The process of identifying and describing the strategies that managers of big corporations use in order to achieve maximum performance and the upper-hand ones against competitors is called Strategic Management (McDonald & Leppard, 1993). A firm, whose return on investments and profits are high, is regarded to have applied the full principles of strategic management. Since it involves the day to day running of an organization, it can be viewed as a set of principles that the managers takes into consideration before making any decision. Before making any decision, however, the manager must be informed beforehand on the pros and cons of the decision made. Big organizations, such as Sony, have boards of directors that are always consulted before certain decisions are implemented. During the decision making process, a thorough analysis of the strengths, weaknesses, opportunities and threats is carried out. After a careful consideration, the strengths are maximally utilized, while trying to minimize the weaknesses. Research is carefully done in order to determine avenues of available opportunities in the external business environment, while taking into account the risks and threats involved. This helps in expanding the business while reducing the risks on investments.
Strategic management can also be viewed as a continuous process that involves control and management of a business organization, evaluating its operating environment and setting goals to cater for its existing customers and provide space for reaching out to the potential ones. A good strategic plan also entails considering potential competitors. It is applicable to both large scale and small scale firms, as they both face competition. Businesses have to formulate strategies that will enable them to gain an added advantage against their competitors (Hastings, 2012). Firms’ objectives are set and relevant ways of attaining them are put into motion. Decisions about the future of the firm are made and implemented. This ensures that the firm is not at risk of facing mismanagement due to poor strategies. The plan should be evaluated on a regular basis in order to determine the success of it and whether it needs reviewing or replacement. It is also through a viable strategy that the working environment in an organization is enhanced (Hastings, 2012). This is because it enables employees to understand how the organization works and which relations exist between various departments. As a result, the diverse functional areas of an organization are incorporated and harmonized to attain the goals of the organization. Various issues emerge in the management of businesses; these issues need a critical analysis through a viable strategic plan.
All modern firms face various strategic management issues. However, some of the issues are prevalent across the business world. Some of these issues the business can totally control while others it has just partial power to influence. With the changes in modern economy, businesses are facing almost similar issues. This article takes a critical look at the issues that businesses and multinational companies are facing. The focus of this article is Sony, which is a well-known multinational company that deals with the diversification of various products. However, the two issues discussed in this context are prevalent for the modern businesses. The recommendations offered are suitable and can be used in any business operating environment. Both external and internal factors are analyzed. Internally this article focuses on a company’s product diversification. As of the external factor, the government control is analyzed.
Challenges Facing Modern Firms
Modern firms are facing a series of challenges due to the lack of specialization. The belief that product diversification has an added advantage over specialization has proven otherwise. As seen from the large companies such as Sony, the disadvantages of diversification outdo its merits (Sony, 2012). From a strategic point of view, here are some of the demerits of specialization lack.
Any company should approach the idea of diversification with caution. If this is not done, the business may fall in the trap of overextending its resources in the name of expansion. Considering the idea of running different divisions under the same corporation may be challenging both to the management and to the financial resources (McDonald & Leppard, 1993). Therefore, a careful consultation that involves all the stakeholders should be taken into account. Before a decision is made, the firm should have a strategic plan that is well evaluated in order to attain maximum results. To run independently, each division of the firm must be capable of maintaining its infrastructure and resources and meeting its operation cost. If for some reason one sector is given minimum resources, that department may tend to rely on other sectors for maintenance. On the other hand, if for any reason a certain department suffers loss either due to mismanagement, lack of market or maintenance hiccups, other segments of the company are liable to support it. Sony Corporation, for example, suffered these consequences, when its Game production sector was hacked, and valuable customer information was stolen (Sony, 2012). During the suit the company had to dig deep from the other departments to salvage this sector.
The diversification of the company makes it to face competition from the different lines of operation (Hastings, 2012). If during this cut-throat competition a company decides to expand and diversify its production, both the old and new sections of the company will suffer from lack of attention and consequently, deprived resources. This is because the firm will be much focused on maintaining all its product lines against competitors. From a strategic viewpoint, this has an added advantage towards its competitors, whose success is determined by their line of production. Such companies have an added advantage, as they are focused on running and maintaining only one sector of the firm. According to the statistics of the Fiscal year 2010, Sony’s competitor, Samsung’s, profitability reached its peak, as compared to Sony, which was still facing a competitive breakdown (Sony, 2010). It can be clearly seen that diversity in production has its cons.
Another aspect that crops when a firm diversifies its products is lack of expertise. Majority of the firms nowadays are driven by greed in their quest to expand (John, 2003). This makes the managements of such firms to disregard the mission and vision of their organizations. Therefore, laid strategies are not followed to the later. Such companies expand into the fields that are totally unrelated to their initial line of production. If, for example, an electronic company takes over insurance, it becomes hard for the company to maintain and offer the same level of expertise, as it previously did. This was the case for Sony as it expanded into realms beyond its area of operations and specialization. With the increased rate of corporate takeovers, many companies are running businesses that were initially owned by organizations that specialized in that area of production (Hastings, 2012). The new ownership, therefore, faces the challenges of running and maintaining large organizations without the proper skills set.
Cost is another inevitable challenge that faces a business once it decides to expand and diversify its production. Some businesses strategize to start a new line of production from the ground up. This requires a lot of resources and infrastructure. Additional costs arising from the activities such as employee training run the risk of increasing the company’s costs to the point, where the return on investments cannot be as high as previously anticipated. Even the well-calculated, most profitable and, probably, the least expensive diversification results in increased operational overheads. Businesses must, therefore, carefully analyze the expected returns from a new venture before they invest. This will reduce the chances of an organization spending more that it anticipates making. The company will also have the chance to plough back its profits rather than invest them into the sectors of diversification (Hastings, 2012). The results of increased overheads can be seen from Sony after it introduced the Sound and music production sector in its line of production. The uncertainties that the company faced in this industry were more than it had anticipated (Sony, 2012). The stiff competition that Sony faced has made this department dependent on other sections of the organization. This resulted in a strain in the organization’s resources. If any company does not have enough resources to support a growing sector it runs the risk of crippling the entire company. To reduce costs, both of production and maintenance, the safest diversification that a business can venture into is the one related to its area of production. This is why the TV production sector of Sony was highly appreciated in the market after their Bravia’s arrival in 2005. With many companies already having a brand name in the market, introduction of a new, similar commodity will meet an already made market. The company will, therefore, stay afloat and have an added advantage against it competitors (Lashinsky, 2012). This is what has kept companies such as Apple always on the front line. Other benefits that businesses enjoy in diversifying in closely related areas are pre-existing infrastructure and expertise, reuse of skills and manpower, and distribution of available technology.
The final aspect that businesses tend to overlook during diversification is the impact in innovation. With the daily changes in technology and increased consumer demand, a diversified company faces the risk of not satisfying its customers. Many innovations happen in smaller companies that are solely focused on a few business or technological goals. This is on the contrary to what is expected. One may tend to think that large, diversified companies have the likelihood of coming up with innovations. During its years of specialization, for example, Sony was the world largest innovator in the telecommunication field. The introduction of Walkman saw Sony rise to glory in the early years (Sony, 2012). When a company diversifies too widely, it shifts its focus to bureaucratic inertia reducing its ability to be instantly responsive to market changes and demands. When a company lags in innovation, it opens doors for its competitors, who take advantage of the situation. This can be seen in the replacement of Sony’s Walkman by competitor MP3s. The results of a company’s reduced innovation are loss of market and even customers’ loyalty to the competing firms. The company cannot meet its operation costs and, therefore, it will have no return on investments. At this critical stage, all a company can do is hope that the industrial prices reduce as well as the manufacturing costs. It can be seen, however, other than diversifying production, the best cause of action for any business is specialization and indulging in aggressive innovation in order to meet customers’ demands.
Any company should consider specializing in order to control markets by guaranteeing sales and distribution. A specialized firm uses its brand name or corporate identity to win customers’ loyalty whenever introducing a new product to the market.
Every business faces the external challenge that is government control. Without question the organization must adhere to the rules and regulations imposed by the government in its area of operations. Different rules apply to different organizations. These rules are formulated according to the size of the business, type of production it deals with and even its area of operations. Different governments impose different regulations in their countries. These laws are formulated with an aim of controlling production, protecting employees and even ensuring a safe, secure and healthy working environment of the workers.
The rules that the government imposes on businesses are divided into the two broad categories: internal and external. The internal rules regulate the internal environment of the business and mostly the employees and production sections. On the other hand, the external laws oversee the ways the business behaves in the market and responds to customers’ demands and competitors. The external arena is mostly dominated by the public and competitors. Regulatory laws apply and they affect the way the business operates and responds to specific situations. The type of business that one ventures into determines the regulations implied. Multinational organizations face these laws for business licensing of multinational rules. A business should consider the effect of these rules in its strategic plan. A good overview and review of the plan should ascertain that the charges and regulations imposed on its operations do not surpass its cost of operations. The business should also ensure that it renews its licenses and operates within the boundaries of law. Failure to do this is jeopardizing the organization, which would face the severe outcomes of the law imposed by that government.
The government also expects an organization to be responsive to the needs of its workers. This is included in every government’s Act on Labor laws. The laws include minimum pay regulations, worker protection rules and child labor protection. Occupational health and employees’ health are also included in this law. Any business should, therefore, take a closer look at the laws regulating its internal operations before deciding to expand or diversify. In some situations, a business may fall short of its expectations and fail to meet its operations costs. If this happens, the government rules in favor of the employees, who are entitled to the privileges above. Since the business has no control other than to conform to the rules set by the government, it is necessary to adhere to the rule stratified to enhance a smooth running of the organization. When an organization hires employees, it is implied that the laws and regulations protecting workers apply. The strategy that any organization adopts should, therefore, be inclusive of the users within an organization. The strategy should incorporate a hierarchy of the various departments of an organization, their responsibilities and rights and clearly state the course of action to take if certain rules are not observed. This internal strategizing of an organization ensures smooth running of it. If this is not done properly, frictions may arise from the different stakeholders of the organization. These result in low production, as employees are poorly motivated and the environment within which they operate is not favorable. Organizations with minimal internal conflicts have an added advantage over their competitors and also the reputation of the firm is maintained in the eyes of the public. However, firms that are prone to internal conflicts, such as strikes, may face opposition in the market as their public image becomes dented (Hastings, 2012).
Every firm is liable to paying taxes to the government. This is done in order to control how businesses report their financial status to the government. There are various methods that are specified by the IRS to dictate the ways organizations report their income and expenses. These methods must all have accounting background. Therefore, it is required that each business organization maintains an accounting department. The strategies that the business applies should ensure that the running and maintenance of this department is not done at the expense of the organization’s resources. The rules that apply to the production and generation of financial tax reports must comply with the laws of accounting. However, some are deviations that are generally notable, and also depreciation schedules. Any organization should strategize paying its taxes on time in order to avoid complications, especially in times of inflation.
Other laws that do not favor business privacy in terms of its finances are the reporting laws. These laws require that a business must report its finances to investors and the government. Set with guidelines and specifications, these laws are meant for transparency purposes. To maintain the moral obligation to the general public, these laws are meant to prevent fraud and misconduct. Businesses have moral obligations toward the general public, some of which include maintaining the privacy of their clients. When these obligations are overstepped, the people can sue the business involved on grounds of breaching a contract. In the case Sony, for example, has experienced a massive security breach, where gamers’ information was illegally accessed. Analysts predict that this would lead to billions of dollars loss after the company was sued. According to the company’s director, the hackers may have stolen useful customer information stored in their online databases (Sony, 2013). The customers accused the company on the basis of “negligence in data security; disregarding protection and encryption of sensitive customer information”. The victims claimed that the company took their time before notifying them of the threat. This disregard of public privacy is viewed differently by various governments. In an attempt to protect its citizens, a government may pass the laws through tribunals that are meant to favor its citizens at the expense of a multinational company. In the UK, for example, data protection and breaches are taken seriously by the office of the information commissioner. This may result in a negative turnover in the company, once it is determined what course of action the government may take in a case, where public information privacy is disregarded (Govindarajan & Natarajan, 2010).
Operating worldwide has its pros and cons. The company has to face different governments operating within different terms. The terms imposed by one government may not comply with other governments. This is due to their different jurisdictions and constitutions. A good example is the cause of action taken by the Australian government when they learned about Sony’s breach of private consumer information. The government opened an investigation into the breach. They also wrote a letter to the company demanding an explanation on why the company failed to notify its million users on time about the breach.
If a company does not implement a good strategic plan, the result of the controls imposed by the government to the firm is weak financial results that depict high rates of liquidity and decreasing sales. The company, therefore, suffers from slow profit recovery rates, inefficient operating power and, therefore, the returns on stocks are low, leading to reduced investors’ confidence.
The recommendations below are meant to enhance the performance of a business. From the analysis above it can be seen the different types of challenges that face a modern businesses setup. For a company to enjoy the full benefits of these recommendations it must be flexible and ready to adapt to change. A specialized company has the chances of performing better than a diversified one (John, 2003). A company should, therefore, consider expanding its line of production other than taking over a new and unrelated line of production. This will win both investors’ and consumers’ confidence. To choose the best segment to specialize in, the sector should be one of the major segments and have the potential to integrate other segments. The selected segment should also have the least amount of competition and have an acceptable market, so as to enhance the implementation of the strategies in an effective manner. Diversification will ensure that a company’s brand remains competitive. The company will also focus on the relevant areas of innovation that will meet market demand.
Diversification should be carried out after a thorough analysis of the company’s resources and evaluation of the need for expansion. In order to reduce the costs, both of production and maintenance, the safest diversification that a business can venture into is one related to its area of production. With many companies already having a brand name in the market, introduction of a new, similar commodity will meet an already made market. The company will, therefore, stay afloat and have an added advantage against it competitors (Lashinsky, 2012). A business should also strive to operate within the realms of its government’s jurisdiction. This will reduce external conflicts and ensure a smooth running of the organization. When this happens, the reputation of the business will be elevated resulting in a favorable market.
Based on the above discussion, it is clear that two of the biggest challenges that a multinational company is likely to face are either internally or externally based. The internal challenges can be addressed by formulating a strategic plan. On the other hand, the external challenges are beyond the company’s control and all the management can do is try to reduce the occurrence of such and hope for the best. This is mainly done by conforming to the laws and regulations outlined by the government. According to the analysis above, it is evident that product diversification is a major hindrance to the success of any company. This is because it results in increased overhead costs, reduced innovation and lack of specialization. To curb this, a company must have a strategic plan in order to determine their best area of operations. Once a company determines this, they should start to acquire aggressively within that section. This will allow the company to enjoy economies of scale, gain market share, reduce the costs of manufacturing and access new technologies and patent rights. It should be noted that a higher market share provides a company with a higher pricing power. On the other hand, increased economies of scale mean increased productivity. Reduced manufacturing power enables a company to effectively engage in any cut-throat competition. Acquiring new technology and patents have an added advantage to a company, as it enables it to accelerate its innovation and production.
Given a company’s initial status before it merges its sectors together into one specialized department, it is a good practice for the management to consider avoiding the overpayment of premiums before the success of the merged sections.