Describe different levels of diversification with different corporate-level strategies. Low Levels of DiversificationFirms that follow single- or dominant-business strategies have low levels of diversification. A single businessis a firm where more than 95 percent of its revenues are generated by the dominant business. Firms such as the Wrigley Co. are examples of single-business firms. Wrigley Co. has dominated the global gum-related industry as the largest manufacturer of chewing gum, specialty gums, and gum bases. Its brands, Doublemint, Spearmint and Juicy Fruit, led the market. A dominant businessis a firm that generates between 70 and 95 percent of its sales within a single business area. Moderate and High Levels of DiversificationArelated-diversifiedfirm is one that earns at least 30 percent of its revenues from sources outside of the dominant business and whose units are related to each other—e.g., by the sharing of resources and by product, technological, and distribution linkages. Related-constrainedfirms also earn at least 30 percent of their revenues from the dominant business, and all business units share product, technological, and distribution linkages, as illustrated in Figure 6.1. Kodak, Procter & Gamble, and Campbell’s Soup Company are related-constrained firms. Mixed related and unrelated or related-linkedfirms, such as Johnson and Johnson and General Electric, generate at least 30 percent of their total revenues from the dominant business, but there are few linkages between key value-creating activities. Unrelated-diversified (or highly diversified)firms do not share resources or linkages, as illustrated in Figure 6.1. Firms that pursue unrelated diversification strategies—often known as conglomerates—include United Technologies, Samsung, and Textron. While there are more unrelated diversified firms in the U.S. than in most other countries, conglomerates(firms following unrelated diversification strategies) dominate the private sector economy in Latin America and in several emerging economies (such as China, South Korea, and India). 3 Explain three primary reasons firms diversify. REASONS FOR DIVERSIFICATION Firms may implement diversification strategies to enhance or increase the strategic competitiveness of the overall organization, and thus the value of the firm increases. Value can be created through either related or unrelated diversification if the strategies enable the firm’s mix of businesses to increase revenues and/or decrease costs when implementing business-level strategies. Firms may implement diversification strategies that are either value neutral or result in devaluation of the firm. They may attempt to diversify to neutralize a competitor’s market powerto reduce managers’ employment risk (i.e., risk of the CEO being unemployed when a dominant-business firm fails as compared to this risk when a single business fails when it is only one part of a diversified firm) to increase managerial compensation because of the positive relationships between diversification, firm size, and compensationBUSINESS POLICYLEARNING NOTES
Chapter 6: Corporate-Level Strategy 6-3 TABLE 6.1 - Reasons for Diversification Firms follow diversification strategies for many reasons.
You've reached the end of your free preview.
Want to read all 9 pages?
- Summer '12
- Business, Firm Performance and Diversification