There is a greater need for strategy and decision making because the diversified company is venturing out into other [outside] Industries. “But in a diversified company, the strategy – making challenge Involves assessing multiple Industry environments and developing a set of business strategies, one for each industry arena in which the diversified company operates” (Thompson, et al. , 2010, p. 239). For these reasons alone, there needs to be extensive research and knowledge done into the arenas of anticipated diversification.
Diversification Is a very important and vital move for any business or company. A business must only know the need to diversify. It must also be aware of when to diversify. As stated by Arthur Thompson, A. J. Strickland, and John Gamble (2010): So long as a company has its hands full trying to capitalize on profitable growth opportunities In Its present Industry, there Is no urgency to pursue diversification. The big risk of a single-business company, of course, is having all of the firm’s eggs in one industry basket.
If the demand for the industry’s product is eroded by the appearance of alternative technologies, substitute products [or revives], or fast-shifting buyer preferences, or If the Industry becomes competitively unattractive and unprofitable, then company’s prospects can quickly dim. (p. 241). Sky Renovations Inc. (SIR) has done extensive research and study in order to make sure that this is the proper time for SIR to develop and plan and strategy for diversification. SIR has decided to diversify upon approval of the Board of Directors.
Sky Renovations has decided to take its business to the next level and diversify. In accordance with the previous research stated earlier, there are a variety of reasons that can cause a business to want and need to diversify. According to Thompson, et al. , 2010: Thus, diversifying into new Industries always merits strong consideration whenever a single-business company encounters delighting market opportunities and stagnating sales in its principal business. In addition there are four other instances in which a company becomes a prime candidate for diversifying: 1 .
When it spots opportunities for expanding Into industries whose technologies and products complement Its present business; 2. When It can leverage existing competencies and capabilities by expanding into businesses where these same resource strengths are eye success factors valuable competitive assets; 3. When diversifying into closely ‘OFF powerful and well-known brand name that can be transferred to the products of other businesses and thereby used as a lever for driving up the sales and profits of such businesses. (p. 241).
SIR, even though it is a relatively newly established company, finds itself in a situation where one or more of these situations has presented itself or will present itself in the near future. SIR has considered and studied all of the above listed as reasons for diversification, but realizes all of the above listed reasons, as well as many other good and legitimate reasons for diversification, SIR knows that no diversification can be considered a total success, unless shareholder value can be maximized. In fact, [d] versification must do more for a company than simply spread its business risk across various industries.
In principle, diversification cannot be considered a success unless it results in added shareholder value-value that shareholders cannot capture on their own by purchasing stock in companies in different industries or investing in mutual funds so as to spread their investments across several industries. Thompson, et al. , 2010, p. 241-242). SIR realizes that building and increasing shareholder wealth is the ultimate reason for this needed diversification. SIR realizes that the reason for diversification can and will differ with each business involved.
The prior reasons listed are but a few that will cause companies to diversify. Monty Lynn and N. L. Irenics, Jar. (1990) stated that: The first research question to ask is, “Why do owner- managers diversity their businesses? ” The purpose or reasons for diversification among large [and small firms] vary widely. Risk reduction, directional change, debilitated earnings, use of spare resources, adaptation to customer needs, synergy gains, and increased growth are mentioned as some of the potential benefits from diversifying among large [and small] firms. P. 60). SIR has done careful study to make sure that this company has chosen the correct reasons for wanting to diversify and have done all of this research and study with shareholders profit minimization as the ultimate goal. With careful study of all the pros and cons pointing towards diversification, SIR has decided to move into the direction of diversification. According o Manuel Bacteria (2009): Strategy and finance scholars are slowly starting to change their negative views about diversification.
Certainly, firms often make expensive mistakes when they move into new markets, but the conclusion that diversification reduces performance on average and, thus, it is inherently negative may have been taken too far. To begin with, the causality direction in the argument may actually be reversed. Recent research suggests that large diversifier generally have lower performance not necessarily because diversification reduces financial performance, UT because firms with limited growth potential are the ones that have greater motivation to diversify and actually do so.
If those firms had not diversified, they would still suffer low performance. That is, poor performance induces firms to diversify, but this does not mean that diversification caused lower performance. The question underperforming firms should ask is not “Should we diversify? ” but rather, “What is the right industry to diversify into? “(Para. 6). SIR will keep all the above stated factors, as well as, the pros and cons on diversification as the main focus of its tragic plan. SIR is excited about the possibility of the company moving towards the direction of diversification.
According to Jack Deal (2008) business consulting is through adding a new company to SARI’S current business portfolio] can have other positive benefits. If you diversify intelligently you should grow and growth attracts skilled employees. Current employees can also grow and learn new skills through diversification. By strategically choosing the right ways to diversify your products and services [and your business], you can take advantage of the turbulent economic downturn and actually grow.
Whether you succeed or not depends first on your strategy’s strengths and subsequently on how well you execute your plan. There are successful companies that “neither make nor do” but focus on diversifying into new markets and actually creating new markets. Since diversification works for them it certainly might also work for you. And it could be a lot of fun, too. (Para. # As SIR moves in the direction towards diversification, if ultimately increasing and building shareholder wealth is the ultimate, final, and overall goal of SIR, diversification can only be a plus for SIR.
Question # 2-Develop a strategy for diversification indicating the products and industries for the diversification and how synergies may be gained from the diversified activity. SIR is a relatively new corporation that has several years before the diversification strategy is fully implemented. SIR is a renovations company that has already diversified into purchasing foreclosed and tax relief properties and repairing them for resale or for rent. SIR chose the related business diversification path instead of the unrelated business diversification path as the better strategic fit for SIR .
Arthur Thompson, et al. (2010 ) stated: Related business are those whose value chains possess competitively valuable cross-business relationships that present opportunities for the businesses to perform better under the same corporate umbrella than they could by operating as stand-alone entities. The big appeal of related diversification is to build shareholder value by leveraging these cross-business relationships into competitive advantage, thus allowing the company as a whole to perform better than Just the sum of its individual businesses.
Unrelated businesses are those whose value chain activities are so dissimilar that no imitatively valuable cross-business relationships are present. (p. 244). With SARI’S being a relatively newly established company, SIR feels that the company will have a more competitive edge, initially, if SIR diversifies into related businesses. Since SIR, as mentioned in the previous paragraph, has already narrowly diversified from the renovations market into the rental, resale, and rent-to-own housing market. Some diversified companies are narrowly diversified around a few (two to five) related or unrelated businesses” (Thompson, et al. ,2010, p. 256). There are many other related versification business paths that are readily available in the real estate market/ sector for SIR to enter. However, SARI’S current strategy will be to use cross-business relationships (related diversification strategies) to grow and develop other business opportunities for SIR.
Related product diversification refers to entries into new products or service businesses that have a connection to the firms existing markets (Penn, 2008). Penn (2008) further states that the benefits of related product diversification are operational synergy: economies of scale, utilizing excess productive capacity, and reinvesting earnings. SARI’S future strategy (within the next five years) will be to utilize a combination related-unrelated diversification strategy. Image that will be able to transcend into the unrelated business diversification market.
Arthur Thompson, et al. , (2010) states: Some diversified companies are really dominant-business enterprises-one major “core” business accounts for 50 to 80 percent of total revenues and a collection of small related or unrelated businesses accounts for the remainder. Some diversified companies are narrowly diversified around a few (two to five) related or unrelated businesses. Others are broadly diversified around a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both.
And a number of multi-business enterprises have diversified into unrelated areas, but have a collection of related businesses within each area-thus giving them a business portfolio consisting of several unrelated groups of related businesses. There’s ample room for companies to customize their diversification strategies to incorporate elements of both related and unrelated diversification, as may suit their own risk preferences and strategic vision. (p. 256). SARI’S strategic vision is to move forth within the next five years into a mixture of both related and unrelated strategies for ultimate and competitive growth.
SIR hopes that synergies relationships will develop from these initial diversification. “In business terminology, synergy is used to describe the ability of two or more business units or firms to make greater value working together than they would do independently” (Gold and Campbell, 1998, p. 133). Diversifying a large firm is considered economically positive only if synergistic effects between the different businesses units are achieved (Gold & Campbell, 1998). The idea of maximizing synergies will be one of the main objectives and goals in SARI’S diversification plan.
Operational synergy has been known in the financial world as a synonym for economies of scope (Attainders and Venerated, 2005). Economies of scope are a direct result from cost-saving strategic fits along the related businesses’ value chain (Thompson, et al. , 2010). Question # 3-latently and discuss the foreign market that the company should enter and discuss the strategy it should use to enter the market. SIR strategically plans to start its competition by entering Just one foreign market. SIR is a service industry and will use franchising as one of its main methods of entry into the foreign markets.
SIR will start with a smaller competitive scope, while entering the foreign market, because of the newness of the business and the scope of SIR being basically a service-related business. According to Thompson, et al. , 2010: Typically, a company will start to compete internationally by entering Just one or a select few foreign markets. Competing on a truly global scale comes later, after the company has established operations on several continents and is racing against vials for global market leadership.
Thus, there is a meaningful distinction between the competitive scope of a company that operates in a few foreign countries (with perhaps modest ambitions to enter several more country markets) and a company that markets its products in 50 to 100 countries and is expanding its operations into additional country markets annually. The former is most accurately termed an international competitor while the latter qualifies as a global competitor. (p. 208-209). SARI’S initial strategy, as stated earlier, will be to compete internationally by initially entering Just one foreign market.
SIR will start in one country, because SIR is initially a service industry and SARI’S main strategy for entry into each country will be and owners of proprietary technology, franchising is often better suited to the global expansion efforts of service and retailing enterprises” (Thompson, et al. , 2010, p. 216). SIR is being careful not to completely adapt the manufacturers and technological industry strategies solely as the strategies for their service industries. Question # 4- Discuss the challenges that companies may face in the foreign market, and how it eight respond strategically to minimize the impact of these challenges.
SIR realized there are many challenges to consider when entering the foreign markets. SIR realizes that there will be a wide variety of differences in cultural, demographic, and market conditions. There must also be considered if there will be enough opportunities that exist in order to achieve a competitive advantage. SIR also knows there will be risks to consider in the currency exchange rates and foreign government policies to consider (Thompson, 2010). SIR must do extensive research in the country that it plans to expand into.
SIR knows that hiring excellent international liaisons officers (with excellent references of course) for the specific country of intended expansion for the business will be a necessity for at least a year before expansion into the foreign country will even begin to take place. According to international contributing writer David Jakarta, (n. D. ): An international liaison officer is also known as an expatriate advisor and is hired by an organization for the proper facilitation of work of the organization in a foreign country or territory.
The organization hires international liaison officers in various countries to ensure that the immunization with the locals of the place is properly maintained and that the operations there go smoothly. (Para. L). Various organizations hire an international liaison officer for different reasons. The organization may be humanitarian or a profit-making institution, and the exact duties and responsibilities differ from one organization to another depending on the type of work the company does. However, the main aim and responsibility of most international liaison officers is to facilitate contact between the local people and the organization.
People get access to the organization due to the work of international liaison officers. They also help in communicating the aims, goals and ideals of the organization to the common masses. The development of the organization in a foreign territory is also a part of the duty of an international liaison officer. They also provide information about the various aspects and situations within that particular branch of the organization so that any problem may be efficiently tackled. (Para. 2). SIR realizes the seriousness of foreign expansion and will approach this cautiously and with the deepest regard on Ewing as informed as possible.
Question # 5-Create a scenario when it would not make sense for the company to diversify or expand into a foreign market. Please support your rationale. SIR will not attempt to emerge into a foreign market where there is political unrest. SIR realizes that an unstable foreign market can only mean uncertainty in the political outcomes of this foreign climate. SIR deals in renovations of houses and businesses. SIR will not invest in a foreign environment where there is uncertainty in the political outcomes and the laws and legal restrictions that may reveal in that market.
According to David Jakarta: As the year 2011 comes to an end, fear and uncertainty have spread beyond the U. S. , and Europe is focused on its own economic difficulties. The sovereign debt crisis has expanded beyond Greece and European Union’s response, a risk remains that one or more nations may eventually default on their obligations and a new financial crisis that could affect the West will emerge. As a result, the investment world is uncertain and the relative safety of commercial real estate investment may be more attractive as investors look for New inundations in an uncertain world. Para. 2). Question # 6-Assess how the company will create a business environment conductive to ethical behavior. SIR realizes that business ethics is the foundation of for any company. Business ethics have to be Judged by societal standards of right and wrong. Ethical standards are that basis of setting, crafting, and executing strategies for the business. A company or business has to set and enforce ethical standards starting at the top executives within the company. These standards have to be enforced from the highest caliber executives to the hourly employees.