Strategic Management – 48 hours open exam 第一部分
Task 1
To what extent does diversification improve organizational performance? Does it depend on the type of diversification, i.e., related and unrelated? What is the role of contingency factors on the relationship between diversification and performance? Answer with reference to two examples.
(706 words)
Diversification has been used as a tool for risk reduction and revenue watch for sometime in the finance sector of firms. Though theories of diversification are mainly focused on watching the risk and revenue components, diversification has been known to affect the general performance of an organization (Heikkilä et al, 2012). This could be derived from the general assumption that as risk levels fall, revenue increases and as a result, profitability also increases. Though this could be true, this is not always the case. There are two main forms of diversification; related and unrelated. Performance of a firm cannot be improved by merely diversifying. It is influenced by a number of other market components such as the motive behind the diversification and the status of the industry in which an organization choose to diversify into, the cost of the procedure among others.
The concentric diversification theory notes high chances of rising organizational performance when a company takes up related diversification. This is so since a business just expands their clientele base in a sector of their expertise. Organizational performance may be raised where a business as illustrated by the conglomerate diversification theory, ventures into a new industry (unrelated diversification) through the purchase of an already established and performing business. The British American Tobacco (BAT), a UK founded multinational has undertaken a variety of diversification strategies throughout its operational years. Some of these strategies have resulted into great investments while others proved as a bunch of trouble for the firm. For instance, the numerous diversification activities within the company between 1980 and 1986; that involved Eagle Star among other enterprises saw the company result into divestiture action to shed off some of the investments that had resulted into an overall falling profitability during the period. Alliance Boots plc that had started in the UK as a small drug manufacturer diversified into a variety of other medical and wellness business lines; dentrisity, optical and children world business among others. This is seen as the major highway of the business to success and venture into foreign markets such as Canada and the international platform today.
Performance however is closely tied to diversification in a number of ways and there are a number of contingency factors that play a role in the relationship between the two;
The size and reputation of an organization;
This component is vital in any business organization. In the case of a large business as BAT diversifying, the firm has a number of advantages over other market players. The organization is large in terms of employees, resources and market impact created over time. Large firms are able to operate efficiently as a result of size by taking advantage of economies of scale, advertising and marketing advantages. Even in diversification, these companies get word out there in a more convenient way and increase business as well organizational performance.
Corporate strategy;
Strategies are formulated in line with corporate mission, goals and objectives (Bamberger, Biron & Meshoulam 2014). The performance of a company after diversification heavily relies on the strategies formulated in line with the new corporate structure. The structure must be in such a way that it encourages interactions of workforce and the management to ensure a flow of communication and business. It could be argued that the success of a diversification is closely tied to the corporate strategies of the company.
Technology;
Technology is mainly related to machinery, procedures, materials and technical know-how that a business uses to convert its inputs into outputs. The diversification strategies used by both Alliance Boots Plc and BAT are similar in that, the organisations bought into already existing businesses. With this, the technologies used were transferred with the ownership. With well established technology comes a positive organizational performance other factors held constant (Amanda, 2013). A weak technology structure in a diversification would simply result in declining performance for a business.
Environment;
Environment has a direct impact on productivity and efficient functionality of a business. The business needs to easily adapt to changes and ensure coordination among existing and new business lines. The environment of BAT Ltd and that of Alliance Boots Plc were strong to enable several successful diversification activities and match them up to improved performance severally within the organizations.
Task 2
Joint ventures and mergers represent two distinctive corporate growth strategies. Discuss the nature of success and failure with reference to case of companies that have implemented those strategies.
(727 words)
When a joint venture involves two distinct firms coming together to form a new firm while at the same time the original companies continue to exist as separate entities, a merger involves dissolution of the original firms forming a single entity.
Experts indicate that joint ventures and mergers have a 70-90%chance of failure. When chances of failure are this high in this nature of business, these are some of the self-proven methodologies to expand and strengthen business operations for a firm.
Some of the strongest market brands today are a result of either of these two methodologies. Success of a merger or a joint venture brings forth a number of notable elements into a business. We explore this in relation to a joint venture between UK’s Jaguar Land Rover and China’s Chery Automotive. The resultant firm Chery Jaguar Land Rover Automotive Company was formed in 2012 and has been a center of success in many ways;
Sharing of the high-risk venture, high-leverage and doubtful engagement – Chery focused on bringing China market a world class quality in terms of service and products and engaging Jaguar Land Rover did it for them. The risks of this venture were spread out in the two firms.
Establishment into unexplored markets;
The formation of a new firm gave the Chinese market a taste of both companies and an experience of Jaguar Land Rover. Through this the UK firm ventured into a foreign market through its high-class characteristics found in the vehicles produced by the joint venture.
Entry into high barrier markets – with China being a manufacturing center of the globe, there exist high barriers of entry in the market which in this case were eliminated for Jaguar Land Rover.
Adoption of new technologies and expertise strengthened the resultant firm.
Despite this nature of businesses being successful, there have been incidences that the same form of businesses failed costing those involved and resulting into millions worth of pounds. In this case, we take the example of Barclays group merger that involved Woolwich Plc in August 2000. The two firms went through a merger that saw Woolwich retain their brand name and its head office at Bexleyheath. This association involved a transfer of 5.4 billion pounds from Barclays in acquiring Woolwich. This merger however did not work as initially intended and a mass closure of the Woolwich branches including the office in 2006 had 1,200 jobs affected. According to Business Matters (2013), there are a number of factors that cause a failure in merging associations;
Synergies;
A merger between two firms brings together a variety of components from the two; one of these is the workforce. For two different workforces to work together, there’s need for a conducive work environment. This is aimed at creating synergy to work towards organizational objectives and goals. Research (Business Matters, 2013) indicates that Woolwich employees felt side-lined in the new state of their organization leading to dropping levels of motivation and eventually poor performance.
Back office savings;
In most merger and acquisition deals, the new management focuses on saving costs that were previously incurred in the two companies, to incur back office costs of a single entity. This was experienced at the Barclays-Woolwich case where a focus to save led to chaos and intensified customer frustrations as a result of a fall in the quality of services.
Corporate strategies;
The newly formed firm after the M&A must come up with strategies that are appropriate for the new status of a business; this requires that the members of the executive and management cooperate to formulate these strategies. The newly formed management at the newly formed group was not attentive enough to the needs of the minority leading to a side-lined minority resulting in a decline in performance.
Brand management – is key in performance of an organization. It is notable that the brands of Woolwich Plc were ignored in the venture which eventually led to the Barclays group converting the branches of Woolwich into the Barclays UK mortgage brands completely finishing off the Woolwich section of the business.
Customer focus – is commonly forgotten in many M&A deals with management giving much attention to the increase in size of the firm. This could be generalized in this case considering the chaos that arose after the merger as a result of what customers termed as ‘poor service’ at the firm.
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