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Understanding Business Strategy

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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


1
Understanding Business Strategy
  • Part 3 Strategy
  • Chapter 6 Multiproduct Strategies

2
Risks of diversification
3
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

4
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)

5
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
    services?

6
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7
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

8
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9
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

10
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
    diversified
  • Changing the multiproduct strategy a firm is
    using signals a need to change the
    organizational structure in place

11
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
    dimensions)
  • 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?

12
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

13
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

14
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

15
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

16
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

17
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

18
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

19
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

20
Restructuring
  • 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.

21
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

22
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

23
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
    diversification.
  • 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

24
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