Unrelated Diversification in UTC - Case Study Example

Unrelated Diversification in UTC Unrelated Diversification in UTC Corporations implement various corporate level strategies to maintain their market and also to stimulate growth. Corporations pursue strategies based on evaluation of business growth or profitability that the strategies offer to the business (Hill, Jones & Schilling, 2014). One of the common strategies is diversification. Companies diversify their processes to take advantage of benefits in related or unrelated field. United Technologies Corporation uses unrelated diversification strategy where it engages in businesses that are not perfectly related to each other. The section discusses how the unrelated strategy of the UTC adds value to the company. Unrelated diversification is important in enabling companies reap benefits from a central management. UTC ensures that its business gain value by auditing their strengths and weaknesses through its elaborate Total Quality Management strategy. The parent corporation ensures that its businesses are operating optimally. For example, the case of elevator failures in Japan was effectively solved through TQM. A parent corporation is objective in identifying failures in its businesses and thus is efficient in finding solutions. Unrelated diversification also offers UTC strategic advantage of identifying the best practices for its companies to mitigate business risks. The situation implies that the corporation can use strategies that have succeeded in one of its business to run another business. Also, the corporation learns for the strategies that have failed in several businesses to avoid them in the future. The result is a more successful and valuable business. For example, UTC uses TQM as its main approach to avoid product failures. The strategy worked well or elevator problems in Japan; hence, the corporation documented it as one of its best practices. As noted above, UTCs best practices are transferred to all its companies. UTC has employed several process disciplines and an elaborate research and development. Also, the corporation benefits from diverse skills and competencies across different industries. These competencies enable UTC to internally manage the human resources, across all its companies. Top performers can be sent to failing companies to improve their prospects. Dangers and Disadvantages of Unrelated Diversification According to Duhaime, Stimpert & Chesley (2012), unrelated diversification allows corporations to invest in business that have little or no process technologies that can result in synergies. The reason or this is that businesses operate in different industries, and hence there are not similarities in technology. It thus becomes difficult for the conglomerates to streamline the businesses where some companies are more reliant on others for financial synergies. However, conglomerates can overcome this by an efficient distribution of capital. Another disadvantage of the unrelated diversification is the complexities of managing companies in different industries. Some of the industries may be too challenging and may stretch the management. Thus, achieving the desired results is difficult, and the management has to have excellent skills and problem detection techniques. Moreover, uniform application strategies may not work for all the companies. The situation means that some strategies work for certain industries and hence it is a gamble to try them on other industries. Managers require advanced skills to detect a profitable venture. Unrelated diversity requires managers to understand the industries they intend to venture in at an advanced level to understand the dynamics of the industry. According to Hill et al. (2014), organization may face problems in unrelated diversification when managers retire. New managers find it hard to adapt to the system and thus the success of diversification scales back. UTC Success in Pursuing a Diversification Strategy According to historical data on Yahoo! Finance, UTC dividends have been growing steadily for the last eight years. The historical data show that in November 2009, UTC had a quarterly dividend of 0.385, 0.425 in November 2010. The dividends increased to 0.59 in November 2014. The data show that the unrelated diversification strategy of the corporation has increased the value of individual companies. The increasing amount of dividends implies that the revenues from individual companies are increasing steadily. Shareholders of the corporation are now getting more earnings per share. The improvement in the economic and financial position of the Corporation has led to a sharp increase in share price of UTC. In 2010, for example, on January 4, the share price was 59.73. The share price rose to $72.71 in January 2012. The price rose further to $114.16 in January 2015. The growth can be attributed to the corporate strategies employed by UTC. Another indicator of the success of UTCs strategy is the increasing amount of revenues. Historical data on revenues indicate that the corporation was having steady growth over the last four years. In 2012, the revenues amounted to $57.7 billion, $62.6 billion in 2013 and $65.1 billion in 2014. The data indicate that the conglomerate is doing well financially and is attracting more market for its goods. The performance can be attributed to the strategy that the conglomerate employs in dealing with its companies. Reduction in UTC expenses and an increase in revenues led to a steady increase in profits. The profits rose from $5.13 billion in 2012 to $6.2 billion in 2014. The increases in profits indicate that the value of the firm is growing, and thus shareholders expect more returns on their investments. The streamlining of processes under a strict code of practice ensures that the companies maintain the desired profitability and financial position. The data also shows an increase of expenditure in research and development in 2013 and 2014. The same period recorded a decrease in administrative expenses. The expenses fell from $5.57 billion in 2013 to $5.2 billion in 2014. The fall in administrative expenses implies that the diversification strategy led to a smaller management team. Also, the reduction insinuates that the management is more efficient. The above discussion proves that diversification is an important strategy that can raise the performance of conglomerates. Individual companies benefit from the diversification through a central management and synergies. Growth of UTC companies can be attributed to shared management practices such as total quality management (TQM) and Achieving Competitive Agreements (ACE). The practices enhance discipline and streamline processes to ensure that the best practice is followed to enhance quality and to lower costs. References Duhaime, I. M., Stimpert, J. L., & Chesley, J. A. (2012). Strategic thinking: Todays business imperative. New York: Routledge. Hill, C., Jones, G., & Schilling, M. (2014). Strategic management: Theory: An integrated approach (11th ed.). Mason, OH: Cengage Learning. UTX Historical Prices | United Technologies Corporation Stock - Yahoo! Finance. (n.d.). Retrieved March 16, 2015, from http://finance.yahoo.com/q/hp?s=UTX+Historical+Prices Read More