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Ref No: 2138

QUESTION TWO

Discuss the drivers for strategic diversification and the role of mergers or acquisitions (M&A) in achieving growth in new directions. Assess the role of the corporate parent in creating (or not) value for such diversification activities, giving relevant examples from the real world.

The millennium has seen an era of globalization, blurring boundaries and distances via internet that has served the world in ways mankind could not have imagined more than two decades ago. Far gone is the past where people would wait for letters for weeks and even months to be able to know how their loved ones are doing. Business economy and strategy Internet today has essentially brought the entire globe together in what we call globalization, the ability to identify the whole world as one unit as opposed to towns, cities or even countries.

In the same vein, business and markets across the world have progressed into channeling their energies and resources from job production to job specification. The world in the late 90’s saw an era of specialization and the division of labor, however businesses out grew the phenomenon and began attempting to internalize globalization by essentially dismantling the past conventions of business.

This is the phenomena of strategic business diversification. Diversification in definition is expanding horizons and entering new markets that fall beyond the business’s core activities. To say strategic diversification is to put a context to the reasons for diversification that serves the business in a profitable manner and thus is a well thought decision.

Since diversification implies new markets and thereby no prior experience to these new markets, it is deemed incredibly risky. Because significant resources are employed into the matter, it is thus advised and well sought to conduct a thorough market research to allow informed decisions to be made. But before one can understand how diversification takes place, it is rather helpful to understand why business deviate from focusing on their core activities and diversify in the first place.

Diversification is advantageous to firms because of the first and foremost benefit of immediate expansion, risk management and financial assistance. By diversifying its operations successfully a firm can offset its ongoing losses if any with those from another market. For instance a market that is sensitive to economic fluctuations like travel agencies or tourism industry diversified with a relatively stable market that is insensitive to economic fluctuations  (recession) like the market for basic necessities like food items make a good investment portfolio for a business.

It allows the business to earn profits from one branch of the business when the other branch may not be able to generate significant profits for its shareholders. In similar vein if a diversification decision is in a related business, then the business can benefit from fewer costs or absorbed margins, enabling exclusivity and value generation for customers.

In addition to the aforementioned, diversification enables businesses to grow. Growth is a well sought goal of numerous businesses which is achiever over long periods of time after having…