Question

What is corporate diversification and mergers/acquisitions? What are the benefits or disadvantages for firms doing this?

Answer 1

Answer: Corporate Diversification: It is a corporate strategy in which the corporations enter into new lines of business and markets where they have not operated earlier. This involves creating a new product or market for a company

The benefits of diversification are

1. It reduces the risks of loss by sharing of risk
2. It makes the product portfolio wider
3. Helps in dealing with the cyclic nature of business
4. Helps in tapping new opportunities
5. Increase in sales

The disadvantages of diversification are

1. This makes management complex
2. It results in dilution of focus
3. It causes damage to the brand identity
4. It reduces quality
5. Results in below average returns

Mergers and acquisitions: They are processes in which two firms consolidate with each other. In mergers two firms combine their resources as become a single entity while in the acquisition one company overtakes the other company and acquire its resources

The benefits are

1. It results in the formation of the a stronger company with more resources
2. It helps in the development of new competencies
3. Increase in cost efficiency

The disadvantages are

1. It results in intra organizational conflicts
2. Consolidation is not easy
3. Difficulties in decision making