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Diversify Or Not To Diversify Essay

1664 words - 7 pages

Diversification is a company strategy where a company’s goal is to increase profitability through increased sales volume from new products and new markets. It allows a company to venture out into new lines of business that are different from present operations. Companies choose to diversify for a host of different reasons. A major reason companies make the decision to diversify is to achieve synergy, making it possible for two or more parts of an organization to achieve greater total effectiveness or profitability than what would have been possible for a single entity. (Investments, 2010)
There are advantages and disadvantages to company diversification. Diversification can help the ...view middle of the document...

These two companies believed that merging opposite ends of a market’s spectrum – personal cell phones and home service from Sprint, and business/infrastructure/transportation market from Nextel – would create one big happy communication family. (DiMaggio, 2009) The two combined to become the third largest telecommunications provider, behind AT&T and Verizon. Aside from stiff competition from AT&T, Verizon and Apple’s iPhone, the companies faced many internal controls issues. For example, Sprint was bureaucratic; Nextel was more entrepreneurial. Nextel was attuned to customer concerns while Sprint had a horrendous reputation in customer service. Shortly after its mega-merger with Nextel, Sprint began losing subscribers and tumbling in customer service rankings. Nextel employees often had to seek approval from Sprint's higher-ups in implementing corrective actions, and the lack of trust and rapport meant many such measures were not approved or executed properly. The two companies even maintained separate headquarters, making coordination more difficult between executives at both camps. Soon after the merger, multitudes of Nextel executives and mid-level managers left the company, citing cultural differences and incompatibility. (Dumon, 2008) Instead of synergy, you had dissension among the two companies. With the decline of cash from operations and with high capital-expenditure requirements, the company undertook cost-cutting measures and laid off employees. In 2008, the company wrote off an astonishing $30 billion in one-time charges due to impairment to goodwill, and its stock was given a junk status rating. With a $35 billion price tag, the merger clearly did not pay off. (Dumon, 2008) According to a ranking by Bloomberg, Sprint's 2005 merger with Nextel is one of the worst of the recent M&A boom. (Goldstein, 2010)
During the acquisition process, it looks as if Spint wanted to merge the two networks from a sales standpoint but from a customer service standpoint, they wanted to keep things separate. For example, Sprint wanted to increase sales under the Sprint name, and at the same time, they had separate billings for Nextel and Sprint, separate service agreements. This became very confusing and frustrating and therefore, customers began cancelling their contracts.
I believe that the merger between Sprint and Nextel failed for a variety of reasons. First, Sprint and Nextel were too huge companies who were basically able to stand alone marketing and selling their own products. They each had their own target audiences and while they were both in the telecommunications area, they were essentially worlds apart. Nextel was simply too big and too different for a successful combination with Sprint. It looks as though this diversification strategy was not properly thought out and all aspects of the organizations’ differences were not fully explored. Had this been done, I believe that this could have been a successful merger between two well-known...

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