Thursday 24 January 2019

Corporate Diversification: corporate level strategy

Corporate Diversification
A company implement a Diversified Corporate Strategy when the company that operate on those industries or markets varied simultaneously. Product diversification strategy is implemented when the company operates in the industries varied simultaneously while the geographic market Diversification Strategy implemented by companies that operate on a markets geographically diversified simultaneously. If the two are combined, the diversification strategy will result in the market Diversification Strategy-product.

Types of Corporate Diversification, there are three kinds, namely:

Limited Corporate Diversification, which occurs when all or almost all of the company's activities take place on a single geographical market and industry consists of two subtypes, namely:
  • (a) companies single business (95% or more of the company's revenue came from a single product market), 
  • (b) dominant business companies (between 70% and 95% of the company's revenue came from a single product market).

Related Corporate Diversification, which occurs when less than 70% of the company's revenue came from a single product market and business lines diversified is connected, consisting of: 
  • (a) Related Constrained that is less than 70% of the company's revenue came from a single business and businesses that share our different relationships and attributes, 
  • (b) the Related Linked that is less than 70% of the company's revenue came from a single business and different business just sharing a little relationship and attributes or relationships and attributes are different.
Corporate Diversification Not Related : less than 70% of the company's revenue came from a single business and there is little relationships or attributes among businesses.

Economies of Scope occur at a company when the value of the products or services sold increased as a function of the amount of business the company is run. Economies of Scope are worth the extent to which Economies of Scope increase revenues a company or lower cost than if the Economies of Scope is not used.

Corporate Diversification in order to economically has a value, then it must be two conditions, namely :
  • There must be some Economies of Scope which is worth between business-diversified business where a company operates.
  • should be cheaper for managers at a company to realize Economies of Scope than to the owners of capital outside the company on their own capital.
  • Types of Economies of Scope there are four, namely:

1. Operational Economies of Scope

Shared Activities, a physical activity that is the same used by more than one business function on a diversified company.
Core Competencies, a non same physical activity used by more than one business function on a diversified company.

2. Financial Economies of Scope

Internal Capital Allocation, business functions on a diversified companies compete for the corporate capital is allocated to them.
Risk Reduction, risk levels of cash flows diversified companies are lower than the rate of cash flow risk from companies that are not diversified.
Tax Advantages, a diversified company that can use the perceived on some bisnis-bisnisnya to partially offset the profit on some other business so as to reduce tax liability entirely.

3. Anticompetitive Economies of Scope

Multipoint Competition, occurs when two or more companies that diversified simultaneously compete in markets that are diverse. Multipoint Competition can cause the onset of Mutual Forbearance which means to refrain from competition because the present value of profits of acquired companies that compete is not greater than the present value of losses suffered by companies that competed.
Exploiting Market Power, the company may use a portion of the profit the monopoly of a particular line of business of the company is to provide subsidies to the operations of other business lines that were previously less profitable business lines so that the subsidised monopoly profits can produce anyway.

4. Employee and Stakeholder Incentives for Diversification

the employees especially the Manager, trying to increase the size of the company is usually measured in sales value, which becomes the decisive quantity compensation for them. One way is through a diversified Corporate Diversifkasi Strategy primarily Not Related in the form of mergers and acquisitions.

Shared Activities, Core Competencies, Multipoint Competition, and Exploiting Market Power. Entirely requires the coordination of business activities between detailed business diversified on a company. Although the owners of capital may have a portfolio of equitas, they are not in a position to coordinate the activities of businesses in the portfolio. In the same way, Internal Capital Allocation need information about business prospects that are simply not available to the owners of capital outside the company. The five Economies of Scope mentioned above can not be realized by the owners of capital outside the company on their own capital.

The two Economies of Scope that is not potential to generate positive returns for the shareholders of a company is diversified to maximize the size of a company-because of the size of the company , in fact, not worth-and diversification to reduce risk — because shareholders can do this on their own proprietary capital at low cost with invest it easily in a stock portfolio that diversified.

Analysis of the basics of diversification that might advocate that Related Diversification may be more consistent with the interests of the shareholders of a company rather than Unrelated Diversification. This is because Risk Reduction which is easiest for Economies of Scope holders outside the company to emulate is the Economies of Scope is the only one that a diversified company in Unrelated Diversification can try to make it possible.

The scarcity of diversification

In the first clash, it seems clear that diversification itself usually is not a rare corporate strategy. Most large enterprises have implemented some form of diversivikasi, only if a limited diversification of the business of a company which is dominant. Even many of the small and medium enterprises have implemented different levels – level of diversification.

However, the scarcity of diversivikasi depends not on diversifying itself but on how rare a particular scope economies, associated with diversivikasi. If only a few companies competing have leveraged economy of scope, then the economy of scope can be rare. But if a lot of companies do it then it will become a regular thing and not be a source of competitive advantage.

In the diversification, the ability to imitate, there are two forms, namely:

a. direct Duplication in the diversification of

  • Expansion in a value and coorporate diversifkasi strategies that rarely is freedom from direct duplication that depend on how the cost of it for companies that compete
  • for real in the same economic scope. In the activities that are performed simultaneously. Risk reduction, profit taxes, worker's compensation in established for coorporate diversification which is usually relatively easy to duplicated reason karna activities together didasarkn on assets in the form of a liability company can take advantage of multiple business.
  • In addition, because the reduction of risk. Tax advantages and employee compensation is a motive for diversification can be resolved from the relationship and the diversification that has nothing to do and then motive is relatively easy to appropriate diversification in dulicate.

B. substitution for diversification, is divided into two, namely:

  • the acquisition cost or revenue gains of utilizing different business economic scope at different companies. A company can implement a successful strategy of kepemimpian costs or product diversification in single business that leverages the cost or profit the same income this is done with the scope economy
  • utilizing the scope of economic diversification in the corporate strategy that can support the use of the strategy of the company may be allians could thrive by exploiting economies of scope sacara carefully in different business
  • the second form is very relevant in evaluating the ability of diversified strategies to generate returns of competition are continually even if the scope of the economy which they generate have rarely been

Economies of scope which can be realised through international operations

in the context of international corporate strategy of diversification can generate competitive advantage for the company, in addition to generating competitive advantage companies are also at risk in implementing this strategy.

Two risks in face by the company when mumutuskan to implement the strategy of diversifying corporate in the international context can be a risk of financial and political risks.

1. Financial Risk, occurs because:

Fluctuations in the eyes of the Debt, which could affect the company's investment. These fluctuations can result in extra profits for investment as well as losses due to a decline in the value of investments due to currency fluctuations.
The difference in the interest rate of inflation, which requires the company to implement practices of complex material approach, business strategy, and complex accounting practices.
Financial risk can be very intimidating for a new company that would like to enter in the international scene.

2. Political Risks

political Circumstances may affect the company's investment value, either the macro or the micro.

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