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CHAPTER OUTLINE
Levels of Diversification
Low Levels of Diversification
Moderate and High Levels of Diversification
Reasons for Diversification
Diversification and the Multidivisional Structure
Related Diversification
Operational Relatedness: Sharing Activities
Using the Cooperative Form of the Multidivisional Structure to Implement the Related
Constrained Strategy
Corporate Relatedness: Transferring of Core Competencies
Using the Strategic Business-Unit Form of the Multidivisional Structure to Implement the
Related Linked Strategy
Market Power through Multimarket Competition and Vertical Integration
Simultaneous Operational Relatedness and Corporate Relatedness
Unrelated Diversification
Efficient Internal Capital Market Allocation
Restructuring
Using the Competitive Form of the Multidivisional Structure to Implement the
Unrelated Diversification Strategy
Value-Neutral Diversification: Incentives and Resources
Incentives to Diversify
Resources and Diversification
Value-Reducing Diversification: Managerial Motives to Diversify
Summary
KNOWLEDGE OBJECTIVES
1. Define corporate-level strategy and discuss its importance to the diversified firm.
2. Describe the advantages and disadvantages of single and dominant business
strategies.
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LECTURE NOTES
See slides 1-3.
Key Terms
Corporate-Level Strategy - specifies actions a firm takes to gain
a competitive advantage by selecting and managing a portfolio
of businesses that compete in different product markets or
industries.
See slide 4.
1.
Levels of Diversification - This section introduces the different levels of diversification that vary
according to the connections between and among businesses with a corporation.
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2.
Low Levels of Diversification - This section discusses two types of strategies used by firms
pursuing low levels of diversification.
See slide 6.
Key Terms
Single Business Strategy - corporate-level strategy in which the
firm generates 95% or more of its sales revenue from its core
business area.
Dominant Business Diversification Strategy - corporate-level
strategy in which the firm generates between 70% and 95% of
its total sales revenue within a single business area.
Additional Discussion Notes for Low Levels of Diversification These notes include additional materials that cover the strategies for
firms with low levels of diversification.
Low Levels of Diversification
A single business diversification strategy generates 95% or more of a
firms sales revenue from its core business area. Take the chewing gum
market, for example. Wm. Wrigley Jr. Company uses a single business
strategy while operating in relatively few product markets. Wrigleys
brands include Spearmint, Doublemint, and Juicy Fruit, and in the 1990s
the company added sugar-free gums Hubba Bubba, Orbit, and Ice
White. Collaboration with Procter & Gamble (P&G) to produce a dental
chewing gummarketed under P&Gs Crest brandcauses Wrigley to
become slightly more diversified than it has been historically.
A dominant business diversification strategy generates between
70% and 95% of a firms total revenue within a single business area.
Smithfield Foods uses the dominant business diversification strategy;
the majority of its sales are generated from raising and butchering hogs.
Recently, however, Smithfield diversified into beef packing by
acquiring a smaller beef processor. Smithfield also attempted to acquire
IBP, the largest beef packer, but was outbid by Tyson Foods. Although
it still uses the dominant business diversification strategy, Smithfields
addition of beef packing operations suggests that its portfolio of
businesses is becoming more diversified.
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Moderate and High Levels of Diversification - This section discusses two types of strategy
used by firms pursuing moderate to high levels of diversification.
Refer to Figure 8.1:
Levels and Types of
Diversification (slide
5)
See slides 7-8.
Key Terms
Related Diversification Strategy - corporate-level strategy in
which the firm generates more than 30% of its sales revenue
outside a dominant business and whose businesses are related to
each other in some manner.
Related Constrained Diversification Strategy - related
diversification strategy characterized by direct links between the
firms businesses.
Related Linked Diversification Strategy - related diversification
strategy characterized by linked firms that share fewer resources
and assets among their businesses, concentrating on the transfer
of knowledge and competencies among the businesses.
Unrelated Diversification Strategy - corporate-level strategy for
highly diversified firms in which there are no well-defined
relationships between its businesses.
3.
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Reasons for Diversification - This section discusses a variety of reasons that firms use a
corporate-level diversification strategy.
See Table 8.1:
Reasons for
Diversification
(slide 10).
4.
5.
Diversification and the Multidivisional Structure - This section discusses the type of
organizational structure needed to support implementation of multi-business strategies.
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Key Terms
Multidivisional structure (M-form) - organizational structure
which ties together several operating divisions, each
representing a separate business or profit center to which
responsibility for daily operations and business-unit strategy is
delegated.
Organizational Controls - guide the use of strategy, indicate
how to compare actual results with expected results, and suggest
corrective actions to take when the difference between actual
and expected results is unacceptable.
Strategic Controls - subjective criteria intended to verify that the
firm is using appropriate strategies for the conditions in the
external environment and the companys competitive
advantages. (Used for sharing strategies.)
Finance Controls - objective criteria used to measure firm
performance against previously established quantitative
standards. (Used for unrelated diversification.)
6.
Related Diversification - This section describes the strategy intended to develop and exploit
economies of scope between business units to build upon or extend its resources, capabilities, or
core competencies and create value. Operational and corporate relatedness determine how
resources are used to create economies of scope.
See slide 19.
Key Terms
Economies of Scope - cost savings that the firm creates by
successfully transferring some of its capabilities and
competencies that were developed in one of its businesses to
another of its businesses.
Synergy - conditions that exist when the value created by
business units working together exceeds the value those same
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Below.
Operational Relatedness: Sharing Activities - This section presents how and why firms create
operational relatedness and discusses issues which affect the degree to which activity sharing
creates positive outcomes.
See slide 20.
8.
9.
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Below.
Using the Cooperative Form of the Multidivisional Structure to Implement the Related
Constrained Strategy - This section discusses the formation of divisions around products or
markets to develop an organizational structure for implementing a related constrained
diversification strategy.
See slide 21.
Key Terms
Cooperative Form - organizational structure using horizontal
integration is to bring about interdivisional cooperation.
10.
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Additional Discussion Notes for Related Constrained Strategy These notes include additional materials that illustrate use of the related
constrained diversification strategy.
Related Constrained Strategy
Procter & Gamble, a related constrained firm, is supported by a
cooperative structure of five global business product units (baby, feminine
and family care, fabric and home care, food and beverage, and health and
beauty care) and seven market development organizations (MDOs)
formed around a global region. Using the five global product units to
create strong brand through ongoing innovation, P&G interfaces with
customers to ensure that a divisions marketing plans fully capitalize on
local opportunities. Information is shared between the product-oriented
and the marketing-oriented efforts to enhance the corporations
performance. Indeed, some corporate staff members are responsible for
focusing on making certain that knowledge is meaningfully categorized
and then rapidly transferred throughout P&Gs businesses. Production
competencies, marketing competencies, or channel dominance are
examples of strengths that P&Gs divisions might share.
Key Terms
Corporate-Level Core Competencies - complex sets of resources
and capabilities that link different businesses, primarily through
managerial and technological knowledge, experience, and
expertise.
11.
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Using the Strategic Business-Unit Form of the Multidivisional Structure to Implement the
Related Linked Strategy - This section discusses the formation of strategic business units
(SBUs) to develop an organizational structure for implementing a related linked diversification
strategy and the complexities of this form of structure.
See slide 26.
Key Terms
Strategic Business-Unit Form - form of multidivisional
organization structure with three levels used to support the
implementation of a diversification strategy.
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12.
Market Power through Multimarket Competition and Vertical Integration - This section
describes the use of related diversification strategies to gain market power.
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Key Terms
Market Power - exists when firm is able to sell its products
above the existing competitive level or to reduce costs of
primary and support activities below the competitive level or
both.
Multimarket (or Multipoint) Competition - exists when two or
more diversified firms simultaneously compete in the same
product or geographic markets.
Vertical Integration - exists when a company produces its own
inputs or owns its own source of distribution of outputs.
Taper Integration - exists when a firm sources inputs externally
from independent suppliers as well as internally within the
boundaries of the firm, or disposes of its outputs through
independent outlets in addition to company-owned distribution
channels.
13.
14.
15.
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Key Terms
Matrix Organization - organizational structure in which a dual
structure combines both functional specialization and business
product or project specialization.
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16.
Key Terms
Financial Economies - cost savings realized through improved
allocations of financial resources based on investments inside or
outside the firm.
17.
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Efficient Internal Capital Market Allocation - This section highlights the advantages of firms
with internal capital markets to fund investments and operations.
See slides 38-40.
18.
19.
What are the major advantages for firms with internal capital
markets?
a. Information provided to capital markets through annual
reports and other sources may not include negative
information, instead emphasizing positive prospects and
outcomes. External sources of capital have limited
ability to understand the dynamics inside large
organizations. Even external shareholders who have access to information have no guarantee of full and
complete disclosure.
b. Although a firm must disseminate information, that
information also becomes simultaneously available to
the companys current and potential competitors. With
insights gained by studying such information,
competitors may find it easier to attempt to duplicate a
firms competitive advantage. Thus, an ability to
efficiently allocate capital through an internal market
may help the firm protect its competitive advantages.
c. Capital can be allocated according to more specific
criteria than is possible through external market
allocations.
d. External market may fail to allocate resources
adequately to high-potential investments.
What is the downside to internal capital markets?
a. Firms sometimes substitute acquisitions for innovations,
allocating more to analyze and complete acquisitions
than nurturing internal innovation.
b. Conglomerates in developed economies have a fairly
short life cycle as financial economies are more easily
duplicated than the gains from operational and
corporate relatedness.
Restructuring - This section discusses how firms create financial economies by buying,
restructuring, and selling other companies assets in the external market.
See slide 42.
20.
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Using the Competitive Form of the Multidivisional Structure to Implement the Unrelated
Diversification Strategy - This section discusses the formation of independent divisions to
develop an organizational structure for implementing an unrelated diversification strategy.
See slide 43.
Key Terms
Competitive Form - organizational structure in which the firms
divisions are completely independent.
21.
22.
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Incentives to Diversify - This section outlines value-neutral incentives, both internal and
external, that encourage organizations and managers to diversify.
See slide 48.
23.
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Resources and Diversification - This section notes the importance of resources and capabilities
required by the firm to successfully use a corporate-level diversification strategy.
24.
25.
26.
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diversification.
Ethical Questions - Recognizing the need for firms to effectively interact with stakeholders
during the strategic management process, all strategic management topics have an ethical
dimension. A list of ethical questions appears after the Summary section of each chapter in the
textbook. The topic of ethics is best covered throughout the course to emphasize its prevalence
and importance. We recommend posing at least one of these questions during your class time to
stimulate discussion of ethical issues relevant to the chapter material that you are covering. (See
slides 52-57.)
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