Unit 6: Written Assignment
An organization may choose to diversify for a variety of reasons which include: increasing performance, increasing revenues and decreasing costs, which increases the organization’s value (Hitt, 2015).
However, often the organization may not be concerned with increasing value and are more focused on reducing managerial risk, mitigating another organization’s competitive advantage over them by moving into similar markets, increase an organization’s size and managerial compensation (Hitt, 2015).
The Article: Diversification, Organization, and Value of the Firm
In the article, Ushijima (2016), suggests that a multifaceted organizational structure is created when an organization decides to diversify because the internal structures and enlarged industry scope must be aligned. First, the legal structure of a diversified organization is analyzed and includes four parts of the organization’s legal structure: the concept, decentralization, differentiation, and compartmentalization.
As seen in Figure 1, the organization that was studied in the article had two lines of business, which included both businesses being organized as divisions of the parent company. The parent company is the organization’s headquarters (Ushijima, 2016). With this being the case the organization has three internal businesses which are seen on the left. However, in the example on the right, Business B is separated and each part of the business which includes Business A and the Headquarters has its own legal identity unlike the example on the left (Ushijima, 2016). The organizational structures are a strategy implementation tool that the company will use to enable them to be successful when they diversify (Hitt, 2015).
Figure 1. Alternative Organizational Forms of a Diversified Firm
The concept illustrates the organization’s level of diversification. In the example, there is moderate to high-level of diversification that the organization has chosen. In this type of diversification level, the organization chooses to have multiple businesses which they may call divisions (Hitt, 2015). Managing this type of diversification may be challenging because decisions about how to manage these businesses must be managed by the organization (Hitt, 2015).
Decentralization occurs when the decision rights are delegated to the managers of the organization (Ushijima, 2016). The business subsidiaries or division may be a legal entity that is distinct from the parent company (Ushijima, 2016). In this situation, the parent organization may allow for the managers of its divisions to have decision rights that are more superior to those of the managers in the parent company (Ushijima, 2016). Corporate governance becomes increasingly important when an organization chooses to diversify (Hitt, 2015).
High-powered incentives to the operation managers may have the potential to increase the organization’s value during decentralization (Ushijima, 2016). Furthermore, research suggests that the more flexible the resources are and the greater the incentives for the managers the higher the level of diversification that should be expected (Hitt, 2015).
Differentiation occurs when the organization chooses to focus on obtaining their competitive advantage by the creation of various products and management of different businesses (Hitt, 2015). This is considered a corporate-level strategy (Hitt, 2015). More precisely the organization has chosen “to diversify their operations from a single business competing in a single market into several product markets—most commonly, into several businesses” (Hitt, 2015). One benefit of differentiation is divisions or subsidiaries may be able to incur their own debt, which is a positive for the organization’s financial synergy (Ushijima, 2016).
This occurs when financial and operational links are weakened among the organization’s divisions. This may cause the subsidiaries to not have access to funds like the parent company or other divisions which is not good for the business. Moreover, depending on the legal boundaries of the that exist between the organization and its divisions, the employees of the subsidiaries or divisions may feel detached from the rest of the organization (Ushijima, 2016). The lack of intra-organizational sharing of resources, coordination, decision making and operational activities may negative for the organization because its employees and managers may be suffering psychologically and physically because of the detachment from the rest of the organization (Ushijima, 2016).
In conclusion, when an organization is choosing to diversify, the organization’s value can be affected by its choice of legal structure. Moreover, the organization must decide on what type of decision rights its managers in its business divisions or subsidiaries will have because they may be the organization’s pathway to decentralization and aid in a successful diversification of the organization (Ushijima, 2016).