Diversification in Firms: Firms That Diversify Are Always Running away from Something - Essay Example

?Running head: Diversification in firms Diversification in firms: Firms that diversify are always running away from something Insert Insert Grade Course Insert Tutor’s Name October 14, 2011 Part 1: Firms that diversify are always running away from something Introduction Business organizations in the contemporary world are faced with serious challenges. The business industry is among the growing industries in the world. Several investors are attracted to different business across the globe. This has resulted into increased competition among the players in the local and international markets. The other difficulty comes from the dynamic nature of the market forces and the technological advances that are currently registered. The needs of the customers constantly changes and the firms are often challenged to keep pace with the changes. In order to reduce these risks, a firm needs to diversify its portfolio of stocks (Solnik, 1995, p.89). In the current market, firms should not only focus on how to produce their goods and services and avail them to the clients in the market. Rather, the market dynamics require the firms to develop corporate strategies and respond to these market forces will providing balance to the objectives and goals of the firm (Thinking Made Easier, 2011). In response to the changing market trends, some firms have opted to diversify their operations. Diversification is a business strategy that has experienced significant growth in the recent past. Diversification involves the production and delivery of new products and service. It is mainly aimed at ‘increasing market profitability, smoother earnings, and greater capital markets and accumulating diverse expertise in diverse environments’ (Thinking Made Easier, 2011). However, it may be noted that these objectives of diversification are not often met. Diversification is a way of hiding from the inability by a firm to acquire and maintain competitive advantage over its competitors producing similar products. This paper asserts that diversification is not an effective strategy in the current market by focusing on the challenges associated with this business strategy. Types of diversification Diversification in business organizations can be considered in terms of the business processes or in terms of the products ad services involved. In the first respect, there are three types of diversification namely: vertical integration, horizontal diversification, and geographical diversification (Kotelnikov, 2011). Vertical integration refers to bringing together two or more businesses that are at different production stages to add on to the value chain (The Economist, 2009). Horizontal diversification involves extending operations to new business industries to produce new products in order to reduce the risks that are specific to a given industry sector (The Investor, 2009). On the other hand, geographic diversification involves moving into new markets to make use of the opportunities in these regions (Kotelnikov, 2011). In terms of the product, diversification can be grouped as related or unrelated (Kotelnikov, 2011). Related diversification occurs when a firm extends its operations to produce products and services that are still in the same production line as the existing products and services. On the other hand, unrelated diversification is a situation in which the firms extend to produce products and services in a completely different production line (Thinking Made Easier, 2011). Objectives of diversification Business organizations diversify their operations with certain fundamental objectives. Firstly, diversification is aimed at improving the implementation of the organizational processes and strategies (Kotelnikov, 2011). It enables the management of organizations to create some value for the shareholders of the organization. In this way, diversification is also aimed at improving the organizational structure and enhancing the structural position of each business unit in the organization (Kotelnikov, 2011). Similarly, firms often invest on different products to counteract the market dynamics. It is not appropriate to invest all the money in assets whose demand may fall simultaneously (Fabozzi, 2006, p.17). It is considered that in the event that one product fails due to reduction in demand, the other product may compensate for the loss thereby ensuring security. By bringing in new businesses, diversification aims at improving the competitive advantage of the firm (Kotelnikov, 2011). The challenges of diversification It has been pointed out that the above objectives of diversification are not always achieved. By adopting diversification as a business strategy, business organizations cease from focusing on the present market forces affecting their products as well as how to manage these forces. The firms fail to recognize the key challenges associated with the business strategy. One of the challenges of diversification is that it is very expensive to develop new products and services and acquire a good market position for them. Establishing new businesses are generally expensive and require much capital due to the preliminary processes involved. The firms often do not consider these costs. Before settling on the type of new products to introduce in the firm’s production process, the firm has to learn more of the product and test its viability. In order to achieve this, the firm must conduct market and marketing research in order to understand the forces affecting this new line of business. The costs of these researches are very high and provide financial challenges to the firms given that several researches may be required to develop an effective strategy. After choosing on a new product, there is also need to understand the concepts involved in its production especially if the product is in a new production line. The organization will have to hire new employees with relevant expertise (Thinking Made Easier, 2011). The recruitment and hiring process is another activity that is costly to business organizations. There is also need to train the employees on the new operations. The firm will also be required to purchase new assts for the new production line. All these processes are expensive. Diversification also makes firms to lose their corporate focus. Diversifying companies tend to pay much attention to the new business activities thereby overlooking the potential of the existing business. The firms take much resource in the recruitment and training of staff for the new product and fail to cultivate the potential in the employees that are working on the existing business processes (Thinking Made Easier, 2011). In this regard, diversification does not improve the performance of the employees and the final output of the firm due to this deviation from the existing employees’ competencies. It has a negative impact on the effective management in the firm. The firms will tend to make decisions that serve the interest of the key stakeholders. This is contrary to the corporate social responsibility of organizations that is essential for the successful operations of the organization. This will also destabilize the market position of the existing products of the firm. Conclusion It is then important to understand that in as much as firms often tend to diversify the operations in order to maximize their returns; this expected result is not always achieved. The level of competition is still very high in the current market with the needs of the customers changing every time. A firm that is to survive in such a market needs to understand the market forces and adjust its operations appropriately. Rather than providing several distinct products and services, the firms should focus on the quality of products towards satisfying the needs of the clients. Thus, in the actual sense, the firms that diversify their operations are running away from the competitive challenge that they get in the market. Instead of developing and adopting other successful business strategies to acquire and maintain good market position, the firms opt to extend the operations by offering other related or unrelated products and services. The establishment of these new initiatives is often costly and realizing the profit-maximization objectives may not be achieved easily. Extensive product promotion, product differentiation, or offering competitive prices are strategies that can be used to gain competitive advantage in the current market. Part 2: Case study- The Morgan Motor Company The Morgan Motor Company is one of the companies that have survived without much diversification for a century. The company listens to the market trends and develops products that are in demand rather than diversifying its operations to other lines of production. The company was founded in 1910 by H.F.S Morgan, the expert who would determine the company’s operations for several decades (Morgan Motor Company Ltd, 2010). Morgan developed interest in the automotive engineering and got into such careers at the very early stages. At the age of 25, Morgan established his garage and motor works where he provided bus services successfully to his clients (Morgan Motor Company Ltd, 2010). At this point, Morgan was able to purchase his motor vehicle, an Eagle Tandem. He then developed the idea of making three-wheeler like the Eagle Tandem. The idea succeeded and with the financial assistance from others like Mr. Stephenson Peach, Morgan used his scarce resources to develop the first design of a three-wheeler (Morgan Motor Company Ltd, 2010). The car had an unusual power to weight ratio and was able to speed much the same as all the other cars available at the time. Morgan did not intend to produce this vehicle to be sold. There was still lack of facilities. However, he was encouraged to produce some more of the product after there were positive comments on the effectiveness of the three-wheeler that had been developed. Thus, he solicited funds and began the manufacture of the vehicles in 1910. The products came into the face of the public in the 1910 Olympia Motor Show (Morgan Motor Company Ltd, 2010). The management of the company focused on the changing market trends and made adjustments on the products accordingly. The first three wheelers were single-seater and orders were posted for the products at the show. It was also observed that in order to attract a global market, there was a need to manufacture two-seater vehicles. These two-seater vehicles were also manufactured successfully by 1911 and it attracted more customers. He received more orders than he could manufacture and attempted to outsource from other organizations that did not grant his request either (Morgan Motor Company Ltd, 2010). This challenged him to expand this garage and produce more vehicles to meet the demands. The company was officially formed in 1912 under the leadership of the Morgan family. At this point, it was a family business and has remained under such management system over the years. The company continued to respond to the changing market needs in order to produce the products in current need in the market. The three-wheeler was doing well especially in the car races where they were used in the early 1910s. However, it emerged that there was growing demand for four-wheelers and the company made efforts to respond to this need. These efforts were not realized immediately and the four-wheeler vehicles would appear about twenty-two years later (Morgan Motor Company Ltd, 2010). The company has been operating in a single line for several years. It has the potential to diversify its operations. This was evidenced during the First World War when the company decided to manufacture more of munitions and machinery to be used in the war and less of the motor cars. After the war, the company maintained its mainstream of manufacturing sports cars and has been in the business for almost a century. In the beginning of the twenty first century, the management of the organization was criticized by business analysts for sticking to old-fashioned system of operations. The company was said to have failed in barely all its operations. However, this has not been an actual weakness of the organization, which has shown evidence of success in its operations. In fact, Morgan Motors Company is the only survivor of the British sports manufacturers that were started in the 1910s and the company can boast of a hundred years of successful operations (The Morgan Motor Company, 2011). The management of the organization responded to the critiques stating that they were mainly focused on the quality of the products and that they were not meant to fetch good prices as other companies did (ICMR, 2011). The company launched it ‘Eco Car’ project in 2005. The initiative was aimed at developing automobiles for sports that were friendly to the environment. This followed global environmental management policies that regulated the fuel consumption and the emission of gases by the automobiles. The new sports car was to be a development from the Aero 8 sports car that had been launched earlier, in 2000 (ICMR, 2011). Despite various challenges, this project finally succeeded with some financial support from the British Department of Trade and Industry and other private donors (ICMR, 2011). As another development in response to the current global fuel issue, the company has also introduced a new idea on sporting cars. The company has also observed the need to develop cars that are more efficient and fit for the sporting activities. It has performed its SWOT analysis and realized that there is the potential to manage these challenges. The Morgan EvaGT is the initiative that has been launched recently to apply clever modern technologies towards economizing fuel consumption (The Morgan Motor Company, 2011). The management of the organization has shown commitment to developing a new model of a car after every two years as from 2010. It sees no significant benefit of diversifying its operations to other product lines. Reference List Fabozzi, F et al. 2006. Financial modeling of the equity market: from CAPM to co-integration. New Jersey: John Wiley and Sons ICMR 2011, Morgan Motor Company - The Car Maker's Journey into the 21st Century, viewed 15 October 2011, http://www.icmrindia.org/casestudies/catalogue/Business%20strategy/Morgan%20Motor%20Company%20The%20Car%20Maker%27s%20journey.htm. Kotelnikov, V. 2011. Diversification strategies, viewed 15 October 2011, http://www.1000ventures.com/business_guide/im_diversification_strategies.html Morgan Motor Company Ltd. 2010, Morgan History, viewed 15 October 2011, http://www.morgan-motor.co.uk/about_morgan/1910.html. The Economist 2009, Vertical Integration, viewed 15 October 2011, http://www.economist.com/node/13396061. Solnik, B.H. 1995. Why Not Diversify Internationally Rather than Domestically? Financial Analysts Journal, http://ben1208.free.fr/nouveaux%20m%E9moires/autre/f0510089a.pdf The Investor 2009, Horizontal Diversification, viewed 15 October 2011, http://monevator.com/2009/03/10/horizontal-diversification/. The Morgan Motor Company 2011, Morgan EvaGT, viewed 15 October 2011, http://www.morgan-motor.co.uk/sales/eva_gt_2010/eva_gt.html. Thinking Made Easier 2011, Diversification is fundamentally a negative strategy…diversifiers are always running away from something, viewed 15 October 2011, http://ivythesis.typepad.com/term_paper_topics/2009/07/diversification-is-fundamentally-a-negative-strategy-diversifiers-are-always-running-away-from-somet.html. Read More