Corporate Strategy

Unit 1
1. Definition of Business

A business is defined as an organization or enterprising entity engaged in commercial, industrial, or

professional activities. Businesses can be for-profit entities or non-profit organizations that operate
to fulfill a charitable mission or further a social cause.

The term business also refers to the organized efforts and activities of individuals to produce and sell
goods and services for profit. Businesses range in scale from a sole proprietorship to an international
corporation. Several lines of theory are engaged with understanding business administration
including organizational behaviour, organization theory, and strategic management.

2. Characteristics of Business

The main characteristics of a business are:

i. Economic activity:

Business is an economic activity of production and distribution of goods and services. It provides
employment opportunities in different sectors like banking, insurance, transport, industries, trade
etc. it is an economic activity corned with creation of utilities for the satisfaction of human wants.

It provides a source of income to the society. Business results into generation of employment
opportunities thereby leading to growth of the economy. It brings about industrial and economic
development of the country.

ii. Buying and Selling:

The basic activity of any business is trading. The business involves buying of raw material, plants and
machinery, stationary, property etc. On the other hand, it sells the finished products to the
consumers, wholesaler, retailer etc. Business makes available various goods and services to the
different sections of the society.

iii. Continuous process:

Business is not a single time activity. It is a continuous process of production and distribution of
goods and services. A single transaction of trade cannot be termed as a business. A business should
be conducted regularly in order to grow and gain regular returns.

iv. Profit Motive:

Profit is an indicator of success and failure of business. It is the difference between income and
expenses of the business. The primary goal of a business is usually to obtain the highest possible
level of profit through the production and sale of goods and services. It is a return on investment.
Profit acts as a driving force behind all business activities.

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 v. Risk and Uncertainties:

Risk is defined as the effect of uncertainty arising on the objectives of the business. Risk is associated
with every business. Business is exposed to two types of risk, Insurable and Non-insurable. Insurable
risk is predictable.

Business is a socio-economic activity. Both business and society are interdependent. Modern
business runs in the area of social responsibility.

vi. Government control:

Business organisations are subject to government control. They have to follow certain rules and
regulations enacted by the government. Government ensures that the business is conducted for
social good by keeping effective supervision and control by enacting and amending laws and rules
from time to time.

vii. Optimum utilisation of resources:

Business facilitates optimum utilisation of countries material and non-material resources and
achieves economic progress. The scarce resources are brought to its fullest use for concentrating
economic wealth and satisfying the needs and wants of the consumers.

3. Strategic Business Unit

A strategic business unit, popularly known as SBU, is a fully-functional unit of a business that has its
own vision and direction. Typically, a strategic business unit operates as a separate unit, but it is also
an important part of the company. It reports to the headquarters about its operational status.

A strategic business unit or SBU operates as an independent entity, but it has to report directly to
the headquarters of the organisation about the status of its operation. It operates independently
and is focused on a target market. It is big enough to have its own support functions such as HR,
training departments etc.

4. Definition of Strategy

“Strategy is the unified, comprehensive and integrated plan that relates the strategic advantage
of the firm to the challenges of the environment and is designed to ensure that basic objectives
of the enterprise are achieved through proper implementation of the process”. --- Glueck

 Strategy is an unified, comprehensive and integrated plan.

 Strategic advantage related to the challenges of the environment
 Proper implementation ensuring achievement of basic objectives.

“Strategy is the determination of basic long term goals and objectives of an enterprise and the
adoption of the courses of action and the allocation of resources necessary for carrying out
these goals”. --- Chandler

 Strategy is the determination of basic long term goals and objectives.

 Strategy is adoption of the courses of action
 Strategy is allocation of resources

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“Strategy is the creation of a unique and valued position involving a different set of activities. The
company that is strategically positioned performs different activities from rivals or performs similar
activities in different ways”. --- Michael Porter

5. Strategy and Tactics

The word Strategy is derived from Greek ‘Strategos’, which means generalship. While strategy and
tactics originated as military terminology, their use has spread to planning in many areas of life.
Strategy is overarching plan or set of goals, Tactics are the specific actions or steps you undertake to
accomplish your strategy.

The word “tactic” comes from the Ancient Greek “taktikos,” which loosely translates to “the art of
ordering or arranging.” We now use the term to denote actions toward a goal. Tactics often center
around the efficient use of available resources, whether money, people, time, ammunition, or
materials. Tactics also tend to be shorter-term and more specific than strategies.

6. Scope of Strategic Management

Strategic Management is well-organized approach that is based on effective principles and process
of management to recognize the corporate objective or mission of business. It establishes suitable
target to assure the objective, identify existing opportunities and restraints in the environment, and
develop a logical realistic process to accomplish company objective. Strategic management is both
the process and beliefs to determine and control the organizational affiliation in its vibrant
environment. It is a process to describe approaches and procedures to help management become
accustomed to the current business environment through the use of objectives and strategies. As a
philosophy, it changes the viewpoint of manager to deal with competitors, customers, markets and
even the organization itself. Its purpose is to motivate management's wakefulness of the strategic
implication of environmental events and internal decision.

7. Importance of Strategic Management

i. Increase in the Efficiency of the Employees: The officers and experienced employees of
all the three levels of re-engagement are included in strategic management process. The
necessary inter-process in being done with them and for the success of strategy
necessary training is also given to them. By this there is a notable increase in efficiency
of employees and they get inspiration to work more.
ii. Increase in Profitability: The profitability of a unit depends upon-the maximum use of
limited resources. Through strategically management process, the managers cannot only
make the maximum use of financial resources but also they can use maximum man
power to increase the overall productivity and profitability of the unit.
iii. Reduction in Fixed and Flexible Expense: The capital invested in the fixed assets is a
fixed capital. Instead of purchasing the fixed assets, the managers may buy such assets
on rent to decrease the fixed capital investment. In the same way, the flexible expenses
can also be reduced through collection arrangement. Making changes in packing, of

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 making changes in full, by acceptance, the strategy of machinery resources in
management etc.
iv. Motivation to Group Activity: By taking strategic decisions through the group,
integration between group members increases on accepting various optional strategies
which result in to co-operation and unity. Not only that, but the managers can also get
the advantage of special strength of group members.
v. Reduction in cost of capital: It is a fact that the unit which is successful in raising the
capital of the lowest possible cost is almost eligible to face the competition right from
the beginning. After getting the estimate of capital requirement the managers select the
sources of capital from where they can acquire the capital in a strategically manner. The
strategic management has been proved to be very useful to raise the estimated capital
at lowest possible rate, simple conditions for mortgage, return of borrowed capital and
conversion of borrowed capital into owner’s capital.
vi. Acceptance of Organizational Changes: Normally the employees do not accept the
changes made in the organization, because due to that the change occurs in their roles
also. As a result the necessity to giving training of the new work to the employees arises.
Not only that but because of such changes many departments also have to be closed. In
these circumstances the problem of the safety of job arises. In strategic management
process the capability of employees is also considered. Not only that, but for its
development, efforts are made through training programmed so no question arises for
the employees for not accepting the changes.
vii. Increase in rate of return on investment: Due to the strategic management there is a
noble increase in the rate of return on investment made in the project. On the basis of
the information received through analysis of internal and external environment the
managers can increase the rate of return on investment by making a maximum use of
resources.
viii. Prevention of Overlapping of Work: Due to the interaction with employees and officers
working at all the levels of the organization the question does not arise at all for the
distribution of one work to more than one employee or event he overlapping work is
also not possible. When the same activity is done by more than one employee. At that
time there is wastage of time and materials. The problem of co-ordination also arises.
With the help of strategic process, the managers can prevent the overlapping of work.
ix. Prevention of Organizational Gap: Out of the departmental activities organization if any
activity is not allotted to any employee, that activity is known as organizational gap. If
the allotment of any work is left out by mistake, then none of the employees can be held
responsible for it. In strategic management process, because of the interacting process
being done with each employee, all the employees are given equal works and so there
does not arise a questions of organizational gaps.
x. Increase in trading on equity: Trading on equity depends upon many factors. Among on
this, by making a maximum use of borrowed capital in a creative manner through
strategic management process, the profitability of the unit can be increased and the
equity share holders can be paid maximum dividend. If an appropriate strategically
arrangement is not made for the use of financial resources, then its profitable use will
not be successful and the interest on the borrowed capital will also become
burdensome.

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8. Competitive Advantage

Competitive advantages are conditions that allow a company or country to produce a good or
service of equal value at a lower price or in a more desirable fashion. These conditions allow the
productive entity to generate more sales or superior margins compared to its market rivals.
Competitive advantages are attributed to a variety of factors including cost structure, branding, the
quality of product offerings, the distribution network, intellectual property, and customer service.

9. Strategic Management Process

Vision

The Vision Statement is about what business you want to do. The category of intentions that are
broad, all inclusive and forward thinking.

Mission

Mission is about how you can achieve the Vision. It outlines the strategies that the CEO or
Entrepreneur wishes to undertake to ensure that the Vision is accomplished.

Goals and Objectives

Goals denotes what an organizations hopes to accomplish in a future period of time.

Objectives are the ends that states specifically how the goals shall be achieved.

Procedures

A Procedure can be defined as a series of functions and steps performed to accomplish a specific
task or undertaking. Strategies, Programs and Policies need to be supplemented with detailed
specifications on how to operate. A procedure is a precise means of making a step by step guide to
action that operates within a policy framework.

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10. Synergy

Synergy is the concept that the combined value and performance of two companies will be greater
than the sum of the separate individual parts. Synergy is a term that is most commonly used in the
context of mergers and acquisitions (M&A). Synergy, or the potential financial benefit achieved
through the combining of companies, is often a driving force behind a merger.

A company can also achieve synergy by setting up cross-disciplinary work groups, in which each
member of the team brings with him or her a unique skill set or experience. For example, a product
development team may consist of marketers, analysts, and R&D experts. This team formation could
result in increased capacity and workflow and, ultimately, a better product than all the team
members could produce if they work separately.

11. Components of Strategic Management Process

The strategic management process means defining the organization’s strategy. It is also defined as
the process by which managers make a choice of a set of strategies for the organization that will
enable it to achieve better performance.

Strategic management is a continuous process that appraises the business and industries in which
the organization is involved; appraises it’s competitors; and fixes goals to meet all the present and
future competitor’s and then reassesses each strategy.

Strategic management process has following four steps:

Environmental Scanning

Environmental scanning refers to a process of collecting, scrutinizing and providing information for
strategic purposes. It helps in analyzing the internal and external factors influencing an organization.
After executing the environmental analysis process, management should evaluate it on a continuous
basis and strive to improve it.

Strategy Formulation

Strategy formulation is the process of deciding best course of action for accomplishing
organizational objectives and hence achieving organizational purpose. After conducting environment
scanning, managers formulate corporate, business and functional strategies.

Strategy Implementation

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Strategy implementation implies making the strategy work as intended or putting the organization’s
chosen strategy into action. Strategy implementation includes designing the organization’s structure,
distributing resources, developing decision making process, and managing human resources.

Strategy Evaluation

Strategy evaluation is the final step of strategy management process. The key strategy evaluation
activities are: appraising internal and external factors that are the root of present strategies,
measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the
organizational strategy as well as it’s implementation meets the organizational objectives.

These components are steps that are carried, in chronological order, when creating a new strategic
management plan. Present businesses that have already created a strategic management plan will
revert to these steps as per the situation’s requirement, so as to make essential changes.

12. Three Levels of Strategic Planning

Strategy may operate at different levels of an organization -corporate level, business level, and
functional level. The strategy changes based on the levels of strategy.

Corporate Level Strategy

Corporate level strategy occupies the highest level of strategic decision-making and covers actions
dealing with the objective of the firm, acquisition and allocation of resources and coordination of
strategies of various SBUs for optimal performance. Top management of the organization makes
such decisions. The nature of strategic decisions tends to be value-oriented, conceptual and less
concrete than decisions at the business or functional level.

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Business-Level Strategy

Business-level strategy is – applicable in those organizations, which have different businesses-and

each business is treated as strategic business unit (SBU). The fundamental concept in SBU is to
identify the discrete independent product/market segments served by an organization. Since each
product/market segment has a distinct environment, a SBU is created for each such segment. This
occurs at managerial level.

Functional-Level Strategy

Functional strategy, as is suggested by the title, relates to a single functional operation and the
activities involved therein. Decisions at this level within the organization are often described as
tactical. Such decisions are guided and constrained by some overall strategic considerations.
Functional strategy deals with relatively restricted plan providing objectives for specific function,
allocation of resources among different operations within that functional area and coordination
between them for optimal contribution to the achievement of the SBU and corporate-level
objectives.

13. Role of Board of Directors in Strategic Management.

A board of directors (BOD) is a group of individuals elected to represent shareholders. A board’s

mandate is to establish policies for corporate management and oversight, making decisions on major
company issues. Every public company must have a board of directors. Some private and nonprofit
organizations also have a board of directors.

The roles of the board of directors include :-

i. Establish vision, mission and values

ii. Determine and review company goals.
iii. Determine company policies
iv. Set strategy and structure
v. Review and evaluate present and future opportunities, threats and risks in the external
environment and current and future strengths, weaknesses and risks relating to the
company.
vi. Determine strategic options, select those to be pursued, and decide the means to
implement and support them.
vii. Determine the business strategies and plans that underpin the corporate strategy.
viii. Ensure that the company's organisational structure and capability are appropriate for
implementing the chosen strategies.

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14. SWOT Analysis

SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate
a company's competitive position and to develop strategic planning. SWOT analysis assesses internal
and external factors, as well as current and future potential.

A SWOT analysis is designed to facilitate a realistic, fact-based, data-driven look at the strengths and
weaknesses of an organization, its initiatives, or an industry. The Strengths and Weaknesses are
internal to the company while the Opportunities and Threats are External.

If the Strengths and Opportunities are greater than Weaknesses and Threats, then the decision
should be implemented. If the Strengths and Opportunities are less than Weaknesses and Threats,
then the decision should not be implemented.

15. Porters Five Force Model

Five Forces Analysis assumes that there are five important forces that determine competitive power
in a business situation. These are:

Supplier Power:

Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of
suppliers of each key input, the uniqueness of their product or service, their strength and control
over you, the cost of switching from one to another, and so on. The fewer the supplier choices you
have, and the more you need suppliers' help, the more powerful your suppliers are.

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Buyer Power:

Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the
number of buyers, the importance of each individual buyer to your business, the cost to them of
switching from your products and services to those of someone else, and so on. If you deal with few,
powerful buyers, then they are often able to dictate terms to you.

Competitive Rivalry:

What is important here is the number and capability of your competitors. If you have many
competitors, and they offer equally attractive products and services, then you'll most likely have
little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good
deal from you. On the other hand, if no-one else can do what you do, then you can often have
tremendous strength.

Threat of Substitution:

This is affected by the ability of your customers to find a different way of doing what you do – for
example, if you supply a unique software product that automates an important process, people may
substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution
is viable, then this weakens your power.

Threat of New Entry:

Power is also affected by the ability of people to enter your market. If it costs little in time or money
to enter your market and compete effectively, if there are few economies of scale in place, or if you
have little protection for your key technologies, then new competitors can quickly enter your market
and weaken your position. If you have strong and durable barriers to entry, then you can preserve a
favourable position and take fair advantage of it.

16. Value Chain Analysis

Value chain is a sequence of business activities by which, in the perspective of the end-user, value is
added to (or costs incurred by) the products or services produced by an entity.

Value chain analysis is based on the principle that organizations exist to create value for their
customers. In the analysis, the organization’s activities are divided into separate sets of activities
that add value.

Value is measured in terms of returns generated in a business.

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The organization can more effectively evaluate its internal capabilities by identifying and examining
each of these activities. Each value-adding activity is considered to be a potential source of
competitive advantage.

The three steps for conducting a value chain analysis are:

i. Separate the organization’s operations into primary and support activities

ii. Allocate cost to each activity
iii. Identify the activities critical to customer satisfaction and market success

Value chain analysis can help organizations to gain better understanding of key capabilities and
identify areas for improvement. It can help them to understand how competitors create value; and
help organizations to decide whether to extend or outsource particular activities.

17. Balance Scorecard

A balanced scorecard is a performance metric used in strategic management to identify and improve
various internal functions of a business and their resulting external outcomes. It is used to measure
and provide feedback to organizations. Data collection is crucial to providing quantitative results, as
the information gathered is interpreted by managers and executives, and used to make better
decisions for the organization.

It was originated by Dr. Robert Kaplan (Harvard Business School) and David Norton as a performance
measurement framework that added strategic non-financial performance measures to traditional
financial metrics to give managers and executives a more 'balanced' view of organizational
performance.

The balanced scorecard is used to reinforce good behaviours in an organization by isolating four
separate areas that need to be analyzed. These four areas, also called legs, involve learning and

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growth, business processes, customers, and finance. The balanced scorecard is used to attain
objectives, measurements, initiatives and goals that result from these four primary functions of a
business.

Information is collected and analyzed from four aspects of a business. First, learning and growth are
analyzed through the investigation of training and knowledge resources. This first leg handles how
well information is captured and how effectively employees utilize the information to convert it to
a competitive advantage over the industry. Second, business processes are evaluated by
investigating how well products are manufactured. Operational management is analyzed to track
any gaps, delays, bottlenecks, shortages or waste.

Third, customer perspectives are collected to gauge customer satisfaction with quality, price and
availability of products or services. Customers provide feedback regarding if their needs are being
met with current products. Finally, financial data such as sales, expenditures and income are used to
understand financial performance.

18. Risk Management

Risk management is the identification, assessment, and prioritization of risks or uncertainties

followed up by minimizing, monitoring and controlling the impact of risk realities or enhancing the
opportunity potential by applying coordinated and economical resources.

Risk management is essential in any business. It lays foresight for returns on investments and
projects all potential backlash a company could face by starting a new (or even routine) endeavour.

There are five steps of Risk Management

i. Identify the risk

Risks include any events that cause problems or benefits. Risk identification begins with the sources
of internal problems and benefits or those of competitors. Risks can be internal or external, so
software can be used to identify the wide range of risk possibilities.

ii. Analyze the risk

Once you have identified risks, you can thoroughly analyze the potential effects that each will have
on consumer behaviour, your company and other current endeavours.

iii. Evaluate the risk

Now you can assign a ranking quality to the likelihood of each risk’s outcomes. This will help paint a
picture around how severely a risk threatens a project or new product. You can also determine the
magnitude that each risk potentially carries to destroy or support a new tactic. The magnitude is a
combination of the risk likelihood and consequence.

iv. Treat the risk

Since you have a grip on all possible risks and their severity, you can begin to treat the worst risks
first. You’ll first want to look at the ways you can reduce the probability of a negative risk and then

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how to increase the probability of a positive opportunity. At this stage of risk assessment,
preventative and contingency should be prepared so that there are no surprises as your move
forward with action plans.

v. Monitor the risk

By now, you know your risks, their likelihood, what will happen if they occur and how to go about
defusing any disaster that arises. What next? Monitor the risks by tracking involved variables and
proposed possible threats to chain reactions. As your tracking system identifies changes, calmly treat
the rising problem to avoid widespread ripple effects and the triggering of a big risk.

This brings us to the next important wave of risk management: treating the risk. There are several
ways to treat risk, and they all depend on what type of risks are being treated and how serious those
risk’s repercussions or opportunities are. Let’s take a look at the techniques.

19. Benchmarking and Performance Evaluation

Benchmarking is a process of measuring the performance of a company’s products, services, or

processes against those of another business considered to be the best in the industry, aka “best in
class.” The point of benchmarking is to identify internal opportunities for improvement. By studying
companies with superior performance, breaking down what makes such superior performance
possible, and then comparing those processes to how your business operates, you can implement
changes that will yield significant improvements.

That might mean tweaking a product’s features to more closely match a competitor’s offering, or
changing the scope of services you offer, or installing a new customer relationship management
(CRM) system to enable more personalized communications with customers.

Benchmarking is a simple, but detailed, five-step process:

i. Choose a product, service, or internal department to benchmark

ii. Determine which best-in-class companies you should benchmark against – which
organizations you’ll compare your business to
iii. Gather information on their internal performance, or metrics
iv. Compare the data from both organizations to identify gaps in your company’s
performance
v. Adopt the processes and policies in place within the best-in-class performers

Benchmarking will point out what changes will make the organization more effective and efficient.

20. Key Factor Rating

This method takes into account the key factors affecting organizational functioning. Information
regarding the key factors is generally collected after a series of meetings, discussions and surveys.
Answers in each functional area are being closely examined with a view to rate the key factors. The
relative impact of each factor (favourable or unfavourable) on a particular result is also examined
using mathematical models.

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Hofer and Schendel have developed this technique to make a comparative analysis of a firm’s own
resources deployment position and focus of efforts with those of competitors. First the technique
requires the preparation of a matrix of functional areas with common features. For e.g. focus of
financial outlay, physical resources, organizational systems and technological capability. Second a
matrix is prepared showing deployment of resources and focus of effort over a period of time. This
profile shows how key functional areas stand in relation to each other and as compared to the
competitors with regard to deployment of resources and the focus of efforts in each functional area.
The matrix can be shown thus:

The matrix gives data pertaining to resources deployment in various functional areas over a period
of time. It also shows how the focus of efforts has changed within a time frame. Strategies can draw
their own conclusions based on past experience, current trends and future expectations. They can
find out whether the firm is able to strengthen the areas of advantage or dissipate its energies over a
period of time. While drawing comparisons it is advisable to compare firms, which are in the same
phrase of product life cycle.

Mergers and acquisitions

Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two
terms, Mergers is the combination of two companies to form one, while Acquisitions is one company
taken over by the other. M&A is one of the major aspects of corporate finance world. The reasoning
behind M&A generally given is that two separate companies together create more value compared
to being on an individual stand. With the objective of wealth maximization, companies keep
evaluating different opportunities through the route of merger or acquisition.

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Mergers & Acquisitions can take place:

• by purchasing assets

• by purchasing common shares

• by exchange of shares for assets

• by exchanging shares for shares

Types of Mergers and Acquisitions:

Merger or amalgamation may take two forms: merger through absorption or merger through
consolidation. Mergers can also be classified into three types from an economic perspective
depending on the business combinations, whether in the same industry or not, into horizontal ( two
firms are in the same industry), vertical (at different production stages or value chain) and
conglomerate (unrelated industries). From a legal perspective, there are different types of mergers
like short form merger, statutory merger, subsidiary merger and merger of equals.

Reasons for Mergers and Acquisitions:

• Financial synergy for lower cost of capital

• Improving company’s performance and accelerate growth

• Economies of scale

• Diversification for higher growth products or markets

• To increase market share and positioning giving broader market access

• Strategic realignment and technological change

• Tax considerations

• Under valued target

• Diversification of risk

Stages involved in any M&A:

Phase 1: Pre-acquisition review: this would include self assessment of the acquiring company with
regards to the need for M&A, ascertain the valuation (undervalued is the key) and chalk out the
growth plan through the target.

Phase 2: Search and screen targets: This would include searching for the possible apt takeover
candidates. This process is mainly to scan for a good strategic fit for the acquiring company.

Phase 3: Investigate and valuation of the target: Once the appropriate company is shortlisted
through primary screening, detailed analysis of the target company has to be done. This is also
referred to as due diligence.

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Phase 4: Acquire the target through negotiations: Once the target company is selected, the next step
is to start negotiations to come to consensus for a negotiated merger or a bear hug. This brings both
the companies to agree mutually to the deal for the long term working of the M&A.

Phase 5:Post merger integration: If all the above steps fall in place, there is a formal announcement
of the agreement of merger by both the participating companies.

Reasons for the failure of M&A – Analyzed during the stages of M&A:
Poor strategic fit: Wide difference in objectives and strategies of the company

Poorly managed Integration: Integration is often poorly managed without planning and design. This
leads to failure of implementation

Incomplete due diligence: Inadequate due diligence can lead to failure of M&A as it is the crux of the
entire strategy

Overly optimistic: Too optimistic projections about the target company leads to bad decisions and
failure of the M&A

GEOGRAPHICAL DIVERSIFICATION

Geographical diversification is the practice of diversifying an investment portfolio across different

geographic regions in order to reduce the overall risk and improve returns.

This method can be used by both private investors and companies to limit and manage risk. Firms
are able to lower their risk exposure to political and economic changes and "forces majeures" by
locating particular departments and/or resources in different parts of the world. If one of the
company’s assets is located in a region more vulnerable to change (tsunami, earthquake, revolution,
riots) the parts located in other areas may compensate and provide balance.

Since the cycles that drive business and investment are experienced at different times in different
countries, foreign markets seldom move in perfect tandem with each other. Losses in one market
may be offset by gains in another. Geographical diversification significantly reduces the overall level
of volatility and exposure to external factors. What does this mean for an investor? The more
diversified your assets, the safer your money.

Globalization

Globalization is the word used to describe the growing interdependence of the world’s economies,
cultures, and populations, brought about by cross-border trade in goods and services, technology,
and flows of investment, people, and information. Countries have built economic partnerships to
facilitate these movements over many centuries. But the term gained popularity after the Cold War
in the early 1990s, as these cooperative arrangements shaped modern everyday life. This guide uses
the term more narrowly to refer to international trade and some of the investment flows among
advanced economies, mostly focusing on the United States.

The wide-ranging effects of globalization are complex and politically charged. As with major
technological advances, globalization benefits society as a whole, while harming certain groups.
Understanding the relative costs and benefits can pave the way for alleviating problems while
sustaining the wider payoffs.

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