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What arguments can be formed against diversification? Use examples from your own company or one you know well. TABLE OF CONTENT 1. Introduction 2. Achieving a sustainable competitive advantage 3. Case Study 3.1. Background 3.2. Strategy and structure of Chinese business groups 3.3. Corporate diversification and restructuring strategies of Chinese business groups 4. Conclusion References
1. Introduction One of the major challenges for the business leader is to maintain the growth of the business. One of the solutions to this issue is diversification. But majority of organizations find it difficult to spread profitability as pointed out by various researchers. During the past 10 years, Zook indicates that around 90% of the organizations have not been successful in diversifying beyond their core business. Further the probability of being successful when diversifying close to the core business is more as compared to any other methodologies adopted to diversify, as pointed out by Zook¶s study (Varadarajan and Ramanujam, 2007, pp. 380-93). 2. Achieving a sustainable competitive advantage When a particular company has certain plus point over their competitors then only they triumph and achieving this competitive benefit is the aim of strategy or planning. So as accomplish this objective organizations that achieve competitive benefit in their field generally adopt particular tactics consisting of innovation, better processes, better quality, reduced cost and marketing (Zeile, 2006, pp. 253-79). The three approaches that might be utilized to get competitive plus point, as per Porter are cost, differentiation and focus. In order to achieve competitive benefit, any one or a combination of these approached might be utilized by organizations and these companies which are in a position to create competitive benefit by utilizing these tactics then they would see better profitability in their scope of industry. Among the industry the companies that are able to utilize cost as well as product differentiation approaches so as to attain competitive benefit, generally experience the best levels of profitability. But even-though the companies are able to achieve competitive plus point and accomplish better profitability, the competitors are generally fast to imitate their approaches or might even better on the original work and as such lead to loss of competitive benefit. In the same year of introduction of a new product or service by a company, its rivals were able to lay hands on comprehensive information of 70% of such products, as per Ghemawat (Khanna and Palepu, 2000b, pp. 45-74).
3. Case Study: Business Group in China 3.1. Background In China, so as to be a business group, as per SAIC or State Administration for Industry and Commerce, the core firm must fulfill the following criterion ± y y y Have a registered net-worth of more than 50 million yuan Should have atleast 5 affiliated firms. The total registered networth of the core and associated companies must be more than 100 million yuan. 3.2. Strategy and structure of Chinese business groups
³In the upcoming nations business groups might play an alike character as corporations in more developed nations. In China a business group would probably create a new firm when it ventures into a new industry, as in various other nations. In the event of the new industry not being integrated in the parent firm¶s charter then it is mandatory for the group to modify its charter or register a new firm, as per the Chinese Company law´ (Andrews and Dowling, 2008,pp. 601-17).
3.3. Corporate diversification and restructuring strategies of Chinese business groups
In the last two and a half decades in USA and European nations, corporate restructuring has been a quite accepted approach. Asset, financial and organizational are the three forms of restructuring into which corporate restructuring which consists of various forms of change, can be classified. Asset restructuring includes the auction or spin-off of business or company in the corporate portfolio resulting in reduction in diversification or acquirement of companies or businesses resulting in greater level of diversification. Leveraged buyouts, stock repurchases etc. form part of financial restructuring. Organizational restructuring contains reorganizations in the firm itself which does not require the auction or clearance of assets (Dharwadkar et al, 2000, pp. 650-69).
The main aspects which might impact Chinese business group¶s decisions to reorganize their business portfolio are ± y y y y Ownership constitution Government rights Private possession Financial institutional possession
4. Conclusion This research gives details about the causing aspects of reorganization approaches taken up by the Chinese business groups. Looking at the changes for higher market focused organizations in upcoming countries like China, we can foresee that spread out business factions might be inclined to bring down their magnitude of diversification since the institutional surrounding enhances the requirement for companies to base on group associations to offer replacement for the flawed institutional aspects decline. This propensity is a bit impacted by the nature of ownership constitution, uniformity in the company¶s diversification approaches and the organization¶s past performance level. Usually, the organizations which are owned privately are likely to be more assertive towards bringing down their business span so as to enhance productivity and competitiveness whereas organizations owned by the government are likely to go on enhancing their diversification magnitude by way of acquiring companies and merging firms.
References: 1. Andrews, W.A. and Dowling, M.J. (2008), µµExplaining performance changes in newly privatized firms¶¶, Journal of Management Studies, Vol. 35, pp. 601-17. 2. David, P., Kochhar, R. and Levitas, E. (2008), µµThe effect of institutional investors on the level and mix of CEO compensation¶¶, Academy of Management Journal, Vol. 41, pp. 200-8. 3. Dharwadkar, R., George, G. and Brandes, P. (2000), µµPrivatization in emerging economies: an agency theory perspective¶¶, Academy of Management Review, Vol. 25, pp. 650-69. 4. Khanna, T. and Palepu, K. (2000b), µµThe future of business groups in emerging markets: long-run evidence from Chile¶¶, Academy of Management Journal, Vol. 22, pp. 45-74. 5. Li, M. and Wong, Y. (2003), µµDiversification and economic performance: an empirical assessment of Chinese firms¶¶, Asia Pacific Journal of Management, Vol. 20, pp. 243-65. 6. Varadarajan, P.R. and Ramanujam, V. (2007), µµDiversification and performance: a reexamination using a new two-dimensional conceptualization of diversity in firms¶¶, Academy of Management Journal, Vol. 30 No. 2, pp. 380-93. 7. Zeile, W. (2006), µµIndustrial policy and organizational efficiency: The Korean chaebol examined¶¶, in Hamilton, G.G. (Ed.), Asian Business Networks, Walter de Gruyter, New York, NY, pp. 253-79.