Copyright © 2009 South-Western, a part of Cengage LearningAll rights reserved.

Power Point Presentation by Dr. Leslie A. KorbGeorgian Court University

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Understanding Business Strategy

Concepts & Cases

Part 3: StrategyChapter 6: Multiproduct Strategies

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

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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?

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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