Types of Diversification
There are two types of diversification depending upon the individual company’s strategic planning. These include related diversification and unrelated diversification.
Related diversification is chosen by the company when it aims to establish a trade unit in a fresh business industry. This type of diversification helps a company in the transfer of distinctive competencies, allotment of resources, and collection of various types of products. The most important advantage a company gets is that it could apply any business competencies to the entire unit performance. The example of related diversification is Intel, where the company has been concentrating on the enhancing business of microprocessors in order to make personal computers (Hil & Jones, 2007).
On the other hand, unrelated diversification helps in enhancing of the company’s profits by capturing the benefits of the multipoint competitions. The focus of the company is on the usage of general managerial competencies for strengthening individual business units. Tyco, is a an example of the organization focusing on unrelated diversification in the successful capture the value for their shareholders.
Methods of Diversification
Versification include horizontal, vertical, concentric, conglomerate and corporate diversifications. The method adopted by a certain organization is based on its goals, objectives and strategies.
Beneficial and Detrimental Effects of Diversification in Different Corporate Circumstances
The rapid change in the environment of the company, the cost structure, abilities within the organization for the successful implementation of change, predictability for profitability, willingness for diversification, decides about the effects of diversification on the company. It might be possible that for one company, the same strategy is beneficial while on the other hand it is detrimental for another one.
Strategy can be illustrated as goal to achieve and measures taken to achieve the goals in short, medium and long term. Capability, on the other hand, is the capacity and resources of the organization. Thus, strategic capability of organization refers to the organization capability to develop strategies and ability to apply strategies within organizations (Armstrong, 2000). Buy assignment topics
How to Use Strategic Capability of Organization for Future Strategy
Since it is found that strategic capability of organization is concerned with the actions to take for long-term view as what is required in the future to have success, choosing the adequate vision and long-term future goal strategy can serve to achieve the future objectives of the organization. In order to achieve the future goals, it is imperative for the organization to recognize its strategic capability as to fulfill the requirements for future goals. With this view, the selection of the development strategic assets must be able to continue for gaining the organizational profitability. Identifying the current strategic capability of organization can help the managers to deal with the future challenges that are likely to be faced by the organization (Koteen, 1997).
The growing globalization of organizations and increasing competition is creating difficulty for the organizations to survive and sustain their existence; therefore, organizations are considering the need for assessing and evaluating their strategic capability to meet the needs for future trends. The most appropriate example of using the strategic capability for the future strategy of the organization is the Coca Cola, which has used its product innovation to merge and acquire the suppliers and decrease the competition level developed by the suppliers (Birchall & Tovstiga, 2005).
Porter’s generic strategies
According to Porter, in order to gain a competitive edge, three strategies should be undertaken by the company. It includes cost leadership, differentiation and focus. In order to be a cost leader in the market, porter stated that the company offering the low cost to the customers would earn high profits in the market. the examples include Tesco and easy Jet. Likewise, with the help of product differentiation, the company could set its price at premium level, as the customers would pay in order to have a differentiated and branded product. In addition, the company’s could reach the high profit margins by concentrating on particular segments of market.
Comparison with Bowman’s Strategic clock
Bowman’s Strategic Clock could be stated as an extension of the Porters’ Generic Strategies, making consideration on competitive advantages of Porters three strategies. Bowman has presented various options for the Porters strategies by providing six basic strategies option to be adopted by the organizations.
Critical Evaluation of the Statement
Porter describe that a company who tries to pursue more than one generic strategy, results in the failure. He further contended that there is no competitive advantage available to that company rather it stuck in the middle. On the other hand, Alderson et al. (2006) has presented various examples of successful companies who have adopted both the generic strategies of low cost and product differentiation. The example of Toyota and Benetton could be considered for this purpose.
For the future organization development, mostly organizations consider the merger and acquisition as best strategy for the corporate venture but it requires relatively great considerations over and comparison of the merits and drawbacks of internal as well as external merger and acquisition methods (Stavros et al., 2009). As future development, internal merger and acquisition can refer to union of two divisions or departments resulting to increase the efficiency of the organization operations while leading to low production due to lack of coordination and communication (Cummings& Worley, 2008). The external merger and acquisition, in which organizations are tended to acquire or to be acquired by other organizations, can affect the internal organizational culture resulting from control of acquirer organization over the acquired organizations (Pablo& Javidan, 2004). Moreover, externally, merger and acquisition as corporate venture can have effects on the market share value because in the result of merger and acquisition, organizations are inclined to change their operational trends while affecting the overall production of the organization.
The underlying principles for choosing the future methods for corporate development involve the organizations to consider the integrity, versatility, empowerment, integration, renewal and commitment resulting from the merger and acquisitions of divisions, department or two organizations (Cummings & Worley, 2008).
Organizations when find their internal capability sufficient to meet the requirements of customers, they strategize to merge their divisions with the core aim to increase the proficiency of the divisions (Koteen, 1997). The advantages of the merging the divisions are related to increased productivity and decreased cost of production while disadvantage of this strategic approach is the low profitability due to lack of flow of information between divisions and cooperation (Pablo & Javidan, 2004). On the contrary, external merger and acquisition with other organization can increase the strategic capability of organization resulting from the gaining another brand identity of the acquired organization and opportunity for increased productivity. The disadvantage of this approach is that such merger and acquisition can be a failure if the acquirer organization could not use the capability of the acquired organization.
Apart from the variables mentioned in the Ansoff matrix, a company in order to determine better future strategic decisions should consider other variables too. In order to penetrate effectively in the market, a company should also focus on the positioning and differentiation strategies. The Ansoff matrix is limited to certain aspects of the business industry as market penetration is itself a limited area, thereby neglecting the broad perspective of the business. Likewise, the matrix has suggested the broad strategic decisions in respect of different products and different markets but the matrix do not suggest the ways to adopt such four variables.
On the other hand, the Ansoff matrix is a technique used by the companies dominated by their market or industry and helping theses companies to administer the rivalry and entrant forces in the market. However, it does not undertake the variables of bargaining power of the customers where the company is offering its product, threats of substitutes and the suppliers role in the success of a business whether exploring new or existing markets with the new or existing product. For example, the company like coca cola the development of a new product is based on the core competencies of the organization itself. Sometimes, the company is not able to divest more risk. The Ansoff Matrix, should also consider the risk factor and cost variables for the successful implementation of future strategic decisions in an organization (Johnson, Scholes & Whittington 2008).
According to Porter’s Five Forces model, the concept of industry can be understood by the active forces exist within the industry and these forces are identified as variable of the industry including suppliers, buyers, new entrants, rivals and substitute products (Fleisher& Bensoussan, 2007). The suppliers, buyers, rivals, and potential rival and substitute product while according to Porter’s five forces model, every business is affected by these variables characterize every industry. Under the five forces model of Porter, suppliers, buyers and rivals are the significant factor in the industry and bargaining power of suppliers and buyers determine the strategic planning of the organization. This can be understood by the example of the food industry, if suppliers of food industry refuses to sell or sell on the price determined by the organization, organization can face difficulty in terms of fulfilling the needs of customers. Similarly, bargaining power of customers mainly influenced by existence of substitute product can lead to low sale. Thus, it is significant for the organizations to consider the rivals, substitute products and new entrants in the industry as part of its strategic planning management. In addition, the variables of the industry also determines the profit of the organization in the industry through affecting the prices, cost and required businesses investment and return on investment while it is further associated with the channeling environment for the business (Hill & Jones, 2007 ). Organizations by reducing the bargaining power of suppliers and buyers gain the competitive advantage over the rivals such as Coca Cola acquired bottlers that are its biggest suppliers and this merger and acquisition strategy reduced the dependency of the company on the suppliers.
Limitations of Port’s Five Forces Model
The limitations of Porter’s five forces is associated in the economic sense, because model illustrates the conditions and variables for the classic perfect market based on the regulations of the industry while application of the model is only possible for the simple market structure (Armstrong, 2000). Thus, the model is not applicable in the complex industry structure due to narrow analysis of the industry. Organizations can use other industry related analytical tools and strategic concepts including macro or PESTEL analysis and SWOT analysis.
A corporate parent could develop portfolio of its business using BCG method and Mckinsey and the one given by General Electric. These methods would help in planning the two dimensional model for the incorporation, evaluation, formulation of the strategies for various business units. The first stage in the development of portfolio is to identify business strategies. After this, an efficient organization of the objectives of the individual business units is made. The best business portfolio is that which reflects the strengths and weaknesses of the company and thereby exploiting new business opportunities.
In making choice about the internal and external methods of development, the parent company would consider that if organic development were to be selected, whether or not the organization has such base and competencies for the development. On the other hand, to select external methods like joint venture, acquisition, partnerships, a parent company would have to make a cost benefit analysis. External methods for development might require less cost than they incur benefits. The adoption of internal method could be made after analyzing the financial reporting of the subsidiaries while for selection of external methods, parent company would have to make analysis of the press releases, and media reports about the business and industry. The drawback of internal development method is the assumption of internal efficiencies regarding process, and personnel.
Likewise, organic planning also requires examining the vision and values of the organization. On the other hand, external strategies are also bound with the limitation of the preference of the partner with whom you are working thereby neglecting the individual point of view of an organization (Hassanien, Dale & Clarke 2010).
Within an organization, decision-making could be of three-level including strategic, tactical and operational. According to Wright (2001), strategic decision making is the process of decision being made to provide advantge to an organization and affeting it in the long-run (Wright, 2001). According to Bhushan and Rai (2004), strategic decision-making within organizations is effective as it determines the objectives, resources of the organization and the major concern of the strategic decision-making is the forecasting of the organization future in the current environment. Strategic decision-making could be of two types including management control and operational control (Bhushan & Rai, 2004), and applied at the strategic business unit in the organization. The strategic decisions made at the strategic business unit for the management control is based on the knowledge management to use the resource available effectively and efficiently to improve the operational performance of the organization. Hence, there could be three different types of strategic decisions including structured, semi-structured and unstructured. Different levels of strategic business units identified are operational, knowledge, and management. The situation in which strategic decisions are mostly made at different levels of the organizations is the competitive advantage of organization through maximizing the profit of the organization by increasing the productivity of the operations.
It is found that the structure of organization and industries can affect the distribution of strategic decision-making between parent and strategic business unit because different managers manage each unit of the strategic business. These strategic business units are better able to understand the need of the unit, the distribution of strategic decision-making between parent and SBU allows the unit managers to use the appropriate information for making the decision in the best interest of the organizations. Moreover, the distribution of strategic decision-making allows the consolidation of performance information at the parent and SBU levels where executive can access the information for strategic decision-making (Koteen, 1997).
Different Strategic Management Processes
It has been observed that in many organizations, strategic management for developing the future development strategies adopts either emergent approach or deliberate approach. According to Carpenter& Sanders (2009), a strategy is considered as a direction setting tool for an organization, which doe not only elaborates and reflects the scope of eth business but also have long term affects on the business of the company.
Deliberate approach refers to the deliberate actions taken by the strategic management. In other word, it could be said as a planned response. This type of approach is adopted by an organization for confronting the challenges within the organization. In this method, objectives of the company are defined in advance and the strategy process aims to accomplish the purpose of suitability, acceptability and feasibility. This type of approach is helpful in the situations where, the requirement is to get the complete overview of the organizations’ concerns. Further, it is also helpful in for the organization in monitoring the agreed plan.
On the other hand, the emergent approach is the type, which emerges from the lower levels without the interference and involvement of senior management. In this type of approach, the objectives are not clear. The main benefit of this strategic approach is to take into consideration the various issues of the people in an organization. This type of approach is best in the situations requiring quick responding to a change therefore, it also known as flexible approach (Carpenter & Sanders 2009).
Today, the environment for business is becoming dynamic and competitive while growing international competition based on demand and supply chain management it has become significant for organizations to consider the investment and divestment decision-making through using analytical tool (Drake& Fabozzi, 2010). In addition, portfolio management is comprised of identifying the strengths, weaknesses, opportunities and threats in the choices of the debt and equity, growth and safety in the struggle to make the maximum profit return in investment.
In order to manage the financial decisions, organizations need to support strategic management and control the strategic business. Management accounting tool can be used as analytical tool to either invest or divest by integrating the business strategies with the organization needs. Since it is important for organizations to match the strategic business unit with the related business unit strategy, to deal with the investment and divestment decision-making of the organization, financial analysis tool can be very useful to identify the financial position and stability of the organization for previous years. With this view, the analysis of financial statement of the organization can be helpful, as it provides the financial information of the organization based on which the financial ratio of the organization can be identified (Gibson, 2007).
The two approaches adopted by various organizations for portfolio management are synergistic and responsiveness. Synergistic portfolios are adopted by those businesses which are much more focused on competition through price. Therefore, these portfolios are designed to take into account the cost effects by providing more than one application for the accomplishment of a similar business activity. An efficient synergistic portfolio could produce comparatively high values to a business, as it is more concentrated towards the competition.
On the other hand, responsive portfolios are designed after analyzing the attitudes and behaviors of customers of an organization. it helps in the reflection of the customer related contingencies. This also helped in analyzing the information about the new customers of an organization (Allen, 2000). An organization has to look after the industry completion and its potentials customers in the view to decide the appropriate portfolio management approach.