An Evaluation of Corporate Diversification Strategies

SINGLE BUSINESS STRATEGY

Company: AMD

Single business: 95% or more of firm revenues comes from a single business.
Advanced Micro Devices, Inc. (AMD) is a semiconductor company that designs,
manufactures and markets microprocessors for the computing, communications
and consumer electronics markets. The company also markets embedded
microprocessors for personal connectivity devices and other consumer markets.
The leading semiconductor company has manufacturing and testing facilities in
the United States, Europe and Asia, and sales offices throughout the world (AMD
2006).

Sales by Business Area

It principally concentrates in semiconductor manufacturing. Total net sales for
2005 of $5.8 billion increased 17 per cent compared with net sales for 2004 of
$5.0 billion (AMD 2006). This growth was driven by the performance of its
microprocessor segment where net sales of $3.8 billion increased by 50 per cent
compared to 2004, due to increased unit sales and average selling prices (AMD
2006).

Rationale for Business Strategy

Because a large pool of technology makers (computers, phone, gaming, servers,
and internet, for instance) rely on the semiconductor industry for manufacturing
consumer devices, it makes commercial wisdom for AMD to devote every drop of
resources to meet increasing demand for advanced chips.

Appraisal of Business Strategy

Like other chips’ makers such as Intel Corp, AMD pursues a single-product line
strategy. That strategy places the chips’ maker in a leading position in the
development and innovation of electronics components.
Moreover, AMD’s single business model has earned the company the reputation
as one of the most recognisable computer processor brands against staunch
challengers like Intel Corp., and Samsung Electronics Co. Ninety per cent of the
top 100 and more than 45 per cent of the top 500 of the Forbes Global 2000
companies or their subsidiaries are using AMD64 technology today (AMD 2006).
Another advantage to the company’s current single product strategy is its ability
to deploy resources focusing on building on competency and capability. The
company's microprocessors—AMD Athlon 64 and AMD Athlon 64 FX processors—
specifically for gamers, PC enthusiasts and digital content creators, are based on
the AMD64 technology platform, which extends the industry-standard x86
instruction set architecture to 64-bit computing (AMD 2006; Reuters 2006).
AMD’s current business model permits it to be more responsive to changing
demands of industries like gaming, digital content creation, and computing
security for instance.
Despite Intel Corp’s dominance in the semiconductor industry, AMD is able to
parlay its experience and reputation into sustainable competitive advantage and
prominent leadership position in terms of strategic alliance with software giant
Microsoft, and motherboard manufacturers.
Nonetheless, AMD’s all-eggs-in-one-basket business model comes with some
risks. Intel’s dominant position in the microprocessor market is a threat; AMD’s
reliance on one supplier for its 200-millimetre and 300-millimetre silicon-on-
insulator wafers, and reliance on third-party companies for the design and
manufacture of core-logic chipsets, graphics chips, and motherboards, all
undermines its survival.
Still at least for some years to come, AMD is reaping the advantage brought on
by benefits of pursing a single-product line strategy.

DOMINANT BUSINESS DIVERSIFICATION

Company: McDonald's
Dominant-business: between 70 and 95% of firm revenues comes from a single
business.
Founded by Ray Kroc in 1948, the fast-food giant primarily franchises and
operates McDonald's restaurants in the food service industry (McDonald’s 2006;
Reuters 2006). It also operates Boston Market and Chipotle Mexican Grill-Chipotle
and has a minority ownership interest in United Kingdom-based Prêt A Manger
(Yahoo Finance 2006).

Sales by Business Area

The company operates in the fast-food segment of the food industry. Of the more
than 30,000 McDonald's restaurants in over 100 countries, over 8,000 are
operated by the company, more than 18,000 are operated by
franchisees/licensees and over 4,000 are operated by affiliates (McDonald’s 2006;
Yahoo Finance 2006). The revenues break down for 2005 (see diagram below)
and are consistent with its preceding historical operations. Therefore, justifies and
confirms the company’s longstanding dominant business diversification strategy.

Rationale for Business Strategy

With Western Europe and the United States markets reaching maturity,
McDonald’s Corp. geared towards consolidating and improving value to its
shareholders and consumers alike. Profitable growth mattered so much to the
fast-food giant. It makes perfect commercial sense to penetrate emerging
markets in Eastern Europe, Asia, Middle East, Latin America and Africa. Such
strategy plays a defensive market mechanism against competing fast food chains
like Subway, Burger King, Pizza Hut and KFC.

Appraisal of Dominant Business Diversification Strategy

Though McDonald’s engages a single product line portfolio, it has sustained its
competitiveness through geographic diversification strategy. This mix business
model is reflected in its unique use of franchisees/licensees and affiliates to
penetrate international, national, regional and local markets. McDonald’s Corp. is
reaping the ensuing advantages:
• Easy recognisable branding worldwide;
• Sustainable competitive advantage. The Company competes on the basis of
price, convenience and geographic out-reach;
• Keeping strategy responsive to consumers’ changes;
• Higher probability innovative ideas will emerge;
• Resources can be focused on building competencies and capabilities;
• Top executives can maintain hands-on contact with core business;and
• Ability to augment experience and reputation into prominent leadership
position.

Though the single product business strategy might undermine business prospects,
McDonald’s Corp. is no stranger to onshore and offshore threats from health
campaigners and national governments. The company’s positive responsiveness
to the markets (such as consumers’ increasing preference for a healthier menu
and environmental pressure groups) would inevitably ensure its survival.

RELATED BUSINESS DIVERSIFICATION

Company: The Walt Disney Company.

Distant-Related Business Diversification
Less than 70% of firm revenues come from a single business, and different
businesses share only a few links and common attributes or different links and
common attributes (Hit, Ireland & Hoskisson 2004; Lynch 2006). The Walt Disney
Company, which started in 1923 as a studio animated company, has over time
grown to become a mega-entertainment empire comprising four diversified
business segments: Studio Entertainment, Parks and Resorts, Consumer
Products, and Media Networks (Disney 2006). Each segment consists of
integrated, well-connected businesses that operate in concert to maximise
exposure and growth worldwide.

Rationale for Business Diversification

Compared with many other studios, Disney's had not prospered during World War
II, when it had devoted much of its energies to producing films for the U.S.
government (MBC 2006). Indeed, the Disney studio’s growth was hindered
because of the time-and-labour-intensive nature of animation work (MBC 2006).
After the war, Walt Disney was poised to expand his enterprises. The key to this
expansion, according to Christopher Anderson in Hollywood TV (1994), was
diversification (MBC 2006). Disney was ready to set sights beyond the film
industry.
Furthermore, Disney’s diversification strategy is driven, amongst others, by
financial goals. The company aims to maximise earnings and cash flow, and to
allocate capital profitability toward growth initiatives that will drive long-term
shareholder value.
Having developed a strong brand image over many years, the company is poised
to diversify its operations and products to hedge against decreasing sales in
product lines. The company not only diversified its product portfolio into home
video, film, merchandise, radio broadcasting, network television and (delete
‘in’)theme parks, it has also effectively globally diversified its operations into Asia
and Europe.
In addition, Disney’s decision to diversify into France (Disney 2006) with the
theme park may, among other reasons, have been prompted by economies of
scale. Economies of scale should result from the new theme park, because much
of the costs associated with planning a theme park have already been incurred.
Also, the sales of Disney toys will increase, allowing for additional economies of
scale in production.
And that is not the end of Disney’s appetite for market dominance. On January
24, 2006, the company entered into an agreement and plan of merger with digital
animation company Pixar (Pixar 2006). This latest move is an attempt at
consolidating and extending its competitive advantage in the animation market by
taking advantage of Pixar’s three core technologies—Marionette, an animation
software system for articulating, animating and lighting; Ringmaster, a production
management software system for scheduling, coordinating and tracking of a
computer animation project, and RenderMan, a rendering software system for
high-quality photo-realistic image synthesis that the company uses internally and
licenses to third parties (Reuters 2006).

Sales by Business Area

Appraisal of Disney Distant-Related Business Diversification

Disney is able to achieve operational efficiency for its four main business units by
sharing technological and marketing resources. The main strengths of Disney’s
internal resources refer to human resources and financial stability. The recent
acquisition of Pixar is a lesson that drives home the company’s intent.
Besides, the company can control costs, and still sustain positive performance of
its theme parks, media network, studio entertainment and consumer products
businesses. Financial risks have been minimised by sharing initial investment
costs with a maximum number of outside participants.

Close-Related Business Diversification

Company: Apple Computer Inc.

Less than 70% of firm revenues come from a single, business and different
businesses share numerous links and common attributes (Lynch 2006; Mellahi,
Frynas, & Finlay 2005; Hit, Ireland & Hoskisson 2004).
Apple Computer, Inc. is known for the Macintosh computer line; perhaps most
recently for the portable digital music players—iPod that has revamped the digital
music industry. The breakdown of the company’s revenues for the last four years
confirms it is pursuing a close-related diversification as shown below for the
September 2005 revenue breakdown.

Sales by Business Area

Rationale for Close-Related Diversification

During the 90s, the computer manufacturer grappled with fallen market share for
its Macintosh line of computers (to the advantage of Microsoft-platform PCs) until
late 2001 when it discovered the magic bullet. That magic bullet came when
Apple Computer diversified into the digital music market with the launch of the
revolutionary portable mp3 player—iPod. With Apple occupying a comfortable
70% share of the global digital music market (Apple 2005), the very concepts
that defined the success of the iPod are snowballing to the Macintosh computers
and other related products as expanded below.
Given the high degree of integration between personal computing products and
on-line entertainment, there are clearly economies of scope for PC makers like
Apple who can exploit this opportunity. Exploiting these economies of scope
reduces operating costs, which can contribute both to higher margins and to more
attractive prices for customers. Of course, providing more attractive prices to
customers increases the opportunity to win customers in the competitive market,
thus reinforcing the economy of scope. Apple’s release of the Mac Mini and iPod
product range is a step in that direction.
Not only has diversification rejuvenated the company’s image, it has enabled
Apple to understand the modern consumers. This understanding is reflected in
the company’s innovative consumer products such as the iPod Hi-Fi, Mac mini and
iTunes. Because Apple discovered the close link between computing and personal
entertainment, the company is more financially buoyant than any time in history.

Appraisal of Close-Related Business Diversification Strategy

Faced with the onset of competition in the computer industry, a computer
manufacturer should then see this form of diversification as an attractive option.
It makes commercial sense for Apple to seek the benefits of diversification where
appropriate.
The success of the iPod and iTunes on-line music store has boosted sales of the
Macintosh computers. These revolutionary products are closely integrated to
home computing products. Therefore, the company is able to pull music
customers’ attention to its unique-styled computers. The foregoing premise is
consistent with progressive sales achieved for the Macintosh product line from
2001-2005 compared with sales figures of the 90s.
Moreover, integrating the iPod and iTunes products together with the Mac into an
attractive overall package also makes the customer more loyal, and certainly
decreases the likelihood of the customer switching, if at all easily for one or other
competing products.
Besides, selling more products to the customer augments the customer
relationship and, provided that quality is maintained or indeed enhanced in so
doing, makes the customer more loyal to Apple’s products. Customer loyalty is
vital to survival in a competitive marketplace.
Customers may be attracted to the advantages of having a single manufacturer
for both computing and entertainment products. So much so in fact, that at least
a significant proportion of the customer base demands a bundled Apple-styled
computing and home entertainment package. This means that the company’s
close-related diversification has defensive implications as well as offensive
implications. The ultimate verdict is, a computer maker in a competitive market
that does not diversify into the other product will lose customers to competitors
that do.
The company through its own self-styled retail stores is able to target the general
consumer markets concurrently with its broad music and computer product
range. More so, with Apple poised for more innovative and diversified products
ahead, there is a greater likelihood the company’s diversification’s strategy is
geared towards long-term sustainability such as the likes of Unilever Group.

UNRELATED BUSINESS DIVERSIFICATION

Company: Siemens
Unrelated Diversification: Less than 70% of firm revenues come from a single
business, and there are few, if any, links or common attributes among businesses
(Lynch 2006; Dobson, Starkey & Richards 2005; Hit, Ireland & Hoskisson 2004).
Founded more than 150 years ago, Siemens has a broad and well-balanced
operational portfolio, that includes power generation as well as transmission,
telecommunications, information, transport, automation and also healthcare
(Siemens 2005). These activities are divided into six business areas:
• Information and Communications
• Automation and Control
• Power
• Transportation
• Medical
• Lighting
• Financing and Real Estate

The breakdown of revenue, which is also relatively consistent with historical

performance in the last five years, and unrelated nature of its business units,
compels the description of unrelated diversification.
Sales by Business Area Source: Siemens 2005

Rationale for Unrelated Business Diversification Strategy

Siemens is striving for profitable growth for all its business areas by increasingly
strengthening its product portfolio through acquisitions. Diversification has
enhanced Siemens’ profitability because Siemens has integrated into new
markets like medical, communications and information.

Appraisal of Unrelated Business Diversification Strategy

Siemens’ diversified consumer product portfolio means that a successful
conglomerate—Siemens—has a better chance of achieving a significant customer
base across its home appliances, computers, multimedia, electrical installation
systems and hi-fi product lines, and thus achieving economies of scale in addition
to economy of scope, which again helps both to maintain adequate margins and
to enable attractive pricing.
Expenses have been minimised through diversification because Siemens’
management staff can analyse the profitability of each department and eliminate
excess facilities and non–core business activities which are unprofitable. A case in
point is the company divesting its loss-making mobile phone business to BenQ,
which according to Siemens (2005) is the best solution in the interest of
customers, employees, and its shareholders.
Like any conglomerate, there comes a point when Siemens would grapple to
manage many diverse businesses. The Siemens’ mobile phones line is a typical
scenario. Right now, Siemens is poised to strengthen its current unrelated
diversification strategy through acquisitions such as the likes of General Electric
(GE).
However, as Gary noted (1998), there comes a point when increased
diversification ceased yielding returns, and diversification-performance
relationship would indicate a curvilinear relationship since excess assets that can
be exploited by diversifying into other businesses lose their value as the firm
moves further away from its core. But then that does not rule out the advantages
that organisations like GE, Siemens, 3m, Unilever, SABMiller and Time Warner
have reaped from diversification.

Reference

AMD (2006). SEC Filing: Form 10-K. www.amd.com [Accessed: 27 March 2006]
Apple Computer Inc. (2005). SEC Filing: Form 10-K. www.apple.com [Accessed:
28 March 2006]
Dobson, P., Starkey, K. & Richards, J. (2004). Strategic Management: Issues and
Cases. Oxford: Blackwell Publishing, pp. 87-125.
Hit, M., Ireland, D. & Hoskisson, R. (2004). Strategic Management. 6th Ed.
Oxford: South-Western Educational Publishing Gary, S. (1998). The Dynamics of
Diversification. Quebec: International Dynamic Conference-1998, pp. 4-6.
Lynch, R. (2006). Corporate Strategy. 4th Ed. London: Prentice Hall, pp.416-418.

McDonald’s (2006). SEC Filling: Form 10-K. www.mcdonalds.com [Accessed: 28

March 2006]
MBC (2006). The Museum of Broadcast Communications. www.museum.tv
[Accessed: 26 March 2006]
Mellahi, K., Frynas, G. & Finlay, P. (2005). Global Strategic Management. New
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Reuters (2006). AMD. www.investor.reuters.wallst.com [Accessed: 27 March
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