Reference no: EM133537022
Question: Based upon the information presented by the textbook authors in Chapter 6, discuss your view of the likelihood of the success of the diversification, citing specific information in the textbook that backs your perspective.
When businesses face a downturn diversification can be critical and fundamental to success, but success is not always guaranteed. As there are many strategies to choose from, what may be successful for one company may not be as successful for another. With the correct strategy in place companies are very likely to achieve success through diversification as it helps to reduce risk while also giving you exposure to different opportunities. Many large corporations have seen success and substantial growth from spreading investments among multiple areas. Dess et al. (2021) states, "Many leading high-tech firms such as Google, Apple, and Intel have dramatically enhanced their revenues, profits, and market values through a wide variety of diversification initiatives, including acquisi-tions, strategic alliances, and joint ventures, as well as internal development".
Why do some diversification efforts pay off while others produce poor results?
One major reason diversification efforts may produce poor results is because the right strategy isn't selected. When selecting the correct one it is important to know that what may work for one company may not work for another. There is also the possibility of investing in the wrong securities.
Dess et al. (2021) say, "Diversification initiatives-whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development-must be justified by the creation of value for shareholders?" (p. 175). What should that value be? And what happens if diversification initiatives do not create that value?
The value diversification should create for shareholders is an increase and sales and earnings. When a company has growth in revenue it results in the shareholders dividends and capital gains increasing as well. If this value is not created by the diversification, then it could result in financial loss and damage the company's reputation with shareholders.