A company manufacturing certain well-known brands of malted food, chocolates and biscuits for more than a decade ventured into manufacture of apple juice in 2001, but had to sell off the plant in 2004. During the year 2007, the company's sales were higher by 20% over the previous year despite new competition. Production of chocolates increased by 14 % and of malted food by 22%. The sale of biscuits was also higher although these were processed by third parties and sold under popular brand names of the company Having satisfactory financial results in 2007, the company decided to diversify into computer software business
a. Was it the right strategic decision?
b. What could be the possible reasons business? underlying the company's decision to diversify into software
Increased sales does not always mean an increase in the profit margin. Food safety and changes in product legislation, combined with necessary upskilling of the work force have incremented and continue to do so, having an initial impact on profits.
There is a possibility the software diversification is linked with food production where the company can use its expertise. The decision to diversify will be the right strategic fit for the organisation if the aims of the strategy will be satisfied e.g. were profits increased?/can the plant size be further reduced to release assets?/does the change satisfy the needs of the stakeholders?.
Diversifying into apple juice in 2004 was a related diversification. Yet it did not prove to be profitable and the company withdrew from that business.
Computer software is unrelated diversification. It could have been a prospective business but 2007 seems to be too late to wake up to the prospects of an industry that is no longer in fast growth mode. Unless there is some other reason to diversify, I do not think going for unrelated diversification into computer software is a prudent decision.
Ahmed Ali Alsayed
This is a classic example of "unrelated diversification." Nokia, if my memory serves me well, did something similar, diversifying from "paper milling" and eventually to mobile telephony.
To the best of my knowledge, I do not think there would be a single explanation to the move. The one reason that comes to mind is "industry attractiveness" and possibly, the need to reap first mover advantages, at least more generally speaking.
To determine whether it was a good decision, always look at the results. Your best yardstick is operating profit margins, revenue growth and return on invested capital and probably size of economic profits over a longer time period.
Strategic moves also depend upon right environment. If the business is in Malaysia where supply of coco as is used in chocolates as raw material is in abundance supply may have proven better margin due to cheaper cost and increased sales definitely have helped the company. But rare earth is not yet available until Lynas project is operational therefore a totally new venture and chances of success is 50 and 50. Let's see more details for further discussion.
The move of the business computer software is an unrelated diversification as the business processes are not related and the decision to move must have been as a result of pressure for internal expansion or the career expectation of managers
Cases are a must for understanding strategic management. Theories only bears fruit once being translated into action/practice. My recent book entitled, " Islamic management Practices in financial Institutions: Case studies in Islamic economics, banking and Finance is published by Routledge. Have look at it.
Pleased to know about your book. Really sir you are a great scholar. I would love read your work.
Thank you
Wasslam
Yasir
Thank You Mohd.Yasir.
It looks like this is my last book. I have to leave this academic journey from now for younger generations to continue since I am retiree.
Now is time for something else. Keep on praying for me and Ummah. Now just want concentrate to supervisee research and that's it...
Wassalam
It was long before I saw this question. Now there seems to be silence and none seems to be interested in this question anymore. My latest book entitled, " Islamic Management Practices in Financial Institutions-Case Studies...." is an addition to this topic of your interest. The book is published by Routledge.(Routledge. httpsdoi.org10.43249781003243779)
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