Business // Understanding the Value of Diversification
Understanding the Value of Diversification
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Understanding the Value of Diversification
Overview of Diversification Strategies
Business leaders could potentially succeed using diversification strategies. Research studies showed that diversification strategies could help corporate managers alleviate the risk by cherry-picking diverse investments. Though diversification could not warrant investment returns or eradicate risks of loss, this strategy could only present more opportunities to enter new markets, while expanding product and service lines. As the process of diversification required effective strategies, business frontrunners could implement this strategy at the business unit level or the corporate level. Cisco’s case revealed the importance and value of a diversification strategy (Dyer, Godfrey, Jensen, & Bryce, 2020). To thrive in the market despite the challenges, Cisco succeeded in its operations using diversification strategies to increase profitability, reduce business risk, grow and increase market share, and increase debt capacity. With these corporate diversification strategies, business executives like Cisco could promote the extension of the business life cycle and efficiency in the utilization of financial resources (Yigit & Behram, 2013, p. 121). Cisco’s case, for instance, allowed business executives and experts to consider diversification strategies to ensure the instability of the company’s operations. These research studies would suggest that entering a new market could even introduce new products and services to be challenging. However, Cisco Company managed to survive by embracing strategies that gave it the chance to survive (Dyer, Godfrey, Jensen, & Bryce, 2020, p. 98). As pointed out in the video, The Upside of Concentrating Risk, corporate executives could utilize diversification strategies to compel themselves to create organizational value and competitive advantage.
Comparison between Corporate Strategy and Business-Unit-Level Strategies
Business leaders need to comprehend the differences between corporate strategy and business-unit-level strategy. According to research, corporate strategy concentrates on the overall route and latitude of an organization while concentrating on decisions made at the uppermost level of management. Using this corporate strategy, business executives can set long-term goals and objectives, mission, and vision. They know about the advantages of corporate strategies, such as collaborations and synergies, portfolio management, and risk diversification. However, the disadvantages of corporate strategies center on a lack of focus and slow policymaking. As corporate strategy decisions come from higher-level management and necessitate a wide-ranging analysis and organization, business executives must consider effective strategy in their decision-making process that bring new relationships between diversification strategies and organizational performances (Yigit & Behram, 2013, p. 122). Moreover, corporate frontrunners need to think of business-unit-level strategies to focus on singular business units within organizations. These business-unit-level strategies cover decisions coming from the division or department level. With business-unit-level strategies, corporate leaders can align their strategies with more detailed guidance for individual units. Looking at the advantages of business-unit-level strategies, business frontrunners can have market focus, flexibility and responsiveness, and performance dimension as part of strategic management (Dyer, Godfrey, Jensen, & Bryce, 2020). On the contrary, the drawbacks of business-unit-level strategies focus on the lack of synergies and the rise of potential conflict. Though business-unit-level strategies can nurture conflicts among different units within the organization and encourage competition among units, business leaders need to step in and resolve the issues right away. Hence, business managers must strike a balance between these corporate and business-unit-level strategies to achieve overall organizational success.
The Failure of Diversification to Add Value
Business frontrunners know about the impact of diversification. They accept as true that diversification strategies can fail to add value. If business leaders must deliver good governance to manage the challenges and complexities associated with entering new markets before losing themselves in the competitive market (Creţu, 2012, p. 621). Without sufficient market research, business leaders fail to grow their business operations because of a limited understanding of customer needs. Aside from that, an inadequate adaptation of business models can even hinder them to thrive in the market. Moreover, diversification can be unsuccessful if weak synergies and unsatisfactory sharing of capabilities and resources between the current and fresh businesses take place. Diversification, in this case, can undergo failures from a lack of administrative capability and focus. Those business executives who spread their attention without focus and pay attention to their resources too thin across multiple business units fail to uphold their key business operations. The lack of strategic direction and hopeless decision-making of business leaders, in this case, can disintegrate their business strategies. For example, the unsuccessful attempt to diversify IBM’s operations into the consumer market with its “personal computer” division happens due to the inattentiveness of the fast-evolving consumer market – the rise of laptop computers and other innovations. Regardless of the robust brand status and substantial resources, IBM faces the predicament of acclimatizing to new trends. This specific example validates the idea of how an unwavering company with extensive resources faces diversification issues. For that reason, business frontrunners must not undervalue the complexities of a new market and instead must adapt their operations and strategies effectively.
Factors that Business Executives Should Consider When Deciding to Diversify through Green Field Entry over Making an Acquisition
Those business managers who decide to diversify through green field entry or acquire assets need to consider several factors, such as control and flexibility, cost and time, integration challenges, risk and market knowledge, and industry and competitive landscape. These factors help them remember the impact of building their businesses. In terms of green field entry, business executives can have full control over the strategic direction and operations of the new venture. In other words, they can modify their entry strategy to fit the specific needs of their local market conditions. and maintain flexibility in decision-making. However, green field entry can be costly. It even demands time to establish its operations. Aside from that, these business leaders can encounter integration to build operations. In other words, business leaders need to think of risk and market knowledge before allowing themselves to gain first-hand market knowledge while understanding the local dynamics and relationships. Of course, acquisitions can offer immediate market access. However, these acquisitions can come with cultural discrepancies, mismatched business practices, or acquisition issues. In this case, these business leaders can think of their industries and their competitive landscape to succeed in the market.
References
Creţu, R. F. (2012). Corporate governance and corporate diversification strategies. Revista de Management Comparat Internațional, 13(4), 621-633.
Dyer, J., Godfrey, P., Jensen, R., & Bryce, D. (2020). Strategic management: Concepts and cases (3rd ed.). Hoboken, NJ: John Wiley & Sons.
Yigit, I., & Behram, N. K. (2013). The relationship between diversification strategy and organizational performance in developed and emerging economy contexts: Evidence from Turkey and Netherlands. Eurasian Business Review, 3, 121-136.
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