Friday, July 1, 2011

Emerging Markets

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In today’s emerging markets, companies which are managing their business portfolios through acquisitions and divestitures create substantially more shareholder value than those that passively hold their businesses. McKinsey & Company’s research also proves that acquisitions are more common than divestitures. Most large divestitures take place when there is a loss so divestitures are reactive rather pro-active. Holding onto a business creates costs to the entire corporation, but also to the unit itself. There are several steps corporations have to do in these situations and these are (1) Prepare the organization; () Identify candidates; () Structure the deal; (4) Communicate the decision; and (5) Create new businesses. By following these steps, “companies are more apt to get a proactive divesture program off the ground, build support for it throughout the ranks, and ultimately make it a core element of their corporate strategies”(Dranikoff). This core element is what core competencies are about.

Core competencies are the source of competitive advantage and enable the firm to introduce an array of new products and services. These competencies are needed to the develop core products. These core products are not sold directly to the customers but instead they are used to build a larger number of consumer products. For instance, motors are a core product that can be used in wide array of end products. Executives spend too much time creating and acquiring businesses and not devoting enough attention to divesting them. The result is that they often end up selling businesses too late and at too low a price. In other words corporations overlook the potential of divestiture. Corporations need to spend more time on developing core competencies in order to keep their competitive advantage. Development of core competencies is due to the integration of multiple technologies and the coordination of diverse production skills such as Sonys ability to miniaturize electronics. Core competencies should not be mistaken what they do not entail. They are not about outspending rivals on R&D, sharing costs among business units or integrating vertically. Corporations should be very cautious when they are developing core competencies. For instance, Cost-cutting moves sometimes destroy the ability to build core competencies. For instance, “Decentralization made it difficult to focus on core competencies” (Prahalad, Hamel) because different groups rely on outsourcing of critical tasks and this will prevent the firm developing core competencies. Also failure to recognize core competencies may lead to decisions that result in their loss. So its very important for corporations to recognize its core competencies and understand the time required to build them or regain them, in order to make better divestment decisions. It is also very advantageous and important for the corporation to have a portfolio of core competencies rather than a portfolio of independent business units. “Management trapped in the strategic business unit (SBU) mindset almost inevitably finds its individual businesses dependent on external sources for critical components, such as motors or compressors” (Prahalad, Hamel). Corporations might see these as just components but they are in fact “core products that contribute to the competitiveness of a wide range of end products. They are the physical embodiments of core competencies”(Prahalad, Hamel).

Shape shifters means corporations that expands into related or even unrelated industries with success in order to take advantage of profit potential. In doing that “they can leave competitors in the dust because they have an objective view of the industry and attempt to create value by rewriting its rules”(Piturro).

It is worth reorganizing the entire business from start to finish, for refocusing which is why corporate strategy should be adopted, implemented, appraised and adjusted. In other words, a well thought strategy must be found for company’s survival. Once a business has decided upon a particular strategy, it needs to look at how it develops that strategy. This also means focusing on core competencies, becoming the best at a few key skills or a few knowledge areas. Companies should concentrate their business efforts, firstly to those areas where they excel in order to provide protection against competitors. It is very important for companies to understand the economics of their core businesses as well as the state of their competencies and assets required to win in the marketplace. Corporate strategy is the umbrella which helps the company maintain its position and move forward in market place by building and implementing core competencies. Shape shifter approach can be used by a company to develop their business into other areas which are not the businesses main area of expertise without changing corporate strategy and core competencies. This approach might be necessary when a company sees potentials of success and high profit returns. This does not mean that corporations should have variety of business units independent of each other. In other words, Shape shifters means moving one corporations resources into another business unit to build new profit centers. The corporations’ core competencies stay the same but the resources are relocated. Divestiture, on the other hand, can help companies eliminate low profiting assets or businesses that are not part of their corporate strategy or core competencies. This will allow them “to strengthen the company’s balance sheet and invest in high-growth opportunities” (Dranikoff). As I indicated before, it’s very important for corporations to recognize its core competencies and understand the time required to build them or regain them, in order to make better divestment decisions. And Executives should spend more time on divesting businesses rather than creating and acquiring businesses. As in Divestiture article, the trees root (Core Competencies) should be strong enough to support its leaves (Shape Shifters) and the necessary steps should be taken by the specialized personal to keep it that way while cutting the unnecessary leaves (Divestiture).

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