Summary of Article

SUMMARY OF ARTICLE.

In the article, John G Matsusaka highlighted the main point that diversification is the search process by which firms seek businesses that are good matches of their organizational capabilities. He explained that diversification is not the cause of poor performance but it may result in poor performance. This is due to the inherent uncertainty in a search process. Plus, the weak and inefficiency of conglomerates are being subsidized and this lead investor to punish the diversified companies. But, It may become as a good news if a manger succeeds in looking a better match for their organizational capabilities.

Matsusaka presents a mathematical model that shows how diversification can be a value-maximizing strategy even if specialization remains the ultimate goal. He believes that the company who has an expert capability sources like marketing or products innovations and improvements has values because those skills are transferable across products and industries. Therefore, shutting down from the market while facing a decline in their core business is not a wise step because they can still maximize their shareholder value by trying to find a new industry that offers a good match for their skills available.

Although careful analysis made can improve the search process, Matsusaka believes that some uncertainty about the quality of a match will almost invariably remain. The only way to determine whether a sector offers a good fit or not is only through experimentation of entering into an industry. Rarely, managers will not choose to liquidate their existing operation before embarking on experimentation. Most often they will choose a diversification which combined old and new activities to see the outcome whether the combinations is suited with the organization capabilities or not.

Matsusaka’s theory offers a new explanation for the diversification discount. It is a situation when the diversified companies have begun the process of...