Homework Writing Help on Citigroup: the Opportunities and Risks of Diversification

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.