Education

The Value of Diversification

Diversification presents businesses with the opportunity to enter new markets, expand product or service lines, and, if done effectively, broaden the scope or reach of a business. The process of diversification requires the development of effective strategies to be implemented at the business unit level and/or at the corporate level. For this Discussion, you will utilize a specific case to compare these two strategy options. Within this, you will examine the role, challenges, and potential benefits of diversification strategies within an organization.

To prepare for this Discussion, review the “Cisco Systems: Growth Through Diversification and Acquisition” case found on pages 108–109 of Dyer, Godfrey, Jensen, and Bryce (2016) and consider how companies can utilize diversification strategies to create organizational value and competitive advantage. You may also want to review the video titled “The Upside of Concentrating Risk,” as well as the cases provided in this week’s Optional Resources for further research on diversification initiatives and business strategy effectiveness.

By Day 3

Post a comparison of corporate strategy versus business-unit-level strategy. In your comparison, address the following:

· How does corporate strategy differentiate from a business-unit-level strategy, including advantages and disadvantages of each?

· Which approach for diversification (related-constrained or related-linked) has the strongest return on investment in this case study? Explain, including at least one supportive example.

· In your opinion as an independent scholar, why does diversification most often fail to add value? Explain with at least one supportive example.

· What factors should executives consider when making a decision to diversify through green field entry over making an acquisition? Explain.

Be sure to support your work with a minimum of two specific citations from this week’s Learning Resources and at least one additional scholarly source.

Brendan

· How does corporate strategy differentiate from a business-unit-level strategy, including advantages and disadvantages of each? 

The difference between business unit level strategy and corporate strategy is the volume of markets they complete in. Business unit strategy operates within a single market and corporate strategy competes for competitive advantage though participation in several different markets (Dyer, Godfrey, Jensen, & Bryce, 2016). The advantages for the business unit level is there will the organization can focus on the market and how to make improvements and compete in the market. Costs would be low due to not needing to hire or maintain multiple locations depending on the market. The disadvantage would be in the single market the competition may be harder to compete with. The smaller the market the harder an organization may need to work to gain customers satisfaction if there are more options. The advantage to a corporate strategy would be the opposite of a business level unit. The more markets an organization is in the better they can expand the brand name and open up for more profit opportunities. The disadvantage is also the same as a business level unit opposite. The more markets an organization is in the more competition they will experience. Strategies in a corporate level become complicated and require more work for an organization.

· Which approach for diversification (related-constrained or related-linked) has the strongest return on investment in this case study? Explain, including at least one supportive example.

In the case study the related lined diversification is the strongest return on investment for the organization. The company in this situation acquired new aquisitisions that would bring in new technology and enhance there current customers experience. In this situation Cisco is doing things correctly and efficiently. The acquisitions that are acquired are not just companies that will make money but also a company that is related and will be helpful to the customer base.

· In your opinion as an independent scholar, why does diversification most often fail to add value? Explain with at least one supportive example.

In my opinion diversification can fail because of the expanding a company is trying to do. Expanding into more markets that differinates from the original market the company is based on can hurt the organization. An example of how this situation can hurt a company is National Semiconductor Corporation. According to an article from the Washington Business journal the company tried to make electronic consumer products in addition to the semi-conductors that went inside them. But the company wasn’t suited for retail manufacturing, and was crushed by companies that were (Bloom, 2011)

· What factors should executives consider when making a decision to diversify through green field entry over making an acquisition? Explain. 

Executives need to consider many different things when making a decision on diversifying the organization. How will the new acquisition or addition benefit the organization besides profits. Are there any legal issues with the acquisitions? Currently the Disney Corporation is going through this as the purchasing of Fox is finalized. Another factor would be if the acquisition would in any way hurt the existing company. Sometimes an acquisition can take over the old and more is put into the new assets that funs may not be allocated correctly to fund all parts of an organization. They might begin to fail in one market while trying to succeed in another to branch out.

 

Bloom, P. (2011.). Diversification can be deadly. Retrieved from

 

https://www.bizjournals.com/washington/blog/fedbiz_daily/2011/06/diversification-can-

 

be-deadly.html

Dyer, J. H., Godfrey, P., Jensen, R., & Bryce, D. (2016). Strategic management: Concepts and

 

tools for creating real world strategy. Hoboken, NJ: John Wiley & Sons.

Guillermo

The difference between corporate and business-unit-level strategy, 

Corporate strategy takes a broader view of the company, its competencies, differentiators and potential market to leverage competitive advantages to find opportunities to create value across multiple industries and markets (Dyer, Godfrey Jensen, & Bryce, 2016). The advantage of the corporate business strategy is the ability to uncover synergy, adjacency and integration opportunities that leverage competencies from multiple business units to drive growth. Business unit (BU) strategy is limited to a specific line of business, market or industry (Dyer et al., 2016). The focus on a specific market or industry gives the BU the advantage of the depth of knowledge and risk management expertise (Strachan, 2005). For example, General Electric (GE) corporate looks at all potential markets while business units like GE Capital focus on finance. The GE capital business unit is further specialized in aviation and energy to serve the unique needs of these industries (General Electric, 2018)

Cisco’s Related-Constrained Strategy

Over 80% of Cisco’s revenue derives from network infrastructure, applications, and services (Cisco, 2018). The concentration of closely linked products, expertise and distribution indicate that Cisco follows as a related-constrained diversification strategy to stay focused on data networking infrastructure to sustain competitive advantage and growth (Dyer et al., 2018). Strachan (2005) explains that, while a diversification strategy to mitigate risk seems like a good idea, concentration has proven, in practice, to be a more effective diversification strategy. However, value creation is not guaranteed, other authors argue that the type of related constrained integration (vertical or Horizontal) can affect the outcome (Raudszus, Schiereck, & Trillig, 2014). Cisco’s related-constrained strategy allows the firm to scale by leveraging synergies, grow market share, stabilize profit (by avoiding dilution and adding value to their offerings), improve financial performance, and expand within the industry (Cretu, 2012). This approach has created value, Cisco’s shares have grown from around $20 in December 2013 to $44 in December of 2018 (Cisco, 2018). In contrast, GE, which follows a linked-constrained diversification strategy, where each BU addresses a different market, has seen their stock go from $26 to less than $8 in the same period (General Electric, 2018).

 

The Failure to Create Value from Diversification

In my opinion, successful diversification depends on choosing the right related-constrained strategy and dedicating the necessary resources to execute the integration. Value creation from diversification is a highly debated topic, authors explain that many factors influence the outcome of a diversification strategy and that value creation may change at different timeframes (Yigit, & Behram, 2013). Many authors agree that most successful diversification strategies follow the related-constraint model because the amount of commonality and shared expertise can help facilitate the implementation, while failure share execution challenges (Cretu, 2012; Dyer et al., 2018; Raudszus, Schiereck, & Trillig, 2014; Strachan, 2005).  Cisco has been diversifying through acquisitions of companies in the same industry and outperformed the competition (Cisco, 2018). Coca-Cola has done the same though development and acquisition of beverage companies (Strachan, 2005). Failure to create value is often attributed to the lack of realization the expected efficiency gains (Holder, & Zhao, 2015)

Factors to Consider: Build or Buy

Dyer (2016) proposes the Six Ss of diversification: Slack, synergy, shared knowledge, success model, spreading of capital, and stepping stones to other opportunities. The six Ss can help management evaluate diversification strategy. The value of each factor would depend on the type of diversification, the potential target for acquisition and the timeframe for the acquisition. There are no shortcuts for diversification, developing new skills takes tie and effort, and incorporating an acquisition is a process that demands specialized resources and skills (Dyer et al., 2016)

 

 

References

CISCO (2018 -November) Q1 Fiscal year 2019 conference call. Retrieved December 9, 2018 from https://investor.cisco.com/investor-relations/overview/default.aspx

Cretu, R. F. (2012). Corporate governance and corporate diversification strategies. Review of International Comparative Management / Revista de Management Comparat International, 13(4), 621–633. Retrieved from http://www.rmci.ase.ro/

Dyer, J. H., Godfrey, P., Jensen, R., & Bryce, D. (2016). Strategic management: Concepts and tools for creating real world strategy. Hoboken, NJ: John Wiley & Sons.

General Electric (2018) Investor relations. Retrieved on December 9, 2018, from https://www.ge.com/investor-relations/overview

Holder, M., & Zhao, A. (2015). Value exploration and materialization in diversification strategies. Review of Quantitative Finance & Accounting, 45(1), 175–21 doi:10.1007/s11156-014-0434-8.

Raudszus, M., Schiereck, D., & Trillig, J. (2014). Does vertical diversification create superior value? Evidence from the construction industry. Review of Managerial Science, 8(3), 293–325. doi:10.1007/s11846-013-0105-5.

Strachan, J. (2005). The upside of concentrating risk [Books24x7 version]. Retrieved from http://common.books24x7.com/toc.aspx?bookid=38341

Yigit, I., & Behram, N. K. (2013). The relationship between diversification strategy and organizational performance in developed and emerging economy contexts: Evidence from Turkey and Netherlands. Eurasian Business Review, 3, 121– 136. doi:10.14208/ebr.2013.03.02.001

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