on core competencies.

c.Difficult to imitate :The bundle of competencies should be difficult for competencies to imitate.

The competitive advantage should be sustainable.

· Sharing infrastructure :Infrastructure is tangible resources,such as production facilities,purchasing

procedures,marketing networks and logistics.The ability to share these resources is an important benefit of

diversification.

a.The new business should have similar needs.Resources sharing should be possible to gain benefits

of diversification.

· Balancing financial resources :Different business have different levels of cash flow.Some

businesses product more such than they need.Other need more cash that they can produced.

Diversification should efficiently balance cash flows across family of business units.It should combine cash

producers and cash users in the same corporation.It is also called portfolio management approach.

a.G matrix,GE matrix,life cycle portfolio model tools of portfolio management.

· Maintain growth :Diversification should provide continued growth.It should be a source of growth.

The growth should be in terms of sales,market share and profit.

a.Diversification should generate the best return on shareholder investment.However,high levels of

growth may lead to decline in profitability.Marginal business may need to be acquired.

· Reduce risk :Diversification should reduce risk.Risk implies awareness about alternatives

but unwariness about outcomes.A diversified business portfolio can reduced variability of overall profit.

Countercyclical business reduced risk.A bad year in one business is offset by improved performance of

other business.

· The above factors together produce synthetics affects.