We would like to draw our attention to the current economic problems in the world and which are somehow related with the strategic failure of business corporations. Why big companies fall and the role of corporate level management in this regard. Let’s start with -What are the themes of Corporate Level Strategy / role of Diversification?
Management must ensure:
- Increase the value of investment or Value addition to the money invested.
- Increase the competency / competitiveness
- Core process development
- Structural development
Corporate Management core tasks basically structured by Investment and Divestment decisions.
What the core focus of corporate activities? Simply, Stakeholders’ interests fulfillment: i.e., i. Shareholders and ii. Top, Mid and upper Mid level management
Management is believed to be appointed by the Shareholders to safeguard their interests and increase the profitability of their investment.
In fact whose interests are being served?
Primarily corporate level management serves their own interest first and foremost. Considering the exceptions in mind we could take the hypothetical scenario like this, say,
By investing or diversifying,
Situtation –I. Corporate levels will gain most, shareholders less;
Situation-II. Shareholders gain most, Corporate level less;
Situation III. Both are gaining equally but it would take time.
Which one decision option would corporates love to take, generally speaking, situation I.
In other words, corporate management always found to be doing what is best for them, the rests coming last, which is not morally and ethically right. But the society is worshiping money and wealth; hence greed trashes all other aspects.
For diversification shareholders don’t need management help to invest, they know where to invest. So, why go to rely on management?
The diversification by management must bring greater fruits than the shareholders own portfolio selection, or any one of the points above must be served, at least, which is not possible for a shareholder to perform.
As far the history concerns, we can see diversification is a wild horse since 1960, when corporates began integrating with smaller firms for having a rapid growth in stocks, which is known as growth by external factors, without performing real improvement in the ground. This seems like easy money making process in business, performance without performing. Well, this benefited mostly the Corporates than the shareholders, as the number of bulk shares remain in the hands of corporates in many forms, e.g., bonus for achievements, sales etc. Since the doctrine was if some one is good at one sector he would automatically be good in other sectors too, so, while integrating industry types were not considered. Eventually the frantic acquisition slowed down as performance of the main firm becomes affected. But human greed and crave for quick earnings and get rich sharp still remained in tact.
1970 is the time when acquisition is made to selective companies like who have better cash flows or sales or market shares in the industry become the prey of conglomerates. Yet as usual the performance of the mother company do no good for the business. Moreover, the pressure groups in the USA become more vocal against this kind of practices by the corporates. Moreover, oil prices and global economic problems slowed down the acquisition by big firms, as liquidity was a pressure behind it.
1980s is the time for soul searching, and acquisition become dim in action, most of the firms were busy restructuring their operations and the scope of acquisition move towards narrowing down. The big corporates become choosy in integrating with others.
1990s when macro economic situation gone better, companies turned around; again the interest for acquisition began growing. This time unlike the 1960s no unrelated acquisitions were made, only related business were selected to potential acquisition, as they were being watched by laws and various social audit groups.
2000 is the era when all the economic blunders exploded, and big Airlines and financial companies become the prime prey of the turmoil.
Diversification at a glance:
1960=Unrelated diversification (Blind growth)
1970=Cash flow focused
1980=Shrink (Narrow range) Restructuring.
2000=Shrink (Restructuring) e.g., Airlines, Banks.
To conclude, current turmoil in the economy is not a problem of today, it’s the accumulated outburst of many years of errors or wrong doings that the economy endured. If no rectifications are made, it would repeat again and again after certain intervals. The question would be not if but when. So, let’s cross our fingers.