Citigroup:
the Opportunities and Risks of Diversification
The
challenges and opportunities created by both unrelated and related
diversification are well illustrated in the case of Citibank group. The bank’s
huge capital base and its good reputation in the United States allowed it to
diversify the provision of financial services. According to Citibank group,
diversification of financial services results into cost saving, cross-selling
opportunities and economies of scope since the diversified units’ increases
differentiation (Jones and Charles 318). Diversification also comes with its
own challenges including the bureaucratic costs involved in solving transaction
challenges between the various business units. Other challenges include lack of
effective coordination of the diversified services and the right number of
units or services to diversify in order to take advantage of diversification.
Diversification
of financial services brought Citibank group into its knees. Instead of
realizing the benefits of diversification, the newly created divisions began
fighting internally. Further, harmonization of information systems to provide
for effective delivery of services as well as communication became extremely
expensive (Jones and Charles 319). The consolidation of financial services also
led to firing of over 10,000 employees of the bank. The decision to invest in
mortgages was affected by decline in the price of houses in United States.
Diversification turned Citibank group into a loss making entity tarnishing its
reputation. The bank had invested over 90 billion dollars in diversification
with $43 in mortgage related assets. Ultimately, Citibank began reporting hug
losses by the end of 2010 and its share price fell significantly.
Citibank
group applied internal new venture strategy that involves transfer of resources
in order to create new business divisions. It is a type of related
diversification that allows companies to introduce innovative products and
services to increase profitability (Jones and Charles 319). The advantages of
internal new venture include cost saving, profitability, economies of scale and
efficiency. One of the disadvantages of this strategy is that failure to
commercialize and to effectively manage the new divisions at the corporate
level leads to failure. The disadvantages of this strategy are that it requires
huge investment in research and development, sales and marketing and promotion
in order to be successful.
Works Cited
Jones,
Gareth R, and Charles W. L. Hill. Theory of Strategic Management: With Cases.
Mason, Ohio: South-Western Cengage Learning, 2010. Print.
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