Strategies for Managing a Group of Businesses
Markets are shifting, today’s competitor is tomorrow’s collaborator, and products and services are developed and sold in time. Managers and even the entire management are now spending too much time in forecasting, analyzing, and measuring strategies for a fuzzy guess at what would be the enough strategy to apply. Thierauf and Hoctor (2006:264) have noted that among the commonly used business strategy to improve the competitive advantage as well as the survival of an organization is diversification.
Advantages There are two sides to the case of diversification. One side is in favor of such business diversification as being a sensible organizational strategy. Such could promote cost-efficiencies and even give the diversified firm value-adding capabilities (synergies) that would not be attained individually. The diversification boosts any company by providing the needs to attain tremendous growth and positioned its products and services as dominating forces in the particular area of operation.
It is all in cost-saving expectations that create important expenditure and selling synergies. Additionally, the sensibility of business diversification come from gaining different kinds of efficiency improvement such as replacement of inefficient management product, financial, and tax synergies. Other possible reasons for deciding to embark on such venture are gain of monopoly power, valuation discrepancies caused by information asymmetry as well as a number of agency motives such as growth maximization, free cash flow, and employment risk reduction.
Accordingly, most companies deciding to diversify have done a reasonably good job sizing up the economic and financial characteristics of the venture. More specifically, diversifications allow gaining of new technologies in support of the prior objective; will reduce costs through economies of scale and scope; increase in the operational efficiency; and extend the business or embrace for the organization the temporary economic power of major regional or national business to finance expansion.
Connerley and Pedersen (2005:582) asserted that in order to keep up with the rapidly changing technologies; gain access to specific foreign markets and distribution channels; create new products; and ease problems of worldwide excess productivity capacity, the diversification strategy is being used with increasing frequency by contemporary companies in the face of stiffer competition in the market. Disadvantages However, there is an opposing side, which argues that diversification of a business is not a rational move at all.
A diversification move can amply change the frameworks, cultures, and job prospects of the organization such that they cause organizational members to experience stress, anger, disorientation, frustration, confusion, and even fright. Blenkhorn and Fleisher (2005:41) observed that diversification frequently result to lowered worker dedication and output, amplified discontent, high rate of turnover, power and leadership resistance, and a wide-ranging increase in dysfunctional behaviors such a corporate move.
In addition, another disadvantage that a diversification may bring within the company is the tendency for the company to not give enough focus to its products because of many products that it offers in the market. In this manner, the company may not have that assurance of sustaining the competitiveness of other products.
In the race for global competitiveness, some firms trying to achieve economies and market power may not effectively analyze their target firms prior to diversification and may make mistakes when attempting to integrate the new business functions with the old ones. In diversifying, another challenge is evident in the financial management aspect. The challenge now for the financial managers is to explore the options and take advantage of the opportunities while taking caution in managing the risks in the face of the diversification.
Blenkhorn, D & Fleisher, C 2005, Competitive Intelligence and Global Business, Praeger Publishers, Westport, Connecticut. Connerley, M & Pedersen, P 2005, Leadership in a Diverse and Multicultural Environment: Developing Awareness, Knowledge and Skills, Sage Publications, Inc. , California. Thierauf, R & Hoctor, J 2006, Optimal Knowledge Management: Wisdom Management Systems Concepts and Applications, Idea Group, Inc. , Pennsylvania.