Understanding Business Strategy Concepts & Cases

1. Understanding Business StrategyConcepts & Cases Part 3: Strategy Chapter 6: Multiproduct Strategies

2. Multiproduct Strategies • An action plan the firm uses to compete in different product markets • More diversified • Multiproduct strategies result in performance improvements when their use allows firms to create operational relatedness, corporate relatedness, or financial economies

3. 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?

5. 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

7. Single Business Multiproduct Strategy • 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

8. 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 • 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

9. Moderate to High Levels of Diversification • Related Diversification • Firms using a related diversification multiproduct strategy try to create economies of scope • 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

10. Moderate to High Levels of Diversification • Resources and activities may be shared between some of the businesses that are a part of a firm using the related linked strategy • 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

11. Moderate to High Levels of 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

12. 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 • Corporate relatedness is achieved when corporate-level core competencies are successfully transferred into some of the firm’s businesses

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. Operational Relatedness & Related Constrained • Risk - the demand for the output of a unit servicing the needs of several of the firm’s businesses may fall below the unit’s production capacity • Risk – not enough sales revenue is generated to cover fixed costs

16. 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

17. Operational and Corporate Relatedness • It is difficult for firms to achieve operational and corporate relatedness simultaneously • Firms able to do so have developed a competitive advantage that is difficult for competitors to imitate • Example: Walt Disney Studios

18. 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

19. Efficient Internal Capital Market Allocation • Efficiency - investors take an equity position in firms by purchasing shares of stock in companies they believe have high future cash flow value • Efficient markets allocate capital in the form of debt as shareholders and debt holders seek to improve the value of their investments by taking stakes in firms they believe have high growth and profitability prospects

20. Efficient Internal Capital Market Allocation • Access to information is the main reason internal capital market allocations in firms may be the basis for superior returns to shareholders • 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

21. 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

22. Restructuring • To denote that changes are made regarding the assets of a firm by buying some or all of another company’s assets • Buys assets because it believes those assets would create more value if they were operated under its ownership • A firm buys another company’s assets with the intention of selling them as soon as it finds ways to make the assets more productive

23. Managerial Motives • 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

24. Implementing Multiproduct Strategies • The M-form is the structure of choice for firms with moderate to high levels of product diversification • The cooperative M-form is an organizational structure in which horizontal integration is used so that divisions can share resources and activities • The strategic business unit (SBU) M-form is an organizational structure in which corporate headquarters personnel try to transfer corporate-level core competencies

29. Implementing Multiproduct Strategies • Firms using the unrelated diversification multiproduct strategy adopt the competitive M-form structure • Divisions operating in a competitive M-form structure actually compete against one another for the firm’s resources • Examples: Textron and Sears Holding Company