Chapter 6 Summary
Chapter 6 Summary
On the example of one of the largest companies in the world, Tata Group, the unrelated diversification strategy corporate-level principle is explained as an approach that combined different spheres of business that might not even share common technologies. Through this prism, the functions of top executive managers are outlined as well as the strategies that they use in relation to the approach in question (Harrison & St. John, 2004).
The three board approaches are defined as concentration, diversification, and vertical integration. Concentration means operation in a single market with a single product or a narrow range of goods. This strategy is beneficial when there are favorable conditions in the market and in a country that are attractive to customers and allow making profit effectively. In particular, concentration means mastering a single range of products, and it allows top executives to avoid grave strategic mistakes; all the resources are allocated in a single direction, which allows a company to become highly competitive in the market; reinvestment of profit into business is easy. However, concentration might be risky in the changing environment; product maturity might endanger the competitiveness in the market; single-product orientation does not allow flexibility and cannot support the company in case of cash deficit; it does not provide enough challenge to managers, who are forced to do the same things from year to year. Vertical integration is when a firm is involved in several steps of the supply chain within one industry. It is one of the further steps of concentration development; for example, in such cases when revitalization of the business is not effective or when the market is saturated. Thus, in a manufacturing firm a vertical integration supply chain contains extraction of raw materials, primary manufacturing, final product manufacturing, wholesaling, and retailing. However, vertical integration might not be universally applied to any firm; for example, in the apparel production it is limited to some stages. Vertical integration is beneficial since it allows one to increase companys efficiency, to gain control over product quality, marketing, suppliers and the market; in addition, this strategy allows a greater variety of products; sometimes companies adopt it in order to try a new way of management to improve companys performance. Still, vertical integration is not appropriate in all the cases. The appropriateness of the vertical integration strategy is defined by transaction cost economics; this perspective outlines several reasons for a market failure such as uncertainty of the future, a very limited amount of suppliers with their interests, one party possesses more information about transaction that the other(s), and investment into an asset is very specific, so it becomes difficult to operate it in the market. Overall, vertical integration requires skills that are completely different from those that are possessed by a firm. In view of this, some companies omit this strategy and pass directly to diversification strategies (Harrison & St. John, 2004).
Diversification includes the aims of a company within the competing industries and markets. It can be related and unrelated. The former one is connected with organizational efforts aimed at developing activities that relate to a companys main business using common markets and technologies. The latter one does not have any relation to the business and might be reasoned strategically, by personal motives of CEOs. In particular, unrelated diversification might be an attempt to reduce investment risks, stabilize earnings, ensure growth, apply the resources effectively, develop synergetic approach, adopt new technologies, increase market power, and an attempt to save a declining business. As far as personal motives are concerned, CEOs use this approach to increase their power and status, get more returns, increase value of a firm, or try a more challenging strategy of development. The unrelated diversified companies are called conglomerates. On the example of Royal Philips, it is explained how this company combines several unrelated businesses, starting from communications market and finishing with the automotive one. However, there are several significant challenges for a company that chooses unrelated diversification: elevated risks, increased demands on corporate managers, technological challenges due to poor understanding of different unrelated processes. Overall, conglomerates prove to be effective in less-developed countries and in the areas where poor infrastructure has to be compensated. Related diversification takes place within the similar or related segments. This kind of diversification is associated with higher financial income. On the example of Honda Motor Company, it is explained how the company managed to diversify its business on account of motorcycles and other power products. Relatedness might be tangible and intangible. The former one means that the same resources are used for the production of different goods; the latter one means that capabilities developed in one area might be applied to the other area. There are also two types of fit: strategic and organizational. The former one means matching of organizational capabilities, while the latter one refers to similarities in the management processes, cultures, systems, etc. There are several diversification methods that managers might select: internal venture, acquisition, and joint venture. Internal venture is concentrated on the core activities of a company and is, to a great extent, dependent on the research and development within a company. However, this strategy has a high risk of failure, and it might take several years to become profitable. Alternatively, a merger is when two companies unite their productions, while acquisition is when one organization buys the other one. Acquisition is more beneficial since it offers a quick way to enter new markets, buy new products, knowledge, skills, integrate vertically, etc. Still, neither mergers, nor acquisitions seem to be financially beneficial to the stakeholders of the firm that acquires. There are several potential problems related to mergers and acquisitions: high costs (interest rates, various fees, high premiums, etc.) and strategic problems (high turnover, managerial distractions, limited innovation, etc.) (Harrison & St. John, 2004).
Strategic alliance is when two or more companies join, united by the same purpose such as entering new markets, expanding the product range, influencing governments and communities, etc. If an alliance operates independently from the organizations that form it, this is called a joint venture. It should be highlighted that resource sharing (marketing, technology, finance, etc.) is a key factor predetermining the formation of a joint venture. In addition, joint ventures expedite entering into a new market on account of a richer resource base. Joint ventures are considered a less risky type of diversification. However, this type of organization management is limiting because stakeholders have only partial control of the activities of a company and, consequently, its profit. Also, a high level of competitiveness between companies in a joint venture is observed. However, success might be reached on account of well-developed contracts between the parties involved, grounded strategic planning and investigation of the roles of managers; ensuring commitment and monitoring at all the levels; granting independence in each managers area of expertise (Harrison & St. John, 2004).
Portfolio management is used to manage various businesses in a corporation. There are several models of regulation that are used for portfolio management. Boston Consulting Group Matrix refers to the industry growth rate and market share. This matrix is usually used for planning of cash flows. In short, for a successful outcome the BCG matrix should have Question Marks, Stars, and Cash Cows in balance. In the General Electric Business Screen the priority is given to strong competitive businesses. To conclude, the General Electric Business Screen model is more flexible than the BCG matrix; therefore, it might be used with higher effectiveness.