Métodos de destrucción y transformación irreversible

A term coined by Rita Gunther McGrath and Ian C. MacMillan, it refers to planning in the case of highly uncertain ventures where new data and assumptions are incorporated on an ongoing basis and plans revised on the basis of new information flowing in from the market. This technique can be really useful for a multinational corporation entering an emerging

*

Abstracted from The Essence of Strategic Management by Clief Bowman, Prentice Hall of India, 1990.

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market. It is also useful in the case of a new technology when it is diffi- cult to make market forecasts based on the past. If past assumptions change, sales and cost projections and also investment plans need to be altered.

(See also: STRATEGIC PLANNING)

Diseconomies of Scale

Factors which increase unit costs with increasing scale of operations. For example, the costs of coordinating activities tend to be high when the scale of operations is unwieldy. Large firms have many layers of hierar- chy. Communication can get distorted as it is typically done through memos, reports or written requests. Worse still, written messages are often impersonal and less motivating than conversation. In small firms, decisions are usually made by the proprietor, or a small group of people at the top. One person taking the decisions ensures coordination of the firm‘s strategy and actions. Large firms are typically organized as busi- ness units. Different units may head in different directions. So regular meetings involving senior managers are required to ensure coordination. This drives up costs significantly. While all these coordination and ad- ministration costs go up, the scale economies that come as a result of using large plant and equipment may disappear after a certain size. As a result of all these reasons, costs may actually go up as the scale of opera- tions increases beyond a point.

(See also: ECONOMIES OF SCALE)

Disruptive Technology

A term coined by Clayton CHRISTENSEN to describe a technology that is not only quite different from an existing one but also offers a totally new price-value proposition.

A disruptive technology may have fewer features but it may be cheaper and more user friendly. Such a technology tends to attract new customers for whom existing products are either too expensive or too sophisticated. It is often newcomers and not established players who succeed in developing disruptive technologies. For example, the PC was a disruptive technology in relation to mainframe and mini computers. Despite being inferior to a mainframe in terms of performance capabili- ties, the PC was cheaper and easier to use for most people and led to a

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revolution that put computers on every executive‘s desks and in millions of homes and schools.

(See also: INNOVATOR’S DILEMMA, INNOVATION, TECHNOLOGY RISK)

Diversification

A strategy that involves going beyond the current line of business into a new one for various reasons:

 Opportunities to grow may be limited in the existing business.  What starts out as a technology for one product may soon become a

whole family of technologies generating a range of products targeted at different markets.

 Tired of doing the same type of work, managers may think actively

in terms of entering a new business.

 Diversification may be prompted by the need for vertical integration

to get greater control over the value chain.

 Most tax legislation incorporate incentives for reinvestment of prof-

its. Firms may find it tempting to invest the surplus capital in a tax- advantaged new business.

The strategic challenge in diversification is to determine whether there is a fit between the old and the new businesses. In general, the least risky form of diversification is offering a new product to existing customers. Then comes offering the existing product to a new market. The highest degree of risk is involved while introducing a new product in a new market. Companies which embark on diversification in re- sponse to the poor performance of their existing business usually fail. This is because such a diversification tends to be opportunistic rather than strategic and does not take into account the fundamental strengths of the organization. Moreover, if a business is not doing well, it makes more sense to first structure and streamline it rather than take on the added responsibility of a new business.

There are numerous instances of both successful and unsuccessful diversification. Among the successful diversified conglomerates are General Electric, Siemens, Hoechst and ICI. On the other hand, there have been some classic failures, like the Ruias of the Essar group in India and Metal Box (India) Ltd.; the latter went into a terminal de- cline following its ill-advised diversification into bearings.

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In general, the less complex a business is the easier it is to manage it and lower the probability of things going wrong. Highly diversified businesses tend to have more layers of management and more compli- cated structures and control systems. The top management has to de- pend on reports, figures and other quantitative data rather than a fun- damental understanding of the customers and technology. So before diversifying, a firm must critically examine whether the move can cre- ate value for its shareholders that they cannot create on their own by diversifying their investment portfolio. A small checklist is given below:

 Core Competencies: These are the value creating skills which can be

extended to new products or markets. A company can create value for its shareholders by leveraging its core competencies.

 Market Power: By becoming larger through diversification, a busi-

ness might be able to gather extra market power vis-a-vis competi- tion, buyers, suppliers and substitutes.

 Sharing of Infrastructure: Infrastructure represents tangible resources

such as production facilities. There may be scope to leverage this in- frastructure and enter a newer business.

 Financial Stability: A diversified business portfolio can balance cash

flows across businesses effectively. For instance, businesses in grow- ing markets may need more cash than they have while those in ma- ture markets may have more cash than they need.

 Growth: Diversification can provide opportunities for fast growth.  Risk: When different businesses respond differently to economic cy-

cles, diversification can reduce business risk.

Peter Drucker‘s insights on diversification though articulated several years ago, are still useful. The diversified company must have a common core of unity to its businesses. The different businesses, technologies, products and activities could be united within a common market. Alterna- tively, the markets, products and activities must be linked together by a common technology. In general, market diversification based on common technology is more difficult than technological diversification based on a common market. Expertise in technology can be readily identified and acquired whereas expertise in markets is in the form of tacit knowledge which comes from experience and is rather more difficult to assimilate.

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Under what circumstances does diversification work? Milton Lauen- stein* argues that well-managed conglomerates do not tolerate mediocre performance of unit managers. On the other hand, in focused firms the CEO is rarely sacked unless the performance is disastrous. Moreover, well managed conglomerates tend to have a corporate staff who go through the annual budgets and long range plans of the operating units with a microscope. In contrast, directors of a focused company often do not spend enough time going into details. If a conglomerate selects able unit managers, energizes them with a strong corporate purpose, monitors their progress and provides guidance and support when needed, it can outperform the boards of many independent companies. This is exactly what GE, the most successful large diversified company in corporate history, seems to have done under the leadership of Jack Welch.

However, diversified corporations must avoid heavy bureaucracy. They must focus on basic governance using a small corporate staff. As Lauenstein puts it: ―If it begins trying to coordinate the activities of vari- ous units, it will be drawn into operating management functions. The corporate office will expand and begin making decisions which would be better made by executives in operating units. It then becomes an easy mark for a well managed independent competitor.‖

Lauenstein also points out that in focused firms, the top manage- ment‘s role is to understand the industry, make the key operating deci- sions and run the business. In a conglomerate, the top management must govern, not run operations. Its focus must be on selecting, motivating and mentoring the general managers of individual units.

At GE, Jack Welch killed bureaucracy, encouraged innovation and selected extraordinarily talented managers to manage each of the com- pany‘s diverse businesses. Welch was also ruthless with non-performers. In India, JRD Tata successfully built a portfolio of diverse businesses. Even though his management style was quite different, Tata like Welch had the extraordinary knack of selecting some truly outstanding manag- ers to run the different companies.

(See also: CONCENTRIC DIVERSIFICATION, CONGLOMERATE DIVERSIFI- CATION)

Lauenstein, Milton C., ―Diversification — The Hidden Explanation of Suc- cess,‖ Sloan Management Review, Fall 1985, pp. 49-55.

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Divestiture

A divestiture strategy involves the sale of a business or part of a business for various reasons. One could be its lack of fit with the core business. A second reason could be that the business has entered the decline phase of its life cycle. The third might be an urgent need for cash. A fourth could be government antitrust action when a corporation is perceived to mo- nopolize or unfairly dominate a particular market.