DIVERSIFICATION STRATEGIES:-

business of supplying its own raw materials.

 When the advantages of stable prices are particularly important; this is a factor because an organization can stabilize the cost of its raw materials and the associated price of its products through backward integration.

 When present suppliers have high profit margins, which suggest that the business of supplying products or services in the given industry is a worthwhile venture.

 When an organization needs to acquire a needed resource quickly.

3) Horizontal Integration –

Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm’s competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisition, takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies.

Five guidelines when horizontal integration may be an especially effective strategy are:

 When an organization can gain monopolistic characteristics in a particular area or region without being challenged by a federal government for

“tending substantially” to reduce competition.

 When an organization competes in a growing industry.

 When increased economies of scale provide major competitive advantages.

 When an organization has both the capital and human talent needed to successfully manage an expanded organization.

 When competitors are faltering due to a lack of managerial expertise or a need for particular resources that an organization possesses; note that horizontal integration would not be appropriate if competitors are doing poorly, because in that case overall industry sales are declining.

DIVERSIFICATION

There are three general types of diversification strategies: Concentric, Horizontal and Conglomerate. Overall, diversification strategies are becoming less popular as organizations are finding it difficult to manage diverse business activities. In the 1960’s and 1970’s, the trend was to diversify so as not to be dependent on any single industry, but the 1980’s saw a general reverse of that thinking. Diversification is now on the retreat.

1) Concentric Diversification –

Adding new, but related, products or services is widely called as concentric diversification.

Six guidelines for when concentric diversification may be an effective strategy are provided below:

 When an organization competes in a no growth or a slow growth industry.

 When adding new, but related, products would significantly enhance the sales of current products.

 When new, but related, products could be offered at highly competitive prices.

 When new, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys.

 When an organization’s products are currently in the declining stage of the product’s lifecycle.

 When an organization has a strong management team.

2) Horizontal Diversification:

Adding new, unrelated products or services for present customers is called horizontal diversification. This strategy is not as risky as conglomerate diversification because a firm already should be familiar with its present customers.

Four guidelines for when horizontal diversification may be an effective strategy are provided below:

 When revenues derived from an organization’s current products or services would increase significantly by adding the new, unrelated products.

 When an organization competes in a highly competitive and/or a no growth industry, as indicated by low industry profit margin and returns.

 When an organization’s present channels of distribution can be used to market the new products to current customers.

 When the new products have counter-cyclical sales patterns compared to an organization’s present products.

3) Conglomerate Diversification: Adding new, unrelated products or services is called conglomerate diversification.

Six guidelines for when conglomerate diversification may be an especially effective strategy to pursue are listed below:

 When an organization’s basic industry is experiencing declining annual sales and profits.

 When an organization has the capital and managerial talent needed to compete successfully in the new industry.

 When the organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity.

 When there exists financial synergy between the acquired and acquiring firm.

 When the existing markets for an organization’s present products are saturated.

 When anti-trusts actions could be charged against an organization that historically has concentrated on a single industry.

Gap analysis The concept:

Another important step in strategic management is the gap analysis. Gap analysis is also a means for motivating top management to initiate steps for strategic management. Gap is the deviation between events which is perceived, planned or forecasted and that of actual. Based on the system analysis, the outcome is based on the objectives, which is conditioned by the criteria and constraints. Hence, broadly, gap analysis is classified under the following categories:

 Gap analysis on outcome

 Gap analysis on the objective

 Gap analysis on the constraints like environment

 Gap analysis on the criteria like planning promises and assumptions.

Based on existing strategy, organisation has evolved a particular way of planning to accomplish a given set of objectives. A formal evaluation must be made as to the way the existing strategy is working. Based on analysis of environment, anew set of opportunities is opened up.

In order to take advantage of the new opportunities, a set of new strategies are contemplated. Therefore at a future date there are two sets of outcome, which are to be achieved. One set of outcome is those based on existing strategy, which is considered as “expected outcome.” Another set of outcome is that which comes out of the contemplated new strategy, considered as “desired outcome.” The analysis between the two outcomes is called gap analysis of the outcome.

Gap analysis is an important technique in motivating top management to initiate strategic management process. The capability of gap analysis to do so depends upon three conditions they are as follows:

1. Significance : The gap itself can provide the “catalytic effect” of top management. This depends on the significance of the gap. Suppose the “expected outcome”, at a future date is the same or nearly the same as that of the “desired outcome”, there is no need to change the existing strategy. In other words, the gap acts as a “triggering agent” for initiating a new strategy, provided the gap is significant.

2. Importance : Gap analysis, can act as a motivation provided the gap is important. Suppose, the company finds that there is a scope for improving the market share from the present level of 10% to 25% in the next year. At the same time expected increase of share with existing strategy for the next year is only 15% then

there will be a genuine motivation is generated because there is a gap between the expected and desired outcome in one of its objectives, viz, market share.

3. Reducibility : This is major important criterion of success. This is the belief of top management that the projected gap is reducible. In other words, this is the confidence level of top management in the capacity of the proposed strategy to reduce the gap. There are certain constraints, which are beyond the capacity of the organisation to correct.

4. Responsibility centers Control systems can be established to monitor specific functions, projects, or divisions. Budgets are one type of control system that is typically used to control the financial indicators of performance. Responsibility centers are used to isolate a unit so that it can be evaluated separately from the rest of the corporation. Each responsibility center, therefore, has its own budget and is evaluated on its use of budgeted resources. The manager responsible for the center’s performance heads it. The center uses resources to produce a service or a product.

There are five major types of responsibility centers. The type is determined by the way the corporation’s control system measures these resources and services or products.

5. Standard cost centers : Primarily used in manufacturing facilities, standard costs are computed for each operation on the basis of historical data. In evaluating the center’s performance, its total standard costs are multiplied by the units produced. The result is the expected cost of production, which is then compared to the actual cost of production.

6. Revenue centers : Production, usually in terms of unit or dollar sales, is measured without consideration of resource costs. The center is thus judged in terms of effectiveness rather than efficiency. The effectiveness of a sales region, for example, is determined by comparing its actual sales departments have very limited influence over the cost of the products they sell.

7. Expense centers : Resources are measured in dollars without consideration for service or product costs. Thus budgets will have been prepared for engineered expenses and for discretionary expenses. Typical expense centers are administrative, service, and research departments. They cost organisation money but they only indirectly contribute to revenues.

8. Profit centers : Performance is measured in terms of the difference between revenues. A profit center is typically established whenever an organizational unit has control over both its resources and its products or services. By having such centers, a company can be organized in to divisions of separate product lines. The manager of each division is given autonomy to the extent that she or he is able to keep profits at a satisfactory level.

9. Investment centers : Because many divisions in large manufacturing

factored in to their performance evaluation. Thus it is insufficient to focus only on profits, as in the case of profit centers. Thus it is insufficient to focus only on profits, as in the case of profit centers. An investment center’s performance is measured in terms of the difference between its resources and its services or products.

10. ROI budgeting The most commonly used measure of corporate performance is return on investments (ROI). It is simply the result of dividing net income before taxes by total assets. Although ROI has several advantages, it also has several distinct limitations.

Advantages:

1) ROI is a single comprehensive figure influenced by every thing that happens.

2) It measures how well the division manager uses the property of the company to generate profits. It is also a good way to check on the accuracy of capital investment proposals.

3) It is a common denominator that can be compared with many entities.

4) It provides an incentive to use existing assets efficiently.

5) It provides an incentive to acquire new assets only when doing so would increase the return.

Limitations:

1) ROI is very sensitive to depreciation policy. Depreciation write-off variances between divisions affect ROI performance. Accelerated depreciation techniques increase ROI, conflicting with capital budgeting discounted cash-flow analysis.

2) ROI is sensitive to book value. Older plants with more depreciated assets have relatively lower investment bases than newer plants, thus increasing ROI.

3) In many firms that use ROI, one division sells to another. As a result, transfer pricing must occur. Expenses incurred affect profit. Since, in theory, the transfer price should be based on the total impact on firm profit, some investment center managers are bound to suffer. Equitable transfer prices are difficult to determine.

4) If one division operates in an industry that has favorable conditions and another division operates in an industry that has unfavorable conditions, the former division will automatically “look” better than the other.

5) The time span of concern here is short range. The performance of division managers should be measured in the long run. This is top management’s time span capacity.

6) The business cycle strongly affects ROI performance, often despite managerial performance.

ADDITIONAL INPUTS FROM MR. K.G.BHATT