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
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