Business

Strategy

Diversification Dilemma

Diversification has given way to focus in developed countries like the United States and the United Kingdom,  and has often been correlated with lower performance. In contrast, diversified business groups have been hugely successful in most emerging markets, particularly in Asia. Since the mid 1980s, strategists in countries like the United States and the United Kingdom have mostly advocated the use of focused strategies for businesses and have advised companies to ‘stick to their knitting’. Many diversified conglomerates in these advanced economies have been dismantled since 1980s to focus on one or a few core businesses. A look at the motives with which companies diversify reveals some of the reasons why diversification by conglomerates yields benefits in the developing markets as against the discount associated with diversified conglomerates in the developed economies. Growth is a primary motive for diversification However growth does not always translate into higher profitability. Since management status and power is correlated more closely with the size of assets under management, management (the ‘agent’) may have the incentive to diversify for pursuing growth in preference to profitability, which is not in the best interest of shareholders. Reducing risk Having different businesses in their portfolio can potentially balance differences…

Strategy

Core of a Business

We know that firms need to adapt their strategies as per the changes in the business environment. Strategies are highly context specific. What was good five years back will not hold good now. The business model that works for a particular firm may not work in a similar manner for another firm. The strategy that pays off in one country may not produce similar results in another country. While responding to the changes in the environment, sometimes companies have even moved away from their core business. Today, Nokia is a world leader in digital technologies, including mobile phones, telecommunications networks, wireless data solutions and multimedia terminals. You would be surprised to know that Nokia started with a wood pulp mill in Finland as a manufacturer of paper. The company later went on to manufacture rubber bands, industrial parts and raincoats. After World War II they expanded into Electronics and then into telecommunications. HP’s first product was an audio oscillator – an electronic test instrument used by sound engineers. They shifted to computers, printers, servers & imaging products. Reliance Industries Limited (RIL) started as a textile manufacturing business in 1966, and is one of the world’s most vertically integrated and horizontally…

Markets And Economy

Shareholder Engagement or Activism ?

  Continuing from my last post ‘ Is shareholder engagement good for companies? ’,  here we look at the scope of shareholders engagement and different approaches to shareholder engagement. What is the scope of shareholder engagement? Shareholders have a legitimate role in areas pertaining to: Corporate Strategy – such as mergers, diversification, restructuring, non core asset sale. Capital Structure – such as capital allocation discipline, use of cash on balance sheet. Governance – such as audit-related issues, board structure, managerial remuneration. However shareholders are not expected to micromanage companies. Nor is it desirable that shareholders push for short term profitability over sustainability and long term value creation. It is important that shareholders and board members engage effectively in the shared pursuit of high quality governance. What are the different ways in which shareholders engage with companies? Shareholders can either have a proactive approach for engagement with a company or may adopt a passive approach towards a company. Passive investors sell off their shares if they are dissatisfied with the corporate decisions. On the other hand, active investors engage proactively with the management, prior to a corporate decision being affected, in order to change the outcome of the decision. While the term…

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