(1) Positioning of Operation Portfolio
(a) Growth of enterprise
A large number of enterprises are aiming at growth. It is through growth that an enterprise can increase its profits on a long term basis, sustain the active working place, carry out the expansion and provide the chance of promotion and increment to the employees and managers. The directions of growth of enterprise can broadly be classified into two; one is the expansion of existing operations and the other is to diversify into new operations and carry out with multiple number of operations.
There is no absolute answer to the question of finding which one is the correct option. However, any industry has a life cycle and it can be said that diversification is an inevitable process. Let us try to consider the problem of operation portfolio which occurs as a result of diversification.
The operation portfolio, as said earlier, is a list of operations that are carried out under the operation activities of the enterprise or of the total activities. It determines in concrete from what type of operations with what weightage and combination should be conducted within the domain of the enterprise. The following reasons can be attributed to aiming of growth with multiple number of operations by the enterprise.
· Effective use of unused resources
· To cope up with the environmental change
· Economy of the scope
· Risk dispersion
· Activation of the organisation
· Effective use of unused resources
In any enterprise, different management resources keep on appearing which are not sufficient utilised for the existing operations, continuously. A typical example of this type of resources is the information resource. The people, who form an enterprise, have the capability to learn new things, therefore, the information resources are accumulated continuously.
An enterprise can maintain a further effective state by utilising these resources more effectively. Consequently, the enterprise orients itself towards diversification into such operations in which the resources can be utilised effectively, in order to achieve growth.
· To cope up with the environmental changes
The environment in which the enterprise is placed changes continuously and the enterprise cannot expect to survive and grow, unless it copes up with these changes. One of the factors for the ongoing changes in the environment is the life cycle of industry. When an enterprise clings to only one operation, the decline as well as the destiny of the industry get linked to this operation mainly.
Any enterprise can survive and grow through diversification. An earlier mentioned example of fibre industry clearly establishes this fact.
· Economy of scope
In some cases, the total expenses required for carrying out the multiple number of operations simultaneously by one enterprise are less than the total expenses of operations when the same number of operations are carried out by different enterprises. In such a case, it is said that there exists an economy of scope among the operations.
For example, let us compare an example of one company engaged in manufacturing of passenger cars and trucks simultaneously, with tow different companies engaged in manufacturing of passenger cars and trucks independently. The former will certainly have the cost benefit in the operation. This becomes possible due to the common use of management resources like manufacturing equipment and technology as will as the brand image etc. The enterprises advance into multiple number of operations aiming at this type of cost effect.
· Risk dispersion
It becomes difficult to cope up with the unforeseen circumstances in an industry or with regard to a particular product, if a company is engaged in manufacturing of one product or when it belongs to one industry only. Therefore, the enterprises go in for multiple number of operation, to avoid such risk.
One concrete example is the diversification of Ajinomoto. Till 1955, Ajinomoto had a major share in monosodium glutamate. However, in 1956, KYOWA HAKKO KOGYO entered the monosodium glutamate market with a new technology using direct fermentation method. Ajinomoto was suddenly exposed to the menace. However, it used this challenge as a change to diversify into various areas. Further, in 1969, an American scholar came out with the explanation regarding harmful effect of monosodium glutamate. Therefore, Ajinomoto further accelerated the pace of its diversification process. Though, it was later found that the theory of harmful effect of glutamate was not correct, it proved how fragile an enterprise can be against the risk when it is involved in just one operation.
· Activation of the organization
Entry into multiple number of operations can help in extracting more energy from the members of the organization. This is because of the fact that more the number of operations, more will be the requirement for higher posts. Further, the entry into new industry for the sake of growth gives an interesting impetus to the operations and it motivates the employees to carry out the work more vigorously.
(b) Structure of the operations
In this way, any enterprise tries to have multiple number of operations due to the reasons explained above. However, the problem of how to deal with the structure of overall operations becomes very significant. This includes two problems, namely, the setting of scope and selection of combination.
Scope setting falls within the preview of the area of one’s company and it defines to what extent the operation scope of one’s company can be extended. This has been explained earlier as a definition of domain.
The selection of combination concerns the problems of how to combine various operations within the scope as specified by the domain. It concerns various options like whether the operation
must be carried out in concentrated manner or should the company diversify and have multiple number of operations. Further, in the case of over all diversification, the extent, direction as well as the relationship among the various operations covered under diversification are also the options to be selected.
This is the problem of selection of operation portfolio. This section aims at explaining the theory for the study of these problems.
(2) Selection of Operation Portfolio
The research regarding how to select the operation portfolio of an enterprise and what would be the management result, is being carried out in America as well as in Japan. In this type of research, the operation portfolio of an enterprise is divided into a number of patterns and the performance of each portfolio is compared.
(a) Classification of diversification
It can broadly be classified into five types of standard strategies, depending upon the degree of diversification of operation portfolio, as given below. Further, it can be classified into more fine seven types of strategies depending upon how the resources are linked.
(ii) Vertical Integrated Strategy (V: Vertical).
(iii) Diversification Strategy with focus on many operations (D: Domain).
· Constructed Diversification Strategy.
(D.C: Domain-Constrained).
· (Diffused Diversification Strategy (DL: Domain Linked)
(iv) Related Diversification Strategy (R: Related).
· Constructed Diversification Strategy
(RC: Related Constraints).
· Diffused Diversification Strategy (RL: Related Linked).
(5) Unrelated Diversification Strategy (U: Un-related).
This classification has been carried out by using Specialisation ratio (SR). It is expressed by the total percentage in the overall sales, which has the maximum sales in the total sales, of the operation field having vertical integrated strategy. Further, it also uses the related ratio (RR) which represents the percentage share of total of maximum related operations in the total sales.
Moreover, besides this type of quantitative criterion, the qualitative criterion like the type of resources linked in the various operations, is also used. The method of linking in the various operations, is also used. The method of linking these types of resources can broadly be classified into two types.
One type is called the constrained model, in which there is a close relationship between various operations and the industry is known as linked or dispersed model, where entry had been made in various new fields with new operations as the stepping stone.
(b) Trends of diversification
What type of operation portfolios are actually selected by the Japanese enterprises. Let us try to understand this with the help of above discussed classification techniques.
(3) Multiplier Effect (Synergy Effect)
The above discussed relationship between diversification and management resources shows why it is necessary to consider the problem of selection of operation portfolio. A proper selection of operation strategy shall certainly determine the management results of the enterprise.
However, it is not an easy task to find an answer to the problem of type of operation portfolio suitable for a particular enterprise. Though, it may be possible to give the guidelines for finding an answer to such problems.
The above analysis showed that a medium level of diversification brings about the maximum profitability for the enterprise, whereas a higher degree of diversification brings about good result on growth aspect. The reason for such a trend is mostly explained through the synergy effect. The synergy effect was advocated as a concept by Anzov in 1965 and was translated as multiplier effect in Japan. Generally, this means that a higher effect like “2+2=5” can be obtained in total when multiple number of operations are handled by one enterprise.
Synergy effect must be differentiated from the mutually supplementing effect. For example, let us take an example of an enterprise engaged in the manufacturing of blankets. The enterprise, when making only blankets, will certainly have some equipments lying idle at some time, therefore, in such cases, this type of enterprise can start manufacturing towels using the equipment, which could not be manufactured on full time basis due to demand or other reasons.
The effective use of resources like this is called mutually supplementing effect because the two different fields could supplement to each other whatever was lacking in the other. This effect can be expressed by “1+1=2”.
On the other hand, this additional operation activity creates a new brand image as a consequence of towel manufacturing. This might increase the sales of blankets also. This is called multiplier effect and can be expressed by “1+1=3”. In this case, the prestige in the form of information management resources can be used simultaneously by two different operations, therefore, this type of effect is generated.
The synergy effect can be achieved by the overlapping use of information management resources after the diversification has progressed to some extent. This increases the profits also. However, an excessive diversification dilutes the management resources and it becomes difficult to make use of resources in an effective manner. Consequently, the profits also get affected.
A company engaged in the manufacturing of blankets could succeed in the towel operation. This does not mean that it can succeed in the manufacturing of handkerchieves or scarfs also. The management resources, which become necessary in such an event, might be totally different also. Further, there may be a possibility that the combination of blankets and handkerchieves or scarfs may end up in a poor image. In such a case, “1+1” becomes less than two. In other words, a negative synergy effect gets generated.
Further, the growth increases in a linear fashion with the progress in the degree of diversification. The adaptability towards the market changes increases as a result of diversification. Therefore, it can be considered that the progress of diversification has a bigger effect on the growth rather that the synergy effect.
In any case, it is necessary to consider such types of multiplier effect while selecting the operation portfolio. It becomes necessary to consider what exactly are the management resources with one’s company and how or in what combination the operations should be performed so that these resources can be properly utilised. Further, it is possible to accumulate the management resources so that further multiplier effect can be expected. It is also necessary to select the operation portfolio which has the possibilities of development, while assuming the possibility of multiplier effect in failure also.