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Diversification case study. Reasons why GSK diversify

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Introduction

Diversification Introduction Diversification is the process of entering new business markets with new products. Companies diversify either by acquiring already existing businesses or by expanding their own businesses into new markets and new areas of production or service. Firms may choose to diversify for two reasons. Diversification may benefit the firm's owners by increasing the efficiency of the firm. Also, diversification decisions may reflect the preference of the firms' managers. Reasons why GSK diversify GSK is a pharmaceutical giant, with an estimated seven per cent of the world's pharmaceutical market. One of their key strategies is to diversify their business to create a more balanced product portfolio and move away from a reliance on traditional white pill/ western markets Economies of scale and scope Having a wide variety of products will enable GSK to capture a larger market share, and hence more profits. GSK diversify into over-the-counter (OTC) medicines, oral healthcare and nutritional healthcare. ...read more.

Middle

Economizing on transactional costs Since GSK relies primarily on research, ideas from one project can help another project. GSK set up a research centre in Biopolis, Singapore. Biopolis is a world class research hub. By setting up a research centre in Biopolis, GSK can economize on transactional costs. Internal capital markets In a diversified firm, some units generate surplus funds that can be channeled to units that need the funds. In 2009, GSK's core pharmaceuticals and vaccines businesses delivered sales of �19.1 billion. Sales in the Emerging Markets pharmaceutical business grew to nearly �3 billion. Consumer Healthcare sales grew to �4.7 billion. Through these profitable businesses, GSK is able to absorb the impact of losing more than �1 billion of sales to genericisation in the US market in 2009. Diversifying shareholders' portfolios Individual shareholders benefit from investing in a diversified portfolio. Hence, a shareholder can invest in a single diversified firm and achieve the benefits of portfolio diversification. ...read more.

Conclusion

In 2009 this programme delivered �1 billion of annual savings. Take advantage of existing expertise, knowledge and resources in the company when expanding into new activities. This may result in transfer of skills, such as research and development knowledge and sharing of resources. Finally, diversification spread risk by avoiding having all eggs in one basket. For example, instead of just relying on traditional pills and euro markets, GSK has diversified into oral care products, skin care products, sports products, nutritional products, as well as diversifying into emerging markets and Japan. Disadvantages of diversification May result in slowing growth in its core business. Adding bureaucratic complexity. In addition to direct financial costs, there may additional bureaucratic complexities necessitated by the need to coordinate and control core activities with additional activities. Losses may be incurred during market consolidation process resulting in some business units being subsidized by other profit making units. Diversification through acquisition across national boundaries may result in the organisation having to deal with varying intricacies of the political and legal requirements of the different countries in which the organisation has controlling interests. ...read more.

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This is a well researched piece and the writer has discovered a lot of useful information about GSK. My main criticism is that they never define what they mean by diversification and according to classical business theory do not describe any either. Firms often move into new products and new markets. This is not the same as diversifying.

Marked by teacher Dennis Salter 15/05/2013

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