Part 3 Strategy Chap 5 : Business-Level Strategy Chap 6 : Multi-product Strategies Chap 7 : Acquiring & Integrating Businesses Chap 8 : Competing across Borders Chap 9 : Creating & Maintaining Alliances Chap 10 : Innovating through Strategic Entrepreneurship

Corporate Mission and Vision Strategy Development Process(경영전략 수립과정) External Environment Analysis Macro-environment Industry attractiveness Product/market segments Internal Organization Analysis Company performance Business system Capabilities and resources Strategy Formulation Imple- mentation Evaluation Generation of strategic options alternatives Selection of optimal strategies Detailed action plan Respon-sibilities and timing Resource allocation Monitoring system Performance evaluation Feedback and adjustment Corporate Mission and Vision 목표수립 전략수립 전략실행 전략평가 SWOT 분석

Types of Strategy (경영전략의 수준) More specific, narrow, Short term, Action oriented, Lower risks, Fewer opportunities, Corporation Business A Business B Business C Manu- factu- ring R&D Sales Corporate Strategy Business Functional Future Direction : 참여할 사업 결정 Doing the right thing : 사업부내 경쟁전략 수립 Doing things right : 기능부서별 구체적 수행방법 결정

Knowledge Objectives Reading and studying this chapter should enable you to: Define a multiproduct strategy. Understand the differences between the levels of diversification. Discuss the related-diversification multiproduct strategy. Explain the unrelated-diversification multiproduct strategy. Understand two motives that top-level managers have to diversify the firms they lead. Describe the organizational structures used to implement the different multiproduct strategies.

Multiproduct Strategy An action plan that the firm develops to compete in different product markets. —————————————————————— Improves performance by using core competencies to pursue opportunities in the external environment in more than one product market. Smoothes out revenue and earnings flows and earns additional profits by using core competencies in additional ways. Answers the question: What products will be offered and how will those products be managed?

Reasons Why firms use multiproduct strategies to diversify Achieve profitable growth Reduce the risk of being involved with a single product line Learn how to apply core competencies in other value creating ways Gain exposure to different technologies Develop economies of scope Desire to extend the firm’s brand into additional product areas

Levels of Diversification Low Levels of Diversification Single business: More than 95 percent of revenue comes from a single business. Dominant business: Between 70 and 95 percent of revenue comes from a single business. Moderate to High Levels of Diversification Related constrained: Less than 70 percent of revenue comes from the dominant business, and all businesses share product, technological, and distribution linkages. Related linked (mixed related and unrelated): Less than 70 percent of revenue comes from the dominant business, and only limited links exist between businesses. Very High Levels of Diversification Unrelated: Less than 70 percent of revenue comes from the dominant business, and no common links exist between businesses.

Low Levels of Diversification Single-Business Diversification Multiproduct Strategy 95 percent of sales revenue from a single business in which the firm makes and sells a single product or a variety of a single product. Chewing & bubble gums Dominant-Business Diversification Multiproduct Strategy 70 to 95 percent of sales revenue from a single business. Growth in one of its non-dominant businesses can change the nature of a firm’s diversification. UPS

Moderate to High Levels of Diversification Related-Diversification Multiproduct Strategy Less than 70 percent of sales revenue from the dominant business Economies of Scope; cost savings by sharing resources etc. Forms of Related-Diversification Strategy Related constrained multiproduct strategy Related linked diversification strategy Strategic Business Unit (SBU) A semiautonomous unit of a diversified firm with a collection of related businesses Resources, activities, & core competencies are not shares or transferred respectively between the product divisions.

Very High Levels of Diversification Unrelated-Diversification Multiproduct Strategy The strategy pursued by a firm that does not try to transfer resources, activities, and/or core competencies between its businesses or divisions. Results in a conglomerate business form. Economies of Scope Cost savings from sharing resources and activities or core competencies between businesses. 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 core competencies are successfully transferred between some of the firm’s businesses.

Value-Creating Strategies of Diversification: Operational and Corporate Relatedness FIGURE 6.2

Operational Relatedness and the Related Constrained Multiproduct Strategy Strategic Benefit Economies of scope are created when the firm shares tangible resources and/or when a primary activity or a support activity is used in more than one of the firm’s businesses. Firms must ensure that efforts to share resources and activities are effectively implemented. Risk of Strategy Demand for the output of a unit servicing the firm’s businesses falls below the unit’s production capacity, resulting in underutilization that raises costs.

Case: Hyatt Corporation 1.  What organizational structure would you recommend for Hyatt Corporation to implement its strategy?  Why?  Are there indications from the case that this structure is used? 2.  What advantages did Hyatt Corporation seek in expanding from its core brand to such businesses as resorts and time shares?

Corporate Relatedness and the Related Linked Multiproduct Strategy Strategic Benefit Economies of scope generated when the firm transfers core competencies between one or more of the businesses within individual SBUs. Reassignment of personnel Managerial and leadership training programs

Simultaneously Seeking Operational Relatedness and Corporate Relatedness Strategic Benefit Economies of scope created by simultaneously seeking high levels of operational relatedness and corporate relatedness. Special Characteristics The firm’s multiproduct strategy is a hybrid with characteristics of both the related constrained and related linked multiproduct strategies.

Unrelated-Diversification Multiproduct Strategy Strategic Benefit Financial economies (represented by cost savings or higher returns) generated when the firm effectively allocates its financial resources based on investments either inside or outside the firm instead of trying to develop economies of scope through operational relatedness and/or corporate relatedness. Strategic Actions Efficient internal capital market allocation Restructuring—buying and selling assets

Managerial Motives to Diversify Diversification to reduce the risk of managers losing their job is the first motive for top-level executives. The risk is that managers who believe that keeping their top-level positions depends on greater levels of diversification may overdiversify the firm. Increasing a firm’s level of diversification increases the firm’s overall size. The relationship between firm size and executive compensation is the second managerial diversification motive.

Case: Campbell 1.  Why did Campbell Soup fail in its move to unrelated diversification?  Could this diversification have been successful?  How? 2.  What is the strategic lesson to be learned from this case?

Implementing Multiproduct Strategies Multidivisional (M-form) Structure An organizational structure in which the firm is organized to generate either economies of scope or financial economies. —————————————————————— Is used only to implement multiproduct strategies with moderate and high levels of diversification. Evolves as a firm outgrows its dominant-business strategy and adopts a related-diversification strategy With the change in strategy, the firm must also change its structure from the functional form to the appropriate form of the multidivisional structure.

Three Variations of the Multidivisional Structure FIGURE 6.3

The Cooperative M-Form and the Related Constrained Multiproduct Strategy An organizational structure in which horizontal integration is used so that resources and activities can be shared between product divisions. Horizontal Integration Product divisions process information about the resources and activities they intend to share and how they intend to share them. Temporary teams or task forces are a second horizontal integrating mechanism.

Cooperative Form of the Multidivisional Structure for Implementing the Related Constrained Strategy FIGURE 6.4

The SBU M-Form and the Related Linked Multiproduct Strategy Strategic Business Unit (SBU) M-form An organizational structure in which the divisions within each SBU concentrate on transferring core competencies rather than on sharing resources and activities. Each SBU is a profit center that is evaluated and controlled by corporate headquarters. Both strategic controls and financial controls are used to evaluate each SBU.

SBU Form of the Multidivisional Structure for Implementing the Related Linked Strategy FIGURE 6.5

The Competitive M-Form and the Unrelated- Diversification Multiproduct Strategy An organizational structure in which there is complete independence between the firm’s divisions. Divisions actually compete against one another for the firm’s resources. The firm seeks to generate financial economies rather than develop economies of scope through either operational relatedness or corporate relatedness. The focus of headquarters is on performance appraisal, resource allocations, and long-range planning to ensure that financial capital is being used to maximize financial success.

Competitive Form of the Multidivisional Structure for Implementing the Unrelated-Diversification Strategy FIGURE 6.6

Key Terms competitive M-form cooperative M-form corporate relatedness economies of scope financial economies multidivisional (M-form) structure multiproduct strategy operational relatedness strategic business unit (SBU) strategic business unit (SBU) M-form