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  1. 1. Impact of economic environment on business:Business, now-a-days is vitally affected by the economic, social, legal,technological and political factors. Thesefactors collectively form business environment. Business environment, as such,is the total of all external forces,which affect the organization and operations of business. The environment ofan organization has got internal,operational and general lives managers must be aware of these threeenvironmental levels and their relationship andimportance.The term business environment implies those external forces, factors andinstitutions that are beyond the control ofindividual business organizations and their management and affect the businessenterprise. It implies all externalforces within which a business enterprise operates. Business environmentinfluence the functioning of the businesssystem. Thus, business environment may be defined as all those conditions andforces which are external to thebusiness and are beyond the individual business unit, but it operates within it.These forces are customer, creditors,competitors, government, socio-cultural organizations, political parties nationaland international organizations etc.some of those forces affect the business directly which some others haveindirect effect on the business.Business environment as such are classified into the following three majorcategories, they are:yInternal environmentyOperational environmentyGeneral/external environmentBoth internal and operational environment are the creation of the enterpriseitself. The factors of external or generalenvironment are broad in scope and least controlled and influenced by themanagement of the enterprises.
  2. 2. Now we discuss those factors in details as below:Econom ic dim ensions of environm entEconomic environment refers to the aggregate of the nature of economicsystem of the country, the structuralanatomy of the economy to economic policies of the government theorganization of the capital market, the nature offactor endowment, business cycles, the socio-economic infrastructure etc. Thesuccessful businessman visualizesthe external factors affecting the business, anticipating the prospective marketsituations and makes suitable to getthe maximum with minimize costEconomic factors that affect the business environments are as under:yG overnment economic policiesyrate of interest set by the centeral bank of any countryyP er capita Income which has a huge impact on business environment by changingtheirconsumption behavioryP rivatization policy by the governmentyinstablity in the economy due to bad political conditions in the county affects thebusinessenvironmentyD umpingyC ustoms duty structureyA irline air freight chargesyF oreign investment in the countryG enerally speaking an environment includes the air we breathe, the water wedrink, the available business,
  3. 3. social and educational infrastructure in the locality , state and country etc. Inthe context of business the environment refers to the sum of internal andexternal forces operating on an organization. The managers must perforcerecognize the elements, severity and impact of these forces on the organization.They must identify, evaluate and react to the forces triggered by the externalenvironment.More often than not, these forces are beyond the control of an organization andits managers.A ccordingly, the factors of the environment will need to beconsidered as inputs in the planning and forecasting models developed by anorganization.It is quite possible that some large organizations themselves constitute a greaterpart of the businessenvironment e.g.P ublic Sector OilC ompanies in India.A n organization operates within the larger framework of the externalenvironment that shapes opportunitiesand poses threats to the organization. The external environment is a set ofcomplex, rapidly changing andsignificant interacting institutions and forces that affect the organizationsability to serve its customers.External forces are not controlled by an organization, but they may beinfluenced or affected by thatorganization. It is necessary for organizations to understand the environmentalconditions because theyinteract with strategy decisions. The external environment has a major impacton the determination ofmarketing decisions. Successful organizations scan their external environmentso that they can respondprofitably to unmet needs and trends in the targeted markets.The Organization as a SystemInternally, an organization can be viewed as a resource conversion machine thattakes inputs (labor, money,materials and equipment) from the external environment (i.e., the world outsidethe boundaries of theorganization), converts them into useful products, goods, and services, andmakes them available tocustomers as outputs. The organization must continuously monitor and adapt tothe environment if it is to
  4. 4. survive and prosper.D isturbances in the environment may spell profoundthreats or new opportunities. Thesuccessful organization will identify, appraise, and respond to the variousopportunities and threats in itsenvironment.External Macro environmentThe external macro environment consists of all the outside institutions andforces that have an actual orpotential interest or impact on the organizations ability to achieve itsobjectives: competitive, economic,technological, political, legal, demographic, cultural, and ecosystem. Thoughnoncontrollable, these forcesrequire a response in order to keep positive actions with the targeted markets.An organization with anenvironmental management perspective takes aggressive actions to affect theforces in its marketingenvironment rather than simply watching and reacting to it.1. Economic EnvironmentThe economic environment consists of factors that affect consumer purchasingpower and spendingpatterns. Economic factors include business cycles, inflation, unemployment,interest rates, and income.C hanges in major economic variables have a significant impact on themarketplace. F or example, incomeaffects consumer spending which affects sales for organizations.A ccording toEngels Laws, as income rises,the percentage of income spent on food decreases, while the percentage spenton housing remainsconstant.2. Technological EnvironmentThe technological environment refers to new technologies, which create newproduct and marketopportunities. Technological developments are the most manageableuncontrollable force faced bymarketers. Organizations need to be aware of new technologies in order to turnthese advances intoopportunities and a competitive edge. Technology has a tremendous effect on
  5. 5. life-styles, consumptionpatterns, and the economy.A dvances in technology can start new industries,radically alter or destroyexisting industries, and stimulate entirely separate markets. The rapid rate atwhich technology changes hasforced organizations to quickly adapt in terms of how they develop, price,distribute, and promote theirproducts.3.P olitical and Legal EnvironmentOrganizations must operate within a framework of governmental regulation andlegislation.G overnmentrelationships with organizations encompass subsidies, tariffs, import quotas,and deregulation of industries.The political environment includes governmental and special interest groupsthat influence and limit variousorganizations and individuals in a given society. Organizations hire lobbyists toinfluence legislation and runadvocacy ads that state their point of view on public issues. Special interestgroups have grown in numberand power over the last three decades, putting more constraints on marketers.The public expectsorganizations to be ethical and responsible.A n example of response bymarketers to special interests isgreen marketing, the use of recyclable or biodegradable packing materials aspart of marketing strategy.The major purposes of business legislation include protection of companiesfrom unfair competition,protection of consumers from unfair business practices and protection of theinterests of society fromunbridled business behavior. The legal environment becomes more complicatedas organizations expandglobally and face governmental structures quite different from those within theUnited States.4.D emographic EnvironmentD emographics tell marketers who current and potential customers are; wherethey are; and how many are
  6. 6. likely to buy what the marketer is selling.D emography is the study of humanpopulations in terms of size, density, location, age, sex, race, occupation, andother statistics.C hanges in the demographic environment can result insignificant opportunities and threats presenting themselves to the organization.Major trends for marketers in the demographic environment include worldwideexplosive population growth; a changingage, ethnic and educational mix; new types of households; and geographicalshifts in population.5. Social /C ultural EnvironmentSocial/cultural forces are the most difficult uncontrollable variables to predict.It is important for marketersto understand and appreciate the cultural values of the environment in whichthey operate. The culturalenvironment is made up of forces that affect societys basic values, perceptions,preferences, and behaviors.U.S. values and beliefs include equality, achievement, youthfulness, efficiency,practicality, self-actualization, freedom, humanitarianism, mastery over the environment,patriotism, individualism, religiousand moral orientation, progress, materialism, social interaction, conformity,courage, and acceptance ofresponsibility.C hanges in social/cultural environment affect customerbehavior, which affects sales ofproducts. Trends in the cultural environment include individuals changing theirviews of themselves, others,and the world around them and movement toward self-fulfillment, immediategratification, and secularism.6. Ecosystem EnvironmentThe ecosystem refers to natural systems and its resources that are needed asinputs by marketers or thatare affected by marketing activities.G reen marketing or environmental concernabout the physicalenvironment has intensified in recent years. To avoid shortages in rawmaterials, organizations can userenewable resources (such as forests) and alternatives (such as solar and windenergy) for nonrenewable
  7. 7. resources (such as oil and coal). Organizations can limit their energy usage byincreasing efficiency.G oodwill can be built by voluntarily engaging in pollution prevention activitiesand natural resource.External MicroenvironmentThe external microenvironment consists of forces that are part of anorganizations marketing process butare external to the organization. These micro environmental forces include theorganizations market, itsproducer-suppliers, and its marketing intermediaries. While these are external,the organization is capableof exerting more influence over these than forces in the macro environment.1. The MarketOrganizations closely monitor their customer markets in order to adjust tochanging tastes and preferences.A market is people or organizations with wants to satisfy, money to spend, andthe willingness to spend it.Each target market has distinct needs, which need to be monitored. It isimperative for an organization toknow their customers, how to reach them and when customers needs change inorder to adjust itsmarketing efforts accordingly. The market is the focal point for all marketingdecisions in an organization.2. SuppliersSuppliers are organizations and individuals that provide the resources needed toproduce goods andservices. They are critical to an organizations marketing success and animportant link in its value deliverysystem.3. Marketing IntermediariesLike suppliers, marketing intermediaries are an important part of the systemused to deliver value tocustomers. Marketing intermediaries are independent organizations that aid inthe flow of products from themarketing organization to its markets. The intermediaries between anorganization and its markets constitute a channel of distribution. These includemiddlemen (wholesalers and retailers who buy and resell
  8. 8. merchandise).P hysical distribution firms help the organization to stock andmove products from their pointsof origin to their destinations. Warehouses store and protect the goods beforethey move to the nextdestination. Marketing service agencies help the organization target andpromote its products and includemarketing research firms, advertising agencies, and media firms.F inancialintermediaries help financetransactions and insure against risks and include banks, credit unions, andinsurance companies.Importance of understanding the environmentThe managers job cannot be accomplished in a vacuum within the organization.There are a number offactors both internal as well as external which jointly affect managerialdecision-making. It is therefore veryimportant for the manager to understand and evaluate the impact of thebusiness environment due to thefollowing reasons :a)Businesses may be doomed to be non starters due to restrictive businessenvironment which may take the form of rigid government laws ( no pollutingindustry can ever be located in around 50 Km radius of the Taj) , state ofcompetition (C ar manufacturing capacity presently in the country is far inexcess of demand) etc.b)The present and future viability of an enterprise is impacted by theenvironmentF or eg no TVmanufacturer can be expected to survive by making only B&W television setswhen consumer preferencehas clearly shifted to colour television sets.c)The cost of capital and the cost of borrowing - two key financial drivers ofany enterprise are impacted by the external environment .F or eg the ability of abusiness to fund its expansion plan by raising money from the stock marketsdepends on the prevalent public mood towards investment in stock markets.d)The availability of all key inputs like skilled labour , trained managers , rawmaterials , electricity ,transportation , fuel etc are a factor of the business environment.
  9. 9. e)Increasing public awareness of the negative aspects of certain industries likehand woven carpets ( use of child labour ) , pesticides (damage to environmentin the form of chemical residues in groundwater), plastic bags (choking ofsewer lines) have resulted in the slow decline of some industries.f)F inally , the environment offers the opportunities for growth and profits .F oreg when the insurance andaviation industry was thrown open to the private sector , the new entrant couldeasily build on theexpectations of the public.C hanging profile of Indian economic environmentIndia gained independence in 1947 paving the way for national leaders of theIndianG overnment to build aneconomically independent new India.P olicies between 1950-70 wereimplemented with a sincere belief inthe efficacy of the socialist philosophy and political democracy. Heavyinvestment by government in Steelplants, atomic energy, hydroelectric power and irrigation projects laid thefoundation of a strong industrialedifice. The non-aligned movement at a time when the world was divided intotwo power blocks with coldwar between the Super-powers, prevented India from becoming a satellite ofany other nation and enabledit to protect Its economy and the IndianP opulation.Indian economy has made great strides in the years since independence. In1947 the country was poor andshattered by the violence and economic and physical disruption involved in thepartition fromP akistan. Theeconomy had stagnated since the late nineteenth century, and industrialdevelopment had been restrainedto preserve the area as a market for British manufacturers. In fiscal year (F Y )1950, agriculture, forestry,and fishing accounted for 58.9 percent of the gross domestic product (G D P )and for a much largerproportion of employment. Manufacturing, which was dominated by the juteand cotton textile industries,accounted for only 10.3 percent ofG D P at that time.Indias new leaders sought to use the power of the state to direct economic
  10. 10. growth and reduce widespreadpoverty. The public sector came to dominate heavy industry, transportation,and telecommunications. Theprivate sector produced most consumer goods but was controlled directly by avariety of governmentregulations and financial institutions that provided major financing for largeprivate-sector projects.G overnment emphasized self-sufficiency rather than foreign trade and imposedstrict controls on importsand exports. In the 1950s, there was steady economic growth, but results in the1960s and 1970s were lessencouraging.Beginning in the late 1970s, successive Indian governments sought to reducestate control of the economy.P rogress toward that goal was slow but steady, and many analysts attributedthe stronger growth of the1980s to those efforts. In the late 1980s, however, India relied on foreignborrowing to finance developmentplans to a greater extent than before.A s a result, when the price of oil rosesharply inA ugust 1990, thenation faced a balance of payments crisis. The need for emergency loans led thegovernment to make agreater commitment to economic liberalization than it had up to this time. Inthe early 1990s, Indias post-independence development pattern of strong centralized planning, regulationand control of privateenterprise, state ownership of many large units of production, tradeprotectionism, and strict limits onforeign capital was increasingly questioned not only by policy makers but alsoby most of the intelligentsia.But too much of protection from theG overnment had its own disadvantages.Our quality standards were notin tune with international competition. It had produced more traders thanindustrialists. It was high timethat Indian economy became more open and entered the international market.India embarked on a series of economic reforms in 1991 in reaction to a severeforeign exchange crisis.
  11. 11. Those reforms have included liberalized foreign investment and exchangeregimes, significant reductions intariffs and other trade barriers, reform and modernization of the financialsector, and significant adjustmentsin government monetary and fiscal policies.The reform process has had some very beneficial effects on the Indianeconomy, including higher growthrates, lower inflation, and significant increases in foreign investment.F oreignportfolio and direct investmentflows have risen significantly since reforms began in 1991 and havecontributed to healthy foreign currencyreserves ($32 billion inF ebruary 2000) and a moderate current account deficitof about 1% (1998-99).Indias economic growth is constrained, however, by inadequate infrastructure,cumbersome bureaucraticprocedures, and high real interest rates. India will have to address theseconstraints in formulating itseconomic policies and by pursuing the second generation reforms to maintainrecent trends in economicgrowth.Indias trade has increased significantly since reforms began in 1991, largely asa result of staged tariffreductions and elimination of non-tariff barriers. The outlook for further tradeliberalization is mixed. Indiahas agreed to eliminate quantitative restrictions on imports of about 1,420consumer goods byA pril 2001 tomeet its WTO commitments. On the other hand, the government has imposed"additional" import duties of5% on most products plus a surcharge of 10% over the past 2 years. The U.S. isIndias largest tradingpartner; bilateral trade in 1998-99 was about $10.9 billion.P rincipal U.S.exports to India are aircraft andparts, advanced machinery, fertilizers, ferrous waste and scrap metal, andcomputer hardware. Major U.S.imports from India include textiles and ready-made garments, agricultural andrelated products, gems andjewelry, leather products, and chemicals.
  12. 12. Significant liberalization of its investment regime since 1991 has made India anattractive place for foreigndirect and portfolio investment. The U.S. is Indias largest investment partner,with total inflow of U.S. directinvestment estimated at $2 billion (market value) in 1999. U.S. investors alsohave provided an estimated11% of the $18 billion of foreign portfolio investment that has entered Indiasince 1992.P roposals for directforeign investment are considered by theF oreign InvestmentP romotion Boardand generally receivegovernment approval.A utomatic approvals are available for investmentsinvolving up to 100% foreignequity, depending on the kind of industry.F oreign investment is particularlysought after in powergeneration, telecommunications, ports, roads, petroleum exploration andprocessing, and mining.A s India moved into the mid-1990s, the economic outlook was mixed. Mostanalysts believed that economicliberalization would continue, although there was disagreement about the speedand scale of the measuresthat would be implemented. It seemed likely that India would come close to orequal the relativelyimpressive rate of economic growth attained in the 1980s, but that the poorestsections of the populationmight not benefit.In the recent past, India has witnessed changes in several critical factorsstrengthening its economy. Withglobalisation becoming the key word of the 90s, it seems to have paved theway for Indias entry in worldmarkets. Economic reforms have been initiated to facilitate stabilisation andstructural -adjustmentsessential for the growth of the economy Organizational AssessmentsOrganizational Assessments are powerful tools for identifying an organizations strengths andweaknesses. They are the critical starting point for initiating any type of organizational change. Our
  13. 13. Organizational Assessment will sift through the "symptoms" and identify the actual issues that need tobe resolved in order to move your company forward.We begin by conducting one-on-one interviews and focus groups with members of the managementteam and a cross section of employees. Input from employees and managers representing a variety oflevels and departments in the organization will provide us with an in-depth understanding of thechallenges facing your organization. Additionally, the interviews will provide your employees with anopportunity to be involved in the development of strategic interventions and thereby increase theirinterest and "buy-in."Interview information is then compiled and analyzed to provide you with a written summary of theinformation obtained, customized recommendations and a proposed Action Plan. Our consultants canwork with you to set the Action Plan in motion and get your organization on its way to translatingyour vision into reality.Organizational Assessment
  14. 14. TES ScorecardThis assessment is used to benchmark organizations on the Equity Continuum© (EC). The scorecard consists of "the 8 questions that matter" as itrelates to evaluating fairness and equity in the workplace. Examples of typical users of the scorecard include diversity change agents, leadershipteams, and diversity councils and advisory committees.The purpose of the scorecard is to get the equity conversation started in the organization. As a result of completing the scorecard users are providedwith a report including: The groups average score on each question relative to the TWI norm An alignment index that highlights areas of disagreement and consensus The groups position on the Equity Continuum© Depending on the size of the group, we also provide EC scores broken out by gender, visible minority status, and level in the organizationGet the equity conversation started by discovering where your organization is positioned on the Equity Continuum©. You can complete acomplimentary scorecard at of the Business CaseThe Identification of the Business Case for Human Equity™ is aimed at executives and leaders. The purpose of the assessment is to gauge seniorleaderships opinion of the importance/relevance of diversity and human equity to various aspects of their business. It rates the perceived importance ofdiversity and human equity to the following business issues and outcomes: Marketing and Customer Service Recruitment & Retention Productivity Team Management Globalization Compliance with legislation and other standardsThis assessment is also designed to identify the links between established business priorities and diversity/equity from a leadership perspective.Contact TWI to find out how to complete this questionnaire online!The Diversity Quotient©TWIs Diversity Quotient© is our flagship employee survey and measures the extent to which the organization supports a work environment that is fairand equitable for all. The DQ measures employee engagement, as well as perceptions of fairness related to a range of business programs, policies,and procedures. The DQ also assesses the "diversity climate" of the organization by inquiring about employees comfort levels with members ofdifferent groups, attitudes towards diversity, the organizations location on the Equity Continuum©, and employee experiences with discrimination,harassment, and abuse of authority in the workplace. Finally, the Diversity Quotient© compares employee responses for each of TWIs standard (vs.client customized) questions against TWIs "normative database."Another important feature of this survey is that it allows clients to see results through a diversity lens. That is, results for each component measured inthe survey are "broken out" by a series of demographic and organizational categories. The Three Drivers of an Equitable Work Environment and their Associated Sub-Drivers
  15. 15. Diversity CensusThe Diversity Census is a condensed "workforce analysis" that provides organizations with information on minority group representation and otherpersonal and job-related demographics that define the workforce. The Census collects information about the following: Level of representation that exist within the organizations workforce as a whole and within different job levels, salary levels, etc. Under- representation of certain groups or "job ghettos" within the organization act as Oil Lights. Employees experiences with work/life balance in the organization.Questions are consistent with the National Census Surveys in order to allow comparisons with industry and regional norms compiled from the mostrecent census statistics.The Diversity Census is available in hard copy or online. Contact TWI to complete the Diversity Census today!TalkbackTWIs Talkback Survey is a unique assessment aimed at understanding the extent to which leaders and managers are operating in a way that isconsistent with a strength-based organization - one that leverages the unique strengths and talents of all employees. Employees are asked to complete a short survey evaluating their managers. Managers with the highest survey scores are asked to participate in a TWI facilitated in-house session designed to share best practice strategies with other managers in the organization.Contact TWI to find out how to arrange a Talkback session in your organizationTEA© can be found online at CompetenciesThe Diversity Competencies Survey is designed to assess attitudinal and behavioural competencies within an organizations workforce and is based onTWIs Competency Model. The model, shown below, holds that both attitudes and behaviours are important in creating an organizational climate that
  16. 16. respects and values differences within both the workplace (internal environment), and client base (external environment).This survey brings together our measures of attitudinal competencies and behavioural competencies and is used to determine the extent to which anorganizations workforce has the necessary competencies to work effectively in a diverse workplace and with a diverse client base. The reportidentifies: Levels of diversity competency among employees Specific developmental opportunities and training needs for employees Benchmarks that can be used to evaluate progress Strategic and tactical recommendations for enhancing levels of diversity competency in the organizationDiversificationWhat Does Diversification Mean?A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that aportfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment foundwithin the portfolio.Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investmentswill neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio arenot perfectly correlated.Investopedia explains DiversificationStudies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks will yield the most cost-effective level of risk reduction. Investing in more securities will still yield further diversification benefits, albeit at a drastically smaller rate.Further diversification benefits can be gained by investing in foreign securities because they tend be less closely correlated with domesticinvestments. For example, an economic downturn in the U.S. economy may not affect Japans economy in the same way; therefore, havingJapanese investments would allow an investor to have a small cushion of protection against losses due to an American economic downturn.
  17. 17. Most non-institutional investors have a limited investment budget, and may find it difficult to create an adequately diversified portfolio. Thisfact alone can explain why mutual funds have been increasing in popularity. Buying shares in a mutual fund can provide investors withan inexpensive source of diversification.Introduction To Investment Diversificationby James E. McWhinney (Contact Author | Biography)Email ArticlePrintFeedbackReprintsShareFiled Under: Alternative Investments, Bonds, Hedge Funds, Investing Basics, Options, RetirementDiversification is a familiar term to most investors. In the most general sense, it can be summed up with this phrase: "Don’t put all of youreggs in one basket." While that sentiment certainly captures the essence of the issue, it provides little guidance on the practical implicationsof the role diversification plays in an investors portfolio and offers no insight into how a diversified portfolio is actually created. In this article,well provide an overview of diversification and give you some insight into how you can make it work to your advantage.What Is Diversification?Taking a closer look at the concept of diversification, the idea is to create a portfolio that includes multiple investments in order to reduce risk.Consider, for example, an investment that consists of only the stock issued by a single company. If that companys stock suffers a seriousdownturn, your portfolio will sustain the full brunt of the decline. By splitting your investment between the stocks of two different companies,you reduce the potential risk to your portfolio. (For more insight, read Determining Risk And The Risk Pyramid.)Another way to reduce the risk in your portfolio is to include bonds and cash. Because cash is generally used as a short-term reserve, mostinvestors develop an asset allocation strategy for their portfolios based primarily on the use of stocks and bonds. It is never a bad idea to
  18. 18. keep a portion of your invested assets in cash, or short-term money-market securities. Cash can be used in case of an emergency, andshort-term money-market securities can be liquidated instantly in case an investment opportunity arises, or in the event your usual cashrequirements spike and you need to sell investments to make payments. Also keep in mind that asset allocation and diversification areclosely linked concepts; a diversified portfolio is created through the process of asset allocation. When creating a portfolio that contains bothstocks and bonds, aggressive investors may lean toward a mix of 80% stocks and 20% bonds while conservative investors may prefer a 20%stocks to 80% bonds mix.Regardless of whether you are aggressive or conservative, the use of asset allocation to reduce risk through the selection of a balance ofstocks and bonds for your portfolio is a more detailed description of how a diversified portfolio is created than the simplistic eggs in onebasket concept. With this in mind, you will notice that mutual fund portfolios composed of a mix that includes both stocks and bonds arereferred to as "balanced" portfolios. The specific balance of stocks and bonds in a given portfolio is designed to create a specific risk-rewardratio that offers the opportunity to achieve a certain rate of return on your investment in exchange for your willingness to accept a certainamount of risk. In general, the more risk you are willing to take, the greater the potential return on your investment. (To learn more, check outAchieving Optimal Asset Allocation and Five Things To Know About Asset Allocation.)What are My Options?If you are a person of limited means or you simply prefer uncomplicated investment scenarios, you could choose a single balanced mutualfund and invest all of your assets in the fund. For most investors, this strategy is far too simplistic. While a given mix of investments may beappropriate for a childs college education fund, that mix may not be a good match for long-term goals, such as retirement or estate planning.Likewise, investors with large sums of money often require strategies designed to address more complex needs, such as minimizing capitalgains taxes or generating reliable income streams. Furthermore, while investing in a single mutual fund provides diversification among thebasic asset classes of stocks, bonds and cash (funds often hold a small amount of cash from which to take their fees), the opportunities fordiversification go far beyond these basic categories. (For more detail, read Advantages Of Mutual Funds and Disadvantages Of MutualFunds.)With stocks, investors can choose a specific style, such as focusing on large caps, mid caps or small caps. In each of these areas are stockscategorized as growth or value. Additional choices include domestic stocks and foreign stocks. Foreign stocks also offer sub-categorizationsthat include both developed and emerging markets. Both foreign and domestic stocks are also available in specific sectors, such asbiotechnology and health care.In addition to the variety of equity investment choices, bonds also offer opportunities for diversification. Investors can choose long-term orshort-term issues. They can also select high-yield or municipal bonds. Once again, risk tolerance and personal investment requirements willlargely dictate investment selection.While stocks and bonds represent the traditional tools for portfolio construction, a host of alternative investments provide the opportunity forfurther diversification. Real estate investment trusts, hedge funds, art and other investments provide the opportunity to invest in vehicles thatdo not necessarily move in tandem with the traditional financial markets. These investments offer yet another method of portfoliodiversification. (To read more, see Diversification Beyond Equities and Asset Allocation Within Fixed Income.)ConcernsWith so many investments to choose from, it may seem that diversification is an easy objective to achieve, but that sentiment is only partiallytrue. The need to make wise choices still applies to a diversified portfolio. Furthermore, it is possible to over-diversify your portfolio, which willnegatively impact your returns. Many financial experts agree that 20 stocks is the optimal number for a diversified equity portfolio. With that inmind, buying 50 individual stocks or four large-cap mutual funds may do more harm than good. Having too many investments in yourportfolio doesnt allow any one of them to have much impact, and an over-diversified portfolio (sometimes called "diworsification") oftenbegins to behave like an index fund. In the case of holding a few large-cap mutual funds, multiple funds bring the additional risks ofoverlapping holdings as well as a variety of expenses, such as low balance fees and varying expense ratios, which could have been avoidedthrough more careful fund selection. (For more details, see The Dangers Of Over-Diversification.)ToolsInvestors have many tools to choose from when creating a portfolio. For those lacking time, money or interest in investing, mutual fundsprovide a convenient option; there is a fund for nearly every taste, style and asset allocation strategy. For those with an interest in individualsecurities, there are stocks and bonds to meet every need. Sometimes investors may even add rare coins, art, real estate and other off-the-beaten-track investments to their portfolios.ConclusionRegardless of your means or method, keep in mind that there is no generic diversification model that will meet the needs of every investor.Your personal time horizon, risk tolerance, investment goals, financial means and level of investment experience will play a large role indictating your investment mix. Start by figuring out the mix of stocks, bonds and cash that will be required to meet your needs. From there,determine exactly which investments to use in completing the mix, substituting traditional assets for alternatives as needed. If you are toooverwhelmed by the choices or simply prefer to delegate, there are plenty of financial services professionals available to assist you. (SeeChoosing An Advisor: Wall Street Vs Main Street and Shopping For A Financial Advisor.)DIVERSIFICATION1. Introduction
  19. 19. Diversification refers to a strategic direction that takes companies into other products and/or markets bymeans of either internal or external development. There are basically two broad forms of diversification aslisted below:Related diversification, occurs when a company develops beyond its present productand market whilst remaining in the same area. For example a newspaper company expanding byacquiring a TV station remains with media sector. It will use its present strengths by using its expertise todevelop new interests in same area.This form of diversification can further be broken down:Backward diversification, when activities related to the inputs in the business are developed. For example anewspaper company acquiring a printing or publishing company.Forward diversification, refers to development into activities which are concerned with a company’soutput. For example a newspaper company acquiring a distribution outlet.Horizontal diversification, occurs when a company develops interests complementary to its currentactivities. For a company may integrate its activities to include all aspect of the value chain; design,manufacture, market and distribute.Unrelated diversification is used to describe a company moving its present interests intounrelated markets or products. For example a company whose core business is mediaservices may diversify into provision of financial services.12. Alternative methods for carrying out diversificationInternal developmentExternal, through acquisition or strategic alliancesManagers should bear in mind that the acquisition alternative should be seen as both a risk and anopportunity, therefore a clear promotion and management development strategy must be in place at thetime of the take over.In order to test the effectiveness of acquisition as an alternative strategy the followingfive simple rules may be used as suggested by Drucker:The acquiring company must consider what value it can add to the acquiredbusiness. This may include management, technology and distribution.A common core of unity must exit between the businesses in terms of markets,products and technology etcThe acquiring company’s management must understand the business beingacquiredThe acquiring company must put a quality management team quickly into the
  20. 20. acquired businessThe acquiring business must retain the best management from both businesses.3. Reasons for diversificationEfficiency gains, where an organisation has underutilized resources and competences that it cannoteffectively close or sell then it makes business sense to use the resources and competences bydiversifying into a new activity.Increasing market power, an organisation can afford to cross-subsidize one business from the surplusesearned by another in a way that competitors may not be able to.Stretching corporate parenting capabilities into markets and products.2Responding to market declineSpreading risk4.Advantages and disadvantages of diversification in relation to the case studyAdvantagesControl of inputs, leading to continuity and improved quality. For instance 1984 and 1985 NewsCorpacquired Twentieth Century Fox and six television stations of the Metromedia Broadcasting Group in theUS. These acquisition provided the company with a wider platform for consolidation of its related activitiesthrough access to studios for making films and television Programmes.Control markets by guaranteeing sales and distribution. This can arise through a combination of linkagesin the value chain. For example where production and distribution channels are combined, or where acompany uses its well-established brand names or corporate identity to gain benefits in new marketsTake advantage of existing expertise, knowledge and resources in the company when expanding intonew activities. This may result in transfer of skills, such as research and development knowledge andsharing of resources.Provide better risk control through no longer being reliant on a single marketProvide movement away from declining activitiesSpread risk by avoiding having all eggs in one basketDisadvantagesMay result in slowing growth in its core business3