The one best way of diversifying an organization is to carry the work through systematic planning.
Planned Diversification
The one
best way of diversifying an organization is to carry the work through
systematic planning. Though many organizations have diversified
without any systematic planning, the chances for a successful outcome are considerably
increased when diversification decision is organic part of the comprehensive
strategic planning.
In this process, it is preferable to constitute a
tasks force, which is entrusted with the total work of diversification because
it requires separate emphasis on some aspects at least for some period of time.
When this task force is created, it can move in the direction of thinking about
possible diversification. The work of the task force becomes easier if it has
the full support of top management. The role of this task force may be to
collect and analyze relevant information, which helps in arriving at
diversification decision.
The basic problem in a diversification strategy is
to identify the suitable industry sector, which meets basic criteria of diversification.
Figure 11-1 presents a process thorough which identification of diversification
opportunities becomes systematic. The process provides the facility for
assessing and measuring each business sector against a number of different
criteria so that judgment can be reached on two separate factors .
1. Attractiveness
of the sector as an investment in its own right and
2. The
extent to which the qualities required for success in the sector match the own
strengths of the organization.
There are basically three major measurements
involved in this process.
1. Measurements
of industry attractiveness,
2. Measurement
of mesh, and
Combination
of attractiveness and mesh to arrive at some strategic alternatives
(i)
Assessment of Industry Attractiveness
At the initial stage, various sectors of the
industry can be taken for identifying diversification opportunities. Such
criteria may be in the form of: 1. Acceptable
product groups or functions, 2. Minimum sales volume within a specified period of
time, say five years or so,
3. Minimum
projected growth rate in the market 4. Minimum
profitability criteria, 5. Maximum and minimum investment required in the
project, and so on.
These criteria may be used in weeding out the
industry sectors which cannot be considered. The assessment of the
attractiveness of a sector as an area for potential investment is based on its
profitability and maturity. The profitability of a sector is measured in terms
of return on investment (ROI) of the principal companies within the sector. The
profitability ratio may be assigned scores. Scoring pattern may differ from
organization to organization depending on manager’s preference and
interpretation. For example, following scores may be given to various levels of
profitability:
Business Policy: Strategic
Management
The maturity of industry is taken on the basis of
level of growth and future potential. Thus industry sectors can be classified
into growing, maturing, ageing. In growing sector, the rate of growth is more
than the rate of gross national product; in maturing industry, the rate of
growth is almost similar to gross national product; while in ageing sector, the
rate of growth is lower than the rate of gross national product. These stages
can further be classified on the basis of time taken by a sector to move from
one stage to another and scores can be assigned in the following way.
Adding the scores for profitability to the sector
maturity arrives at the scoring for over all attractiveness of each sector. (ii)
Assessment of Degree Mesh
Degree of mesh suggests the extent to which a
particular organization can match the requirements of an industry sector. It is
assess on the basis of organizational strengths and critical success factors (CSFs) required for success in
the industry sector. CSFs
are those characteristics,
conditions, or variables that when properly sustained, maintained, or managed
can have a significant impact on the success of an organization competing in a
particular industry. From the structure and maturity of sector, certain general
conclusions can be drawn on CSFs and its investment characteristics. 1. In growth sector, high market share at the time of
entry is not crucial because opportunities exist for rationalization and
consolidation. Further investment is normally needed. 2. In mature sector, high market share at the time of
entry is critical; cost cutting and control is important and further investment
is generally not appropriate. 3. In ageing sector, a high market share at the time
of entry is critical. Little or no further investment is desirable. Taking
both the factors-organizational strengths and CSFs, mesh matrix can be
constructed as depicted in Figure 11-2.
High
score in the matrix will increase the upside potential of investment because
1. The organization can add something to the operation
of the new business, and
2. Will decrease the downside risk because the
management will have experience of the sort of problems that are likely to
occur.
Combination of Attractiveness and
Mesh
Having rated each sector’s attractiveness and mesh,
we can combine both to form another matrix. Because two measures are
independent of each other, we can expect some sectors to score high on
attractiveness but low on mesh whereas other sectors score low on
attractiveness and high on mesh. The attractiveness/mesh matrix has been
presented in Figure 11-3 below According to this matrix, best diversification
opportunities are those that score high on both characteristics having score of
9; least proffered is with low degree of both characteristics having score of
1. The selection of sectors from elsewhere depends on the strategy the
organization selects. 1. If it
wishes to go for growth and earnings, pays low regard to the relationship which
a sector has with the organizational strengths may select the alternatives in
order of sectors failing in 6,3,8,5,7 and 4 in that preference order. In such a
case, the rate of growth and profitability may be high but the risk involved is
also high. 2. If the
organization wishes to minimize mesh risk and pursues business in those sectors
which mesh high with its own strengths, it would select sectors in the order of
8,7,6,5,4,3 and 2. These strategies are low-risk ones for the organization. 3. If the
organization wishes to select business on the basis of both measures, it would
select in the order of 9,6,8(6 and 8 equal) 5. 4. In the remaining sector,
the preference would be in the order of 3,7 (equal) and 2,4 (equal). The
strategies in the third alternatives would be balanced ones.
Tags : Strategic Management - Strategy Formulation
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