The Drivers of Firms Diversification - Assignment Example

Management Question 2 What are the drivers of firms’ diversification? What diversification options are available to managers? Discuss the options and illustrate with examples of firms with which you are familiar. Six hundred and fifty seven Words Drivers of firms’ diversification Diversification is a corporate strategy to gain entry into new markets or even new industries that the company was not in previously. In other words, this is widening the scope of an organization to include new markets and products or industries. Diversification involves risk though it also provides new opportunities in business and more profits. Should people diversify? This is the most challenging question that faces firms. Rewards and risks are overwhelming (Narasimhan, 2013). Drivers of diversification may be seeking new challenges in business. A firm may be motivated to diversify to reduce monotony and challenge it. A firm may diversify to better utilize available resources. Adapting to cater for the market changes in the industry may also be a driver for growth. Another factor that may drive diversification is the need fuel growth of the firm by providing other profitable avenues. Another reason would be to strengthen the business’ current position. Emergence of a new market may also drive a firm to diversify. Emergence of a new market segment may be an example of a new market. New markets may also be in terms of new geographical market, which may drive a firm to enter into the new markets. Another aspect of diversification may be the reduction of the financial risks that the business faces. Diversification offers the “don’t put all your eggs in one basket” option. A business looking to safeguard its business may diversify so that in case of a loss in one business the other business will offset the loss of the same firm. (Trellis, 2005) Diversification options and Illustrations There are four major diversification options available: 1. Vertical diversification The process of offering new line services not on offer previously. An example is a merger between two firms that are in different stages of production. This mostly occurs when firm has undergone massive growth and is looking to venture into new businesses in its industry that it was not offering (Trellis, 2005). An example here is Food retailer Morrison’s purchase of Vion UKs meat processing company and purchase of a seafood processing company are examples of vertical integration for the food retailer. 2. Horizontal diversification Horizontal diversification is an analogous concept. In contrast to vertical diversification, horizontal diversification does no venture to new businesses where it does not have expertise. Here the firm expands market to other consumers through offering different packages in construction that will appeal to a different consumers or a more appealing price range (Trellis, 2005). An example of such diversification is Ashok Leyland’s decision to produce light commercial vehicles opposed to the heavy commercials it was producing was an example a horizontal diversification. This diversification proved profitable because 10 months after launch they had sold over 12000 units. (Narasimhan, 2013) 3. Geographical diversification Down times are usually locations restricted. As a result, venturing into a new area may provide an escape and guarantee constant cash flows for the business. This method of diversification continues to utilize the same skills of the first business. Risk is only present in understanding the new market (Trellis, 2005). A perfect company is the Unilever. The presence of the company in over 190 countries around the world makes it one of the most geographically diversified companies. As a result, whatever the state of the world economy, Unilever will make sales somewhere adding to its earnings. 4. Conglomerate diversification In this option, the manager has the option of diversifying to other businesses. This new businesses unlike in vertical, do not involve diversification to offer other services in the same industry (Trellis, 2005). An example is General Electric started in 1980 as a lighting company. After a few mergers, GE developed aircraft for the WWI and has now become a manufacturer of jet engines, a new business line, in addition to its other businesses. Besides these, GE has acquired firms in financial services and even in oil drilling. Question 4 What is the case for ‘pure globalization’? Discuss with reference to trends (economic and political). What factors inhibit its current achievement? Five hundred and sixty five Words Pure Globalization Globalisation refers to a systematic process involving extending of social, political and economic activities and the intensification of these activities. The third process is the growing intensity of connectedness then the deepening impact between different spatial events. Pure globalisation refers to the highest level where no nation or state exist other than a global state or civilisation (Globalpolicy, 2012). Hyper-globalists argue that the world states and culture are increasingly being subject to a lot of change in politics and economics that are quickly finishing states and the power politicians hold as well as the cultures the people hold. Economic and Political Trend Illustrations Economic Trends Economic globalisation refers to increasing interdependence between different economies. In the world, economic globalisation is due to a variety of factors such as the increased cross border trade. Another factor is the increased flow of international capital. Advanced technology has made this possible. For example are the international economic and financial organisations, such as World Bank controlled by the west. As a result, the west uses this advantage to promote and control economic globalisation. Through the control of these institutions, they are able to control less developed countries and influence their economic development agenda (Shangquan, 2000). Another example is China in joining of the WTO recently, after agreement between it and the US. This illustrates how much China is interested in accelerating reforms to be part of the economic globalisation (Shangquan, 2000). Another economic trend toward pure globalisation is the adoption of the Euro by European countries.This economic integration is an example of a step towards economic globalisation. (EuropeanCommision, 2015) Political Trends Previously politics had been on a national level and a responsibility of national governments. If successful, pure globalisation will eventually reduce relevance of national states and politicians. For example, the use of western experiences in solving its political problems. This is not just limited to China. Other countries are learning from the west majorly African countries, and this is becoming a trend. Non-Governmental organisations emergence has also been a trend in political globalisation. These NGOs operate internationally and have the end goal of improvement of policies and influencing government action. They achieve this by pressurizing government actions. (Yorkshire, 2010) Other trends include the European Union EU. According to Globalpolicy (2012), when nations join to form a trade bloc, the individual nations cede some part of their sovereignty. An example here is the EU though substantial sovereignty remains with the states. These international unions erode democracy. The result on states is the continued pressure to join and adhere to decisions of these unions. Another form of political globalisation is the formation of the UN. Member countries sacrifice their political sovereignty at times. This infringes on the country’s independence. Factors inhibiting current achievement The fact some countries are winners and others are losers in the process of globalisation presents a hurdle in achievement of globalisation. Political globalisation leads to conflict. For example, the west uses its political influence to affect decisions of other countries and this creates conflict. Arguments have emerged that political globalisation threaten the power of governments and infringe on state sovereignty (Yorkshire, 2010). The organisations driving economic globalisation have many drawbacks and inadequacies in managing a world economy. (Shangquan, 2000) Question 6 Under what circumstances do firms enter international strategic alliances? What makes a successful international strategic alliance? Illustrate your answer with examples with which you are familiar. Strategic Alliances Strategic alliances between businesses have a long history. A strategic alliance is a cooperation or collaboration between two related firms, who agree on objectives, remain independent, and have strategic purposes. A strategic alliance is neither a merger nor an acquisition and the benefit is mutual. The collaboration involves knowledge sharing and transfer, specialization and shared expense and risk (Narasimhan, 2013). Circumstances for formation of strategic alliances The need to reduce risk is an example where firm may need to enter into a strategic alliance. For example in testing new strategies, to reduce the risk that may occur is necessary. As mentioned above strategic alliances involve technology and knowledge sharing. As a result, a firm may be motivated to join strategic alliances to have access to needed skills and technology that may be too expensive to acquire on its own. Reduce operating costs. For example on entry into new markets, firms may form strategic alliances to reduce marketing or operational costs to penetrate the market and access more potential customers. Knowledge of the local market by the other firm is another reason. This is in the case of a firm entering into a new market; a strategic alliance with a local firm will provide invaluable information about the local market. In addition, to overcome certain local government obstacles in entry of new markets, formation of strategic alliances is in order. For example, in most developing countries, local ownership is a requirement for new firms aiming to enter the new market. A strategic alliance with a local firm will offer this solution and allow entry into the new market. Need to overcome competition is also a circumstance that necessitates alliances. In order for small companies to compete with industry giants circumstances, it requires the formation of strategic alliances. This will help the small firms benefit from economies of scale, improve efficiency, and effectively compete against the established firms. (Waggoner, 2004) Reasons for Successful international strategic alliances and illustrations Successful strategic alliances that promote collaboration have a definite structure and a mechanism for accountability. Success of any alliances in business depends on effectiveness of the firms involved and the level of commitments between the firms. For example, the collaboration between LG Electronics and Siemens on joint development on building controls solutions for air conditioners. Existence of trust and goodwill is one reason for success of strategic alliances. Trust may either be character based, where the integrity is key or knowing the true motives behind the alliance. Trust may also be competence based. Trusting a firm to operate competitively in another geographical area is also key to success of the alliance. Another reason for success of international alliances is the existence of senior management support. Managers should have cross-cultural knowledge of different geographical areas that they operate in and exchange human resources. Different tasks that match each firm’s strength is also the task of the senior managers’ to decide. Existence of a monitoring program also promotes success. This is to identify areas for improvement or help know the level of participation of each firm. For example, in the strategic alliance between old mutual international and Skandia international, the management teams continue to collaborate. This has enhanced diversification between the two firms and brought opportunity to both firms. (Investmentweek, 2007) Partner compatibility and specialization is also key. As mentioned earlier, firms that enter into an alliance are related firms. That is, firms in the same industry may enter in an alliance as opposed to firms in different industries; this is compatibility and adds on to efficiency that in turn leads to success. For example, Ashok Leyland has strategic alliances with firms in the automotive industry such as ZF Friedrichshafen AG of Germany, which produces gears for the company. Other alliances are of engine construction. Reference List EuropeanCommision, 2015. The euro. Economic and Financial Affairs. Globalpolicy, 2012. Political Integration and National Sovereignty. Investmentweek, 2007. Old Mutual and Skandia alliance moves offshore as brands merge. Narasimhan, T. E., 2013. Diversification will help company in long run: Ashok Leyland. Business Standard. Shangquan, G., 2000. Economic Globalization: Trends, Risks and Risk Prevention,New York. Trellis, A., 2005. THIRD POWER Market Development Inc. The Interactive Business Network, Issue March, pp. http://thirdpower.net/index.php?option=com_content&view=article&id=62:why-diversify-diversifying-your-business-can-cut-your-risk-or-raise-it&catid=5:news. Waggoner, D., 2004. JOINT VENTURES. Encyclopedia of Business. Yorkshire, T., 2010. Political Globalization: Global Issues, Global Institutions, NGOs. Politics, Power, And The Common Good. Read More