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Understanding Business Strategy


Part 3: Strategy Chapter 6: Multiproduct Strategies * An action plan the firm uses to compete in different product markets More diversified = Less Risk (sometimes ... – PowerPoint PPT presentation

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Title: Understanding Business Strategy

Understanding Business Strategy
  • Part 3 Strategy
  • Chapter 6 Multiproduct Strategies

Risks of diversification
Multiproduct Strategies
  • An action plan the firm uses to compete in
    different product markets
  • More diversified Less Risk
  • (sometimes)
  • Multiproduct strategies result in performance
    improvements when their use allows firms to
    create operational relatedness, corporate
    relatedness, or financial economies

Multiproduct Strategies
  • Firms diversity in at least two ways
  • Product mix
  • E.g., Hewlett Packard
  • Printers, Images et al
  • PCs et al
  • Business Solutions (e.g., servers) et al
  • Product location (Chapter 8)

Multiproduct Strategies
  • What products or services will the firm produce
    and sell?
  • How will the firm manage the different units it
    creates to produce and sell its products and

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Levels of Diversification
  • Five levels
  • Low levels of diversification
  • Single businesses
  • Dominant businesses
  • Moderate to High levels of diversification
  • Related constrained
  • Related linked
  • Very High levels of diversification
  • Unrelated

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Single Business Multiproduct Strategy
  • Lowest level- non-diversification, e.g., Jet Blue
    where 95 of business is passenger travel
  • A firm pursuing low levels of diversification
    uses the single or a dominant business
    multiproduct strategy
  • The firm generates at least 95 percent of its
    sales revenue from a single business
  • A single business is one in which the firm makes
    and sells a single product or service

Dominant Business Multiproduct Strategy
  • A firm using the dominant business multiproduct
    strategy generates between 70 and 95 percent of
    its sales revenue from a single product group
  • UPS- U.S. Packaging
  • Achieving additional successes in different
    product markets may cause a firm to become more
  • Changing the multiproduct strategy a firm is
    using signals a need to change the
    organizational structure in place

Moderate to High Levels of Diversification-
related constrained
  • Related Diversification
  • Firms using a related diversification
    multiproduct strategy try to create economies of
    scope (cost reductions with shared business
  • With the related constrained multiproduct
    strategy, the firms businesses are related to
    each other
  • In the related linked diversification strategy,
    only limited links or relationships exist between
    the firms businesses
  • Starbucks?

Moderate to High Levels of Diversification-
related linked
  • Resources and activities may be shared between
    some of the businesses that are a part of a firm
    using the related linked strategy
  • Transferring corporate-level core competencies
  • An ability to price the firms products and
    services effectively is an example of a
    corporate-level core competency that can create
    economies of scope when transferred from one of
    the firms businesses to its other businesses
  • Boeing?
  • Space, Commercial, Military, Services

Moderate to High Levels of Diversification
  • Operational relatedness is achieved when the
    firms businesses successfully share resources
    and activities to produce and sell their
    products- related constrained strategy
  • Corporate relatedness is achieved when
    corporate-level core competencies are
    successfully transferred into some of the firms
    businesses- Related linked strategy

Operational Relatedness Related Constrained
  • Economies of scope are created through
    operational relatedness when the firm
    successfully shares primarily tangible resources
    (such as plant and equipment) and/or when a
    primary activity (such as inventory delivery
    systems) or a support activity (such as
    purchasing procedures) is successfully used in
    more than one of its businesses
  • Example PG

Corporate Relatedness Related Linked
  • Economies of scope are generated through
    corporate relatedness when the firm successfully
    transfers corporate-level core competencies into
    its different businesses
  • Example SBUs and General Electric

Unrelated Diversification
  • Unrelated Diversification
  • A firm that does not try to transfer resources
    and activities between its businesses or core
    competencies into its businesses
  • Commonly called conglomerates
  • Used in developed and emerging markets
  • Yamaha?
  • Pianos, Guitars, Saxophones
  • Software
  • Toys
  • Motorcycles, Snowmobiles, ATVs, Jet Skis
  • TVs, DVDs, Computer accessories

Unrelated Diversification
  • The unrelated diversification multiproduct
    strategy do not emphasize operational relatedness
    or corporate relatedness as a means of creating
    economies of scope
  • Financial economies are cost savings or higher
    returns generated when the firm effectively
    allocates its financial resources based on
    investments inside or outside the firm

Efficient Internal Capital Market Allocation
  • In highly diversified situations, some firms take
    an equity position internally (rather than just
    stocks) for those SBUs that will generate the
    best ROI.
  • Access to information is the main reason internal
    capital market allocations in firms may be the
    basis for superior returns to shareholders over
    and above what external investors see.
  • Those evaluating the performance of all of a
    firms divisions can internally discipline poorly
    performing units by allocating fewer or different
    types of resources

Efficient Internal Capital Market Allocation
  • The external capital market relies on information
    produced by the firm to estimate the
    organizations ability to generate attractive
    future revenue and earnings streams
  • Firms may not want to divulge additional
    information when using these media because it
    might help competitors

  • Two types
  • Restructuring of assets
  • Example Prestige Brand Holdings purchasing Spic
    n Span from P and G.
  • Given structure follows strategy, reorganize the
    firm to match strategy.

Managerial Motives to Diversify the Firm
  • Agency Theory
  • Reducing the risk of losing their job is the
    first motive for top-level executives
  • Additional diversification reduces the chance
    that top-level executives of a diversified firm
    will lose their job
  • The relationship between firm size and executive
    compensation is the second managerial
    diversification motive

Strategy Toolbox
  • All too often, those involved with a firms
    strategic management process focus only on the
    immediate competitors, as they have been
    announced and are already under study.
  • Analysis takes it two steps further and considers
    impending and invisible competitors as well

Group Exercise
  • Choose a local firm (in town).
  • What is there level of product diversification?
  • Would there be benefit to being more diverse in
    their product mix?
  • Develop a plan for this firm or enhance their
    value and market position through product
  • Be sure to address questions of not just WHAT
    they should do, but HOW and WHY they should (do
    it) a if you were pitching it to them.
  • 15-20 minutes

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