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Diversification is the technique that mixes a wide variety of investments within a portfolio in order to
lower the risks that can be associated, by neutralization of the negative performance of some
investments through the positive performance of others, thus yielding to higher returns
(Investopedia 2011). Diversification can take place within the existing business domain, hence called
related; or into a new business field, and then called unrelated.
Multi-business firms that follow a related diversification strategy are known to gain efficiency
advantages on those which are not diversified or have unrelated portfolios. Related diversification
requires that the new business either is a substitute or complementary to the existing one ; for example,
in the automobile industry, a firm can decide to start a production line either for a different class of cars,
or for producing spare parts . But, under what circumstances do such similarities give efficiency
advantages? Researchers suggest that the absence of contractual and transactional difficulties can
allow two separate firms to share inputs, facilities, or any other resources for achieving the economies
of scope (Klein, and Lien 2002).
Substitutability and complementarities do not apply to unrelated diversification. But, can it still be an
efficient or it is just a form of empire building? Williamson in his hypothesis suggests that efficiency may
come from different sources; such as, ease of information access to the headquarter (HQ); managers
within a firm prefer to reveal information to HQ than outsiders; HQ can make marginal changes to
divisions, therefore intervening selectively; as well, it can redeploy assets of the poorly performing
divisions (Klein, and Lien 2002).
I used to work in an organization that follows unrelated diversification. Divisions included medical
equipment, telecom products, automobiles, geotechnical services, IT consultancy; and that organization
was known to make the biggest profits in the country. I believe diversification has many advantages, but
still requires a highly experienced senior management, and a strong board of directors to implement to
put operations in control.
Johnny Elie Chamata PPM 641
Page | 11
9- Globalization and Benefits
In the new world, the need of shareholders for growth and increase of wealth is turning to be an
obsession. Many local players have the intention to move outside their home countries but the step yet
is tempting, but requires deep knowledge of the paths and attributes that will allow an organization to
survive the ruthless competition in the global market.
An organization to survive should consider three essential requirements in its step outbound the
domestic market. First is possessing strong national attributes; such as the costs of hiring skilled labor
and implementing a strong infrastructure, in addition to the existence of sophisticated local customers.
Second is the ability of the organization to respond to the pressures of the target market by serving
either the similarity or differences in the market’s taste, infrastructure and governmental regulations.
Third is by analyzing the external business forces revolving around the industry globalization drivers and
ways to make a business global; and measuring the internal organizational competencies
(Yip, Loewe, and Yoshino 2002).
Corporate managers in entering a new global market should consider important factors, such as choice
of market, timing and the scale of business. An example is the “Subway” food chain. Early in the past
decade Subway opened many branches in Egypt, and did great marketing campaigns, but suddenly they
shutdown of the chain. A few years later, Subway re-established only few branches, and customized
their product up to the customer’s preference, and turned previous failure into significant success.
Benefits of globalization is an everlasting argument, some perceive that it is taking the money of local
economies and putting it to the global one (Thekaekara, 2002), and increasing poverty as it is affecting
the power of agriculture as a major earning source for the poor (Low, Linda 2001). Others see that it is
essential as organizations carry responsibility towards global economics, through increasing job
opportunities and hence enhancing the standards of living.
Johnny Elie Chamata PPM 641
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10- Organizational Design
Organization design is the process of selecting a combination of organizational structure and control
systems that are necessary, to allow the company attain and sustain a competitive advantage in the
industry. The importance of that design lies in maximizing the effectiveness, by which the company’s
activities are run; and motivating employees and enhancing their morale in order to achieve superior
efficiency, quality, innovation and customer responsiveness (Hill, Jones, and Galvin 2002). Three major
components that build up an organizational design are: Organizational structure, Control Systems and
Organizational Culture.
Organizational activities need to be structured through coordinating the activities of various functions to
exploit fully their skills and capabilities; that is through vertical differentiation which is choosing how to
distribute authorities and responsibilities through a certain hierarchy in order to best control the value
creation activities; Horizontal differentiation is another step, and that is the process of dividing people
and tasks into functions and divisions to maximize their potential in creating value. Finally, integrating
mechanisms, which role is to increase the level of integration as differentiation increases; that is
achievable through cross-functional teams that work on common problems.
Control systems are another vital component, as they are the tools to assure that organizational plans
and behaviors are in control. To make it achievable, standards and targets must be clearly articulated,
monitored, and evaluated. Control systems may include board members and other corporate-level
managers.
Organizational culture though is discussed separately in some literature, I perceive it as a part of the
control systems, or at least it shares a mutual role with them. Spreading a culture through leadership
and reward systems whether they are financial or motivational, along with the management’s
manipulation skills, would surely play a major role in putting strategies and behaviors in control, and
achieve competitive advantage.
Johnny Elie Chamata PPM 641
Page | 13
References
Academic:
A. Lynn Daniel, 1992, “Strategic Planning: The Role of the Chief Executive”, Long Range Planning, 25 (2), 97-104.
Amason, C. Allen. 2011. “Strategic Management from Theory to Practice”. New York: Routledge.
D’Aveni, A. Richard ; David J. Ravenscraft. 1994. “Economies of Integration versus Bureaucracy Costs : Does Vertical Integration Improve Performance?”. Academy of Management Journal, 37(5). 1167-1206. http://www.jstor.org/pss/256670
Hill, WL Charles, Gareth R. Jones, and Peter Galvin. 2002. “Strategic Management: An Integrated Approach”. Australia: Wiley and Sons.
Jeffs, Chris. 2008. “Strategic Management”. Los Angeles; London: SAGE.
Jeyarathnam, M., 2008. “Strategic Management”. Mumbai: Himalaya Publishing House.
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Low, Linda. 2001. “Globalization and Poverty reduction: Can the Rural Poor Benefit from Globalization?”: An Asian Perspective. 1-13.
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Mary Klemm, Stuart Sanderson, George Luffman, 1991, “Mission Statements: Selling Corporate Values to Employees”, Long Range Planning, 24 (3), 73-78.
Teece, J. David. 2009. “Dynamic Capabilities and Strategic Management”. Oxford ; New York: Oxford University Press.
Thekaekara, Stan. 2002. “Globalization: who benefits?”. Growth: The Celtic Cancer (2). 110-113. http://www.feasta.org/documents/review2/thekaekara3.htm
Yip, S. Georg; Pierre M. Loewe; Michael Y. Yoshino. 2002. “How to Take your Company to the Global Market”