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MGT 489 Chapter 6

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					        Part 3: Strategy
Chapter 6: Multiproduct Strategies




                                     1
   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


                                                    3
   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)
   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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6
   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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8
   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

                                                                   9
   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



                                                            10
   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?
                                                                 11
   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
                                                           12
   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


                                                       13
   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



                                                   14
   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




                                                  15
   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
                                                           16
   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


                                                      17
   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
                                                               18
   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



                                                        19
   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.




                                                                20
   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
                                                               21
   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



                                                       22
   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
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