Synergy is commonly regarded as a justification for a firm’s diversification.
But, is it the only one? Or to continue that thought, is it a justification for a
firm’s diversification at all? My intention in this essay is to investigate the
role of synergies in the decission-making process that leads to the
diversification of a company.
To find an answer to that problem, we will first have to take a look at what
the terms “synergy” and “diversification” actually mean. After that, I will go
on to discuss what possible other reasons there might be for a firm to
diversify. To find out about their role in that process, it is necessary to first have a
look on what synergies are and how they can be created. Obviously it is
possible to create synergies by diversification.
Sharon M. Oster writes: “The strategic management literature emphasizes
the role of diversification in creating synergies. Two business units have
synergies if their union allows for opportunities not available to either
seperately.”0 So, this definition of synergy says that new opportunities
emerge from making use of shared resources. [...]
Table of Contents
- 1. Is synergy the only justification for a firm's diversification?
- a. What are Synergies?
- b. What is Diversification?
- 2. Possible Motives for Diversification
- a. Growth
- b. Risk Reduction
Objectives and Key Themes
This essay investigates the role of synergy in corporate diversification decisions. It examines whether synergy is the sole justification for diversification or if other factors influence this strategic choice.
- The definition and creation of synergies.
- Different types of diversification (horizontal, vertical, geographical).
- Alternative motives for diversification beyond synergy.
- The potential conflict between managerial incentives and shareholder value.
- The limitations and potential pitfalls of diversification strategies.
Chapter Summaries
1. Is synergy the only justification for a firm's diversification?: This chapter begins by questioning the prevailing assumption that synergy is the only reason for corporate diversification. It then delves into defining both "synergy" and "diversification," differentiating between real and imagined synergies and highlighting the potential for competition rather than cooperation among business units. The chapter introduces different types of diversification, namely horizontal, vertical, and geographical diversification, explaining their characteristics and offering examples. It then explores the question of optimal diversification dimensions and touches upon the role of transaction costs in decision-making.
2. Possible Motives for Diversification: This chapter explores additional motives for diversification beyond synergy, such as growth and risk reduction. It examines the historical context of diversification as a growth strategy, particularly in the early 20th century, and highlights the potential conflict between managerial incentives (such as enhanced status and power) and shareholder value. The chapter notes that while risk reduction through diversification may not directly benefit shareholders (who can diversify their portfolios), it is appealing to management. It touches on the importance of focusing on shareholder value creation rather than solely company size.
Keywords
Synergy, diversification, corporate strategy, horizontal diversification, vertical diversification, geographical diversification, risk reduction, growth, managerial incentives, shareholder value, transaction costs.
Frequently Asked Questions: A Comprehensive Language Preview
What is the purpose of this document?
This document provides a comprehensive preview of a language essay investigating the role of synergy in corporate diversification decisions. It includes a table of contents, objectives and key themes, chapter summaries, and keywords. The preview aims to give a structured and professional overview of the essay's content.
What are the main topics covered in the essay?
The essay explores the relationship between synergy and corporate diversification. It questions whether synergy is the only justification for diversification and examines alternative motives, such as growth and risk reduction. The essay also analyzes different types of diversification (horizontal, vertical, geographical), the potential conflict between managerial incentives and shareholder value, and the limitations of diversification strategies.
What are the key themes of the essay?
Key themes include the definition and creation of synergies; different types of diversification; alternative motives for diversification beyond synergy; the potential conflict between managerial incentives and shareholder value; and the limitations and potential pitfalls of diversification strategies. The role of transaction costs in diversification decisions is also explored.
What are the chapter summaries?
Chapter 1: This chapter challenges the assumption that synergy is the sole reason for diversification, defining both synergy and diversification. It explores different types of diversification and the role of transaction costs in decision-making. Chapter 2: This chapter examines additional motives for diversification beyond synergy, including growth and risk reduction. It analyzes the potential conflict between managerial incentives and shareholder value, emphasizing the importance of focusing on shareholder value creation.
What are the key words associated with the essay?
Key words include synergy, diversification, corporate strategy, horizontal diversification, vertical diversification, geographical diversification, risk reduction, growth, managerial incentives, shareholder value, and transaction costs.
What types of diversification are discussed?
The essay discusses horizontal, vertical, and geographical diversification, explaining their characteristics and offering examples.
What is the role of synergy in corporate diversification according to the essay?
The essay investigates whether synergy is the sole justification for corporate diversification or if other factors also play a significant role in this strategic decision. It analyzes both real and imagined synergies and their impact on the decision-making process.
What is the significance of managerial incentives and shareholder value in the context of diversification?
The essay highlights the potential conflict between managerial incentives (e.g., increased status and power) and shareholder value. It emphasizes the importance of prioritizing shareholder value creation over simply increasing company size.
What are the limitations and potential pitfalls of diversification strategies?
The essay explores the potential limitations and pitfalls of diversification strategies, suggesting that a focus on shareholder value is crucial for successful diversification.
- Quote paper
- Rüdiger Wolf (Author), 2002, Synergy is the only justification for a firm's diversification. Discuss., Munich, GRIN Verlag, https://www.grin.com/document/20271
