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Diversification For over 100 years, diversification has been key to corporate strategy. The growing power of conglomerates such as Standard Oil even forced regulation as early as 1890 the Sherman Antitrust Act. There are conceptual benefits to diversifying if certain requirements are met, but not all strategic efforts have resulted in the desired outcome. I will start with the requirements of successful diversification and its potential benefits, contrast these to the costs of managerial motivated strategies, and finish with evidence on diversification's true impact. Productive resources are often underutilised by firms, perhaps due to R&D or marketing efforts changing needs over the product life cycle. These may be applied to additional activities at low marginal cost. Capabilities could be replicated and indivisible resources may be used for a new product range, i.e. using Virgin's brand name across all business units transfers marketing benefits. Shared resources thus spread the cost over several products. Even if economies of scope are available, the new market must be attractive to enter. The intensity of existing competition and barriers to entry need to be considered. Furthermore, the redeployed resources must provide some sustainable competitive advantage for diversification to be worthwhile, where the benefits override the costs. For instance, Apple used marketing and engineering knowledge to develop iTunes when entering the MP3 market to generate sustainable competitive advantage. Rockwell successfully replicated expertise in technology and best management practice from Aerospace into navigation systems and printing control systems. Teece (1980) identified that transaction costs must also be significant, so that a market relationship is not more advantageous than internalising control. Market failures often increase transaction costs. Asset specificity can greatly encourage diversification. Contracting poses several threats. There are hold up risks, problem of small numbers, misappropriated knowledge and pricing tacit resources. Also, internally diversified firms do not need to worry with Arrow's fundamental paradox of the credibility of contract information. Unified governance prevents disputes over pricing and allocation, and corporate level advantages can be enjoyed. Diversification strategies often arise from surplus capital generated from current business units. This can be returned to shareholders or used for growth. Firstly, internal finance often costs less than external funds, due to risk premiums added by information asymmetry or the need for effective governance. Moreover, diversification
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