Professional Documents
Culture Documents
Diversification Strategy
Strategy
OUTLINE
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Diversification and Performance: The
Score (cont.)
– Exhibit suggests:
• Categorization of firms into the 4 diversification-
performance groups is remarkably balanced.
– High-performing firms are just as likely to be more
diversified as they are to be less diversified.
– Low-performing firms are just as likely to be less
diversified as they are to be more diversified.
• No significant performance differences between
high-performing more or less diversified firms.
Diversification and Performance: The
Score (cont.)
• Summary
– Though diversification has been disastrous for
many firms, diversified firms can also be
successful.
– Studies have found no obvious differences
between high- and low-performing diversified
firms along several important strategic
dimensions.
Motives
Motives for
for
Diversification
Diversification
GROWTH --The desire to escape stagnant or declining industries
has been one of the most powerful motives for
diversification (tobacco, oil, defense).
--But, growth satisfies management not shareholder
goals.
--Growth strategies (esp. by acquisition), tend to
destroy shareholder value
RISK --Diversification reduces variance of profit flows
SPREADING --But, does not normally create value for
shareholders, since shareholders can hold diversified
portfolios.
--Capital Asset Pricing Model shows that
diversification lowers unsystematic risk not
systematic risk.
2. The Cost of Entry Test : the cost of entry must not capitalize
all future profits.
NationsBank 118%
Norwest 142%
First Bank 195%
Wells Fargo 234%