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Corporate Strategy – ITT. Diversification and the Multibusiness Corporation

29/12/2009

Corporate Strategy – ITT. Diversification and the Multibusiness Corporation

דיויד שוגרמן David Sugarman

The point of time chosen to be related to and as the basic reference point is the year the paper was published- 1994.

Focus Questions:

1.                  How related was ITT’s diversification to its existing businesses?

There are three different forms of diversification a company may pursue: concentric diversification, horizontal diversification, and conglomerate diversification. the three essential tests of success are 1. Attractiveness: The industries chosen for diversification must be structurally attractive or capable of being made attractive. 2. The cost-of-entry test The cost of entry must not capitalize all future profits. 3. The better-off test – either gain competitive advantage from its link with the corporation or vice versa.

Factors that can lead to diversification are: 1. diversify when objectives can no longer be met within the product/market scope defined by expansion. 2. retained cash exceeds total expansion needs. 3. diversification opportunities promise greater profitability than expansion opportunities. 4. when the available information is not reliable enough to permit a conclusive comparison between expansion and diversification

In that respect ITT under Geneen`s leadership was extremely diversified and its business was to increase revenue at all costs. In that respect the diversification was very related to the business strategy that existed at that time. When Araskog took over the strategy changed and by the time the paper was published dozens of the ITT subsidiaries world wide were sold to maintain high profitability and reduce diversification, become more focused in the businesses that ITT was controlling.

2. What are the implications of such diversification strategy?

There are many implications. For example, In a competitive environment horizontal diversification is more desirable if present customers are favorably disposed toward the company and if one can expect this loyalty to carry over to the new product; in the long run, however, a new product must stand on its own Finally, diversification, if successful, has the potential of providing increased growth and profitability.

2.                   What are the limits to ITT’s growth?

Even though not stated as a reason in the paper in my view the limiting essential factor is the size of debt that ITT has held. It had reached 5 Billion $ in Geneen`s time. He was willing to expand and take loans and keep cash levels low. It eventauly bounced back effected sales in the mid 80`s and forced strategic change. Do you think that its diversification strategy can create sustainable competitive advantage? It can when management is flexible to market changes on the one hand and on the other stays focused. Though sometimes there are setbacks – For example, Gillette entered the market for pocket calculators in 1974 and for digital watches in 1976. Later it abandoned both businesses.

3.                  How would you characterize ITT’s organization and management system?

Under Geneens time – Spartanian in its operational business process and Roman-Decadent in its provision of benefits to executives. The aim of providing success at all cost under extreme pressure brought it to its peak but lacking to read and evaluate changes in global ethical and business environment (a type of Nemesis) was its greatest fault. Under Araskog- it had adjusted itself to the mainstream conglomerate corporate surroundings.

What are its advantages and disadvantages? Advanteges can be to improve the profitability and flexibility by entering into businesses that have better economic prospects than those of existing businesses. In addition, because of its size, gain better reception in capital markets. The diversification decision is a major step that must be taken carefully. Every company is best at certain products. Diversification requires different knowledge, skills, etc. Consequently, diversification can be a risky strategy and may no provide opportunities for growth.

4.                  Do you think that Geneen’s managerial practices are suitable for managing a multibusiness firm? 

Perhaps at the time it may have been though it lacked any basic and moral ethics. Under Araskog it become more suitable to become a mainstream business conglomerate.

How should the organization of a multibusiness firm differ from that of a single-business firm?  Literature indicates that increased levels of diversification increase performance up to a point, after which further diversification results in declining performance (Shayne, 1998, Grant et al., 1988, Markides, 1995). Research indicates that diversified firms, on average, fail to create economic value through increasing levels of diversification, and findings are mixed concerning the relationship between diversification strategy and profitability. Thus the difference should be charecterised by development of size and by business focus over time. 

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