Transcript Understanding Business Strategy

Part 3: Strategy
Chapter 6: Multiproduct Strategies
1

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
3

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)


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
6

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
8




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
9

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
10

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?
11

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
12


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
13

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
14

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
15

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
16


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
17



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
18


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
19

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.
20


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
21


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
22

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