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?

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

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 firm’s 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 firm’s 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 firm’s businesses to its other businesses • Boeing? • Space, Commercial, Military, Services

13. Moderate to High Levels of Diversification • Operational relatedness is achieved when the firm’s 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 firm’s 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: P&G

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 firm’s 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 organization’s 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 firm’s 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