Strategic management

• Levels of Diversification


  • Single-business
  • Dominant-business
  • Related
  • Unrelated
• Single-business diversification strategy


  Firm generates 95% or more of its sales revenue from its core business area
• Dominant-business diversification strategy


  Firm generates between 70 and 95 percent of its total revenue within a single business area
• Related diversification strategy


  Firm generates more than 30% of its revenue outside a dominant business and whose businesses are related to each other in some manner
• Unrelated diversification strategy


  Highly diversified firm that has no relationships between its businesses
• Diversified firms vary according to their level of diversification and the connections between and among their businesses
• The more links among businesses, the more "constrained" is the level of diversification
• "Unrelated" refers to the absence of direct links between businesses
• Levels of Diversification


  • Single-business
  • Dominant-business
  • Related
  • Unrelated
• Single-business diversification strategy


  Firm generates 95% or more of its sales revenue from its core business area
• Dominant-business diversification strategy


  Firm generates between 70-95% of its total revenue within a single business area
• Related diversification strategy


  Firm generates more than 30% of its revenue outside a dominant business and whose businesses are related to each other in some manner
• Unrelated diversification strategy


  Highly diversified firm that has no relationships between its businesses
• Reasons for Diversification


  • Value-Creating Diversification
  • Value-Neutral Diversification
  • Value-Reducing Diversification
• Economies of scope


  Cost savings a firm creates by successfully sharing resources and capabilities or transferring one or more corporate-level core competencies
• Sharing activities


  Operational relatedness - separate resources are jointly used to create economies of scope
• Transferring core competencies


  Corporate relatedness - transferring corporate-level core competencies to create economies of scope
• Market power


  Ability to sell products above the existing competitive level or reduce costs of primary and support activities below the competitive level
• Financial economies


  Cost savings realized through improved allocations of financial resources based on investments inside or outside the firm
• Efficient internal capital allocation

  Reduces risk among the firm's businesses by developing a portfolio with different risk profiles
• Asset restructuring


  Diversified firm buys another company, restructures its assets to operate more profitably, then sells the company for a profit
• Compared to corporate office personnel, external investors have relatively limited access to internal information and can only estimate the performances of individual businesses as well as their future prospects
• Buying assets at low prices, restructuring them, and selling them at a price that exceeds their cost generates a positive return on the firm's invested capital
• Value-neutral diversification


  Objectives that are not value-creating, such as matching a competitor's market power, reducing managerial risk, or increasing managerial compensation
• External incentives to diversify include antitrust regulations and tax laws
• Internal incentives to diversify include low performance, uncertain future cash flows, the pursuit of synergy, and reduction of risk for the firm
• Value-reducing diversification


  Diversifying to spread managerial employment risk and increase managerial compensation, even if it does not create value for shareholders