Diversification as a Corporate Strategy - Essay Example

Diversification as a Corporate Strategy Firms that Diversify are Always Running Away from Something An integral component of corporate strategy is selecting the right portfolio for the company to compete effectively, especially in terms of growth strategy. In the currently evolving market environment, it has become essential for business leaders to have a precise understanding of the varying strategic alternatives that are best suited for a company’s operations in different types of markets or industries. In this regard, the business environment that comprises of the competitive activity also plays a fundamental role in deciding the strategic choices that are better suited for the company or organization in general. One of the most preferred corporate strategies for increasing a company’s competitive edge is diversification as companies strive to align themselves with the diverse market environments. However, a close look at the concept of diversification reveals that this kind of corporate strategy is not always beneficial to the company, and in fact, may result in negative results, if not well implemented. In this regard, this paper is aimed at making a closer look at the effectiveness of diversification as a corporate strategy with an aim of presenting the argument that the success or failure of diversification is heavily dependent on the previous performance of the company. It is evident that firms make decisions in the course of their business regarding the products or services that they provide in any given market. Varying matrixes are applied in determining the objectives that should be used in achieving the desired results in the course of the product life cycle. In this regard, one of the major objectives utilized by companies includes the Ansoff matrix which involves the four product combination. However, the focus of this paper is on the last component of the combination which entails the high-risk strategy of diversifying. It is plausible that this strategy is perceived as different from the other strategies in the combination due to the fact that it propels the company away from the original products and services into newer products. The diversification strategy appears to be the most risky of all (Lins & Servaes, 2002). This may due to the fact the company has to devise new products and introduce the same into completely new markets. It is apparent that the failure rate remains high for such an undertaking since many products may at times fail to meet the expectations of the target group. This may result in massive losses rather than the anticipated profits and market gains (Paley 2013). When it comes to diversification, it can be said that any firm that has several related or unrelated business, can be said to be a diversified company. Thus, diversification is a concept that arises when organizations have to make a decision on their preferred business portfolios (Campa & Kedia, 2002). In the current competitive business environment, each company has concerns regarding its growth and development strategies. One of the greatest challenges that face business managers is the ability to choose the right portfolio for the company in order to ensure sustainable growth through the establishment of a formidable competitive edge. This explains why strategic planning has evolved into an extremely crucial factor to counter the challenges of the modern business environment. In the course of this strategic planning, diversification has often been the foremost strategic options that today’s managers apply in growing their companies. Diversification enables companies to make investments in various sectors or industries thereby diversifying the business risks in various sectors. This kind of risk diversification enables firms to survive in case any of the sectors within the industry suffers any uneventful loss. However, it is noteworthy that operating in varying industries requires that business managers must have precise understanding of the core differences that prevail across all the sectors. This is the point at which the main problem of diversification arises. Many business leaders tend to make assumption that the way in which a business segment is run can be utilized in other sectors where the company has interest in. This approach is very consequential and often makes it hard for a company to survive in the long-term (Campa & Kedia, 2002). It is important to note that the business environment of every industry varies. This explains why many business leaders may not be able to cope with the varying requirements of different business sectors. The firms that get involved in the diversification strategy often look only on the positive aspects of the strategic alternative. However, there are other prominent disadvantages that accompany the process of diversification. Despite the many hardships and appalling rates of failure, the diversification strategy remains the preferred alternative for many organizations, usually for behavioural rather than economic reasons. When one places diversification on a broader perspective, it becomes clear that the concept is fundamentally a negative option. Indeed, many business scholars have expressed that companies that result to diversification are, more often than not, running away from better alternatives. This assertion stems from the fact that many firms actually delve into diversification with the hope of finding better prospects on the other side, without conducting due diligence on the actual benefits that diversification brings to the company (Paley, 2013). During the process of diversification, there are three main approaches that companies adopt in expanding their operations. These include; networks, acquisitions, and internal development. Networks have been seen as playing pivotal role in streamlining the operations of international businesses. There are numerous definitional problems that have been linked to the idea of networks. However, in their broader viewpoint, networks portray inter- rather than intra-organizational ideas for coping with the complexities of the current business environment. It is plausible that networks offer an intermediate answer. In fact, networks can offset the uncertainties that characterize many market-based transactions. They also enable the organization to avoid the complexities that underlie the integration process (Marlin, Lamont, & Geiger, 2008). Despite these profound benefits, networks have their share of negative outcomes for businesses. For instance, the idea of collaborating rather than engaging in competition stifles a company’s innovative capacity and allows companies to become more inefficient. In the process, the clients become the ultimate victims of these cartel-like business practices. It seems that the positive outcome of diversifying is to give the company an increased market share. The introduction of new products, targeting new customers, and tapping into new regions enables the company to expand its customer base. On the other hand, it is apparent that each of these strategies exposes the company to increased competition, as well as likely changes in customer preferences. These disadvantages can become more pronounced when the company increases its expenditure on marketing and the delivery of new products. The conclusion here is that diversification strategy involves increased expenditure with no substantial guarantee that each of the strategies employed in diversifying will yield tangible results (Marlin, Lamont, & Geiger, 2008). It is also clear that the major reason for resulting into the diversification alternative is to protect the company from the risk of failure, especially with the many uncertainties that face the current business environment. Thus, diversification is premised on the assertion that a particular product may be compensated for by the profits made in another product thus cushioning the company from the effects of loss making. Furthermore, success in regional marketing may lead to lucrative opportunities that compensate for sluggish performance in local sales. However, it is noteworthy that these strategies in loss protection tend to be expensive in the long run. This because the company might end up spending huge amounts of money on strategies that may not work out as expected in the long-term. Thus, even though other strategies may make up for the money spent on these strategies, the company may actually do better by adopting less diversifies strategies that concentrate on its most effective efforts. Case study of Tesco In order to understand the actual effects of diversification on the company, it is important to look at the case study of Tesco, which is a leading groceries distributor in the United Kingdom (Kivilahti, 2012). Over the recent past, the company has been losing ground as a leading supermarket retailer in the U.K. As the U.K retail market continues to recover from the effects of the recession, and cope with the current changes in customer dynamics, it is apparent that Tesco’s corporate strategies have been detrimental in giving the company a competitive niche in the U.K market. Apart from the organizational and operational strategies that appear to be quite of touch with the current market dynamics, it seems that the decision to go on a diversification campaign has had the greatest contribution to the company’s diminishing performance (Industry Report Consumer goods and retail: United Kingdom, 2012). From a preliminary assessment, it is clear that Tesco’s dismal performance in the U.K market began in 2011 as a result of several factors. These include the following; The decision to neglect investment in customer engagement, as well as their shopping experience Competition with cost leadership and other differentiated retailers concurrently The decision to maintain a static products range for a prolonged period of time The above corporate undoing appear to have set the ground for the company’s diminished performance in the succeeding years, and the subsequent loss in competitive advantage to other upcoming rivals. When one analyses the effects of the company’s diversification strategy, it is clear that the company’s non-food portfolio that includes its F&F ready-made product line can be criticized for the enlargement of its shelf space while negatively impacting on the grocery line. Furthermore, the company’s private labels section that makes up 38% of the company’s product range has undergone a significant shift towards increased competition with discounters, as well as subsidized prices (Pradesh, 2013). Even though the company’s efforts at lowering prices and provide private labels are aimed at moving a cost leadership strategy, the move has affected the company’s premium clients with differentiated products. Furthermore, it is clear that the product range and the variety were not effective enough in leveraging the potential of the private labels. The situation was exacerbated by the poor store display and the overall shopping environment. According to the company’s 2012 annual report, the multichannel leadership plan was aimed at implementing a horizontal diversification strategy that provides commercial solutions to a similar group of target segments. The move would include the strategic location of petrol pump stations around the company’s major consumer segments. It is plausible that the enterprise perfectly adopts a multinational dimension in management and reporting with the business units divided according to markets and not the product groups. This strategy makes it hard to analyse the company’s portfolio and the performance of its product categories (Pradesh, 2013). In its pursuit for diversification, the company’s vision and strategies seem to be broader and more general. This means that the company has failed to chart a smooth and effective working strategy that aligns its strengths with the expansion opportunities available in the diverse U.K market. For instance, the slump in the company’s domestic performance can only be linked to the management’s decision to allocate financial resources and experienced staff to its offshore operations in its pursuit to establish solid global positions (Kim & Mathur, 2008). The current investments in customer service training, rigorous advertising strategies, and the improvements in store atmosphere are not sufficient in ensuring the rejuvenation of Tesco’s fortunes. Without conducting a precise assessment of the reasons behind the apparent low employee’s engagement and morale, the current diversification efforts will not solve the company’s economic woes. Even though the company has adequately mastered its operational efficiency, as well as supply chain management when compared with its major competitors, it is evident that its strategies have been oscillating between differentiation and cost leadership, with greater concentration on cost leadership. In this regard, it seems that the company has made a decision to engage in competition with both the discounters and the premium grocery stores in a bid to dominate both markets. In this quest for diversification, the company has faced extreme challenges in establishing and sustaining a concise brand position among its loyal customers (Pradesh, 2013). In conclusion, it is clear that companies and organizations are always under scrutiny from various stakeholders such as clients, suppliers, investors, employees, and the investors. In this regard, diversification strategies can be effective in attracting new customers, retaining employees, as well as establishing new investment fronts for the company. However, the discussion above shows that diversification strategies may not always and may, in fact, result in negative consequences for the company. For instance, diversification might raise concerns among the customer base that the firm has little interest in their business and the customers may then seek alternative suppliers. As seen in the case study of Tesco, diversification strategies may divert the company’s attention on its key strengths where the human and financial resources should be focused. The end-result is a progressive loss of market edge, thereby giving the rivals a competitive advantage over the company. If not addressed in a perfect manner, poorly researched diversification strategies may gradually drain a company’s resources, leading to successive loss of customers, and the eventual exit of the company form a given market or industry. References Campa, M., & Kedia, S. (2002). Explaining the diversification discount. Journal of Finance, 57 (1); 1731-1762. Industry Report Consumer goods and retail: United Kingdom, (2012). Consumer Goods Industry Report: UK, (3), 1-15. Kim, S., & Mathur, I. (2008). The impact of geographic diversification on firm performance. International Review of Financial Analysis, 17(2); 747-766. Kivilahti, A. (2012). The Growth of UK online Grocery Retailing into a Multichannel Service. Retail Digest, 34-37. Lins, K. & Servaes, H. (2002). Is corporate diversification beneficial in emerging markets? Financial Management, 31(2); 5-32. Marlin, D., Lamont, B., & Geiger, W. (2008). Diversification Strategy and Top Management Team Fit. Journal of Managerial Issues, 2 (1); 361-398. Paley, N. (2013). The Marketing Strategy Desktop Guide. London: Kogan Page Publishers Pradesh, A., (2013). Tesco Losing Market Share in U.K. IBS Centre for Management Research 2(1); 4-10. Read More