The Drivers of Firm Diversification - Essay Example

Management Question 2 What are the drivers of firm diversification? What diversification options are available to managers? Discuss the options and illustrate with examples of firms with which you are familiar. The rise of the global market has significantly changed the nature of completion among firms. Diversification defined as a growth strategy, includes actions by firms that involve their entry into new product categories, markets, and geographic locations. One of the key factors in strategic management is a firm’s diversification strategy. There are two types of diversification: product and international diversification. The access to foreign markets can enhance a firm’s ability to demonstrate overall positive performance outcome. Numerous factors contribute to the rise in firms internationally and product diversification. Firm diversification is a central issue of importance to managers. The research literature on the subject of diversification affirms that over the past two decades the growth in the globalization of markets and products by firms has been tremendous. Globalization as a concept is used often to imply a condition of increased mutual interdependence among nations. The given condition depends on a number of factors. First, there is decreased governmental policy on trade barriers. Second, free international movement of capital across borders. Third, there is high volume of foreign direct investment. Fourth, there is migration of the workforce across the borders. Finally, there is exchange of services and goods among the nations involved in trade. However, despite the recorded increase in diversification by firms, the definite factors that contribute to diversification remain debatable among firm managers. The drivers of a firm’s diversification decision-making process can be explained with the aid of two theoretical frameworks. Namely, the Resource Based View and the Transaction Cost Theory. The resource-based view theory offers an understanding of the choice of industries into which a firm diversifies. According to the theory, a firm is best viewed as a collection of resources that enable it to compete against other firms. The theory suggests that the potential of a firm to gain and maintain a sustained competitive advantage relies on its defined resources (Wierseme, 2008). Firms that have the ability to develop unique and difficult to imitate resources, are more likely to engage in diversification compared to other firms with no such unique and inimitable resources. The transaction cost theory of strategic management also offers an understanding of firms drivers for diversification. The theory holds that firms diversify when the firms’ activities can be performed cheaply within the company, than by external providers in the market. History of firm diversification strategies shows that firms usually arrive at the decision to diversify through an evaluation process of multiple details. A firm must measure the profit potential of a diversification strategy. Hence, a firm’s diversification strategy is driven by considerations of additional transaction costs that will be associated with the control and co-ordination of the diversified firm activities. Firms diversify to exploit positive cost externalities (Ang, 2007). Effects of technological advances represent a significant driver of corporate diversification. The theory of international expansion holds that experimental learning is an essential factor in a firm’s international diversification process. Experimental learning is a process in which a firm concentrates its resources in gaining both objective and experimental knowledge concerning foreign markets. A major challenge faced by firms in the cross-boundary diversification objectives is their ability to cope with uncertainties in unknown foreign markets (Drori, 2012). To overcome this challenge, the implementation of the Uppsala process model by forms is effective in their international expansion efforts. The model holds that firms should gain a gradual and incremental knowledge about its next foreign market. The knowledge concerning foreign markets includes tariffs, investment regulations, labour laws, and practices. The ability of firms to make use of the internet has the potential to reduce barriers of distance and in aiding firms to get involved in international operations. The extent of foreign completion to a firm’s domestic market base is an essential factor that influences the firm’s diversification strategy. Increased competition among firms in an industry is more likely to result in technological changes within the industry. The resulting effect of the changes in technological development may increase the pressure on firms in the industry to increase their efficiency levels to remain competitive. This may motivate the managers of locals firms to engage in related or unrelated product diversification measures. Competition by foreign firms within the domestic market particularly has implications for a domestic firm to engage the intentional diversification measures. The nature of the observed globalization of industries and markets within the last two decades is a significant driver for firms’ international diversification strategy. The global industry is characterized by the integration of domestic markets across national boundaries. Competition among firms occurs on a global basis. Hence, a firm’s competitive position in one-country influences its position in another host country. Standardization of products across the global markets enables firms to engage in uniform branding and advertising. This is the case with Coca-Cola Company’s international success. Evidence suggests that firms respond to the increasing diversification of the market by adopting many global corporate strategies. Based on the industry globalization of a firm’s core business industry, managers of domestic firms would be motivated to increase the firm’s product and international diversity (Drori, 2012). Question 6 Under what circumstances do firms enter international strategic alliances? What makes a successful international strategic alliance? Illustrate your answer with examples, which you are familiar. The globalization of markets over across the globe is an important driver for the establishment of strategic alliances between firms. A strategic alliance is an agreement of mutual nature between two or more organizations to establish a condition of co-operation amongst themselves in the achievement of specified business objectives. A strategic alliance may involve a firm’s competitors and usually is of a short life span. The alliance involves the sharing of knowledge and expenses among the partners as well as the reduction of risk and costs related to the specified business activity. Strategic alliances are a source of competitive advantage for businesses in their current operations and a future strategy. Strategic alliances form an important part of a business activity among many industries especially with the growing realization of the growth of the global market. The cooperative arrangement among partners of these alliances seeks to attain the achievement of the organizations objectives more effectively through collaboration as opposed to competition (Isoraite, 2009). These alliances can enable companies to gain entry into new markets, improve their competitive position, and share the risks and costs involved in major development projects. In strategic alliances, firms unite to achieve a common objective while remaining competitive. Strategic alliances are no longer an option, but an imperative business necessity in many markets and industries. Most firms are competent in some specialized areas but lack sufficient competence in other business areas. The formation of a strategic alliance can enable the access of knowledge and expertise in an area that a company is deficient. The exchange of knowledge and expertise involved may include the gaining of production knowledge, how to acquire resources or insights on handling government regulations. The competitive strength of organizations is effective when partners leverage on each others strengths. In a retail business, entry into a new market is ardours and expensive undertaking by a single firm. The formation of a strategic alliance with a firm that hold a positive reputation can help a firms favourable brand image fortified by efficient distribution networks. This alliance is not only limited to small firms but also to reputable firms. Therefore, there is the need to strike strategic alliances when they are introducing new products to the market (Cool, 2006). The competitive nature of a business activity in the globalized sector is accompanied by uncertainty and instability. Strategic alliances take a number of forms and various labels. The alliances may include joint ventures, outsourcing, affiliate marketing, franchising, research and development, technology and product licensing and distribution relationships. For example, in 2001 Coca-Cola and Procter & Gamble Company announced over a billion-dollar joint venture. The joint venture aimed at enhancing each company’s distribution system to increase the products reaching the market (Kuglin & Hook, 2006). In the aviation industry, Star Alliance is reputed to be the largest partnership in the airline industry extending its reach to over 130 countries and over 800 destinations. In the field of computer science, Apple and Toshiba have once formed a strategic alliance to develop multimedia computer components. The overwhelming rationale for the formation of strategic alliances is the desire among firms to exploit each other’s area of expertise in the achievement of their respective interests. The alliances are very flexible, and emphases are of mutual interest among the partners. The mutual interdependence of the partners in the alliance is a key distinguishing feature. This is a condition in which one partner is vulnerable to the behaviour of another firm whose behaviour is not under the control of the first. Hence, it is a prerequisite for firms to determine when the alliances are sound strategically and hold beneficial outcomes for their business objectives (Cool, 2006). Firms involved in a strategic alliance can increase the success outcomes of the alliance by developing, a disciplined, structured and systematic alliance. Strategic alliances are not immune from failure, however, when effectively organized they are indispensable tools in today’s business environment. Aligning the alliance with the growth strategy of the partners ensures the alliance has a defined strategy. To further increase success outcomes, firms considering engaging in a strategic partnership should conduct a thorough partner search. The selection process should be based on financial and strategic considerations. Partners should effectively negotiate the alliance deal while also establishing a clear exit plan. Finally, the monitoring and evaluation of the performance of the alliance is a key ingredient in a successful strategic alliance (Reuer, 2004). The evaluation process of the performance of the alliance should be transparent and participatory in nature. A relationship founded on trust and respect between the firm managers, guarantees that differences that arise can be resolved to the interest all the partners. Conversely, when the relationship between operating managers in the alliance is devoid of respect and trust, minor differences can be solved only through the aid of contracts and time-consuming beauractic methods. The process of successfully attaining the business objectives of the firms involved in the alliance involves co-operation, whereby each firm adapts to and learns from the other partners operating style. Question 7 Henry Minzberg identified 7 organizational configurations. Discuss the validity and utility for strategists of the configurations with reference to the following types of organizations: law practises, campaigning organizations, and entrepreneurial small firms. The theory of Organizational configuration by Henry Minzberg is essentially concerned with how organizations function. Minzberg as a management theory specialist, aimed at prescribing an effective organizational design. He employs the use of the word structure to refer to how the various components of an organizational system fit together to achieve system functionality. Minzbergs ideas offer a powerful tool for identifying and prioritizing components of an organizations system. The structure of an organization is the way in which an organization divides labour into distinct tasks and how it achieves coordination of these tasks. The theory of Organization structure illustrates that organizations have a few basic structures or configurations. According to Minzberg’s theory, organizations can be differentiated along three lines. First, the part of the organization that plays a major role in decision-making. Second, coordinating mechanism refers to a major part of the organization that coordinates its activities. Finally, the organizations decentralization system, that is the level to which the organization involves subordinates in decision-making (Lunenberg, 2012). The three elements relate in various ways as part of an organizations overall system. The theory stipulates seven basic organizational configurations namely: the entrepreneurial, the machine, the diversified, the professional, the innovative, the missionary, and the political. The theory argues that it is necessary for organizations to achieve a sense of stability in their internal characteristics, create a sense of synergy, and establish fit with their external environments. An understanding of the seven basic configurations according to the theory is essential to conceptualizing the dynamics of an organization. Organizations such as law firms, campaign organizations and small entrepreneurial firms exist to achieve defined set of goals. The goals often are broken down into tasks, which form the basis for job responsibilities. The jobs are then grouped into departments. The departments within an organization are characterized by related job responsibilities such as marketing, sales and manufacturing among many more. Departments are then linked to form the organizations structure. Minzberg argues in the theory that major building blocks of an organizations structure include its parts and people, co-ordinating mechanism, design parameters and the various environmental factors that shape the design parameters. The employees who work for the firm become its internal coalition while those agencies or individuals who have dealings with the organization become its external coalition. The two groups exert significant pressures on the organizations decisions and actions (Lemieux, 2010). In the case of professional organizations such as law practices, Minzberg’s theory validates a number of ways in which such organizations accomplish functionality. The process of mutual adjustment as illustrated in the theory achieves organization coordination by the simple act of communicating information among employees. The aspect of direct supervision can be employed to issue orders or instruction to employees who perform related work. Frequently, direct supervision is the norm in small entrepreneurial firms. Standardization of work process helps set out how work processes should be undertaken. Standardization of skills and knowledge is particularly relevant in professional fields such as law practice. The validity of Mintzberg theory concerning political organizations is accurate. A political campaign often calls for the support of the campaigns staff. Campaign organizations often make use of mutual adjustment as a form of coordination. These organizations from experience tend to be low in formalization and decentralization. The primary reason for campaign organizations employing the organizational structure is to give room to the technical specialists to attend to the organizations core activities. In strategic management, the orienting of organization activities to its strategic objectives is essential. In the political configuration as described by Mintzberg, power in such an organization, has the potential to collapse it. In the entrepreneurial configuration of the theory, Mentzberg, illustrates that commitment by the individual could lead to a social entrepreneur. Frequently, a single owner manages small entrepreneurial firms. Such organizations thrive because they are managed based on collective or general interest. Strategists can make use of Menztbergs theory of Occupation configuration to facilitate better organizational structures. For example in the theory, Mertzberg affirms that the coordination of work in small and very complex organizations occurs largely by mutual adjustment. That is the process of two or more employees engaging in an act of communication with each other. Theory of Occupation Configuration can also be of value to strategist for it helps to point to the observed dominant information and flow channels among large organizations. According to the theory, the dominant information flowing in various organizations is not the traditional vertical channel characteristic of traditional bureaucracy but rather horizontal between unit groups. Reference List Ang, S. H. (2007). International Diversification. University of Auckland Bussines Review , 1-10. Cool, K. (2006). The Strategic Logic of Alliances. The Boston Consulting Group.Inc. Drori, N. (2012). Drivers of International Diversifcation and their Relationship with product Diversification and Firm Performance. Isoraite, M. (2009). Importance of Strategic Alliances in Companys Activity. Lithunia: Intellectual Economics. Kuglin, F. A., & Hook, J. (2006). Building,leading and Managing Strategic Alliances. Amacom. Lemieux, V. (2010). Applying Mintzbergs Theories on Orgnizational COnfiguartion To Archival Appraisal. Lunenberg, F. C. (2012). Organizational Structure:Mintzberg Framework. International Journal of Scholarly,Academic Intellectual Diversity , 1-8. Reuer, J. (2004). Strategic Alliances Theory and Evidence. USA: oxford University Press. Wierseme, M. F. (2008). Coporate Diversification:The impact of foreign competition,Industry Globolization and Product Diversification. Strategic Mnagement Journal , 115-132. Read More