Key Drawbacks of Unrelated Diversification Key Drawbacks of Unrelated Diversification Demanding Managerial Requirements Limited Competitive Advantage Potential The greater the number and diversity of businesses, the harder to manage Need capable managers to manage the diverse requirements of each business Judge soundness of strategic proposals of business-unit managers Lack of cross-business strategic fits means that unrelated diversification offers no competitive advantage potential beyond what each business can generate on its own Likely effect is 1 + 1 = 2, rather than 1 + 1 = 3!
Levels of Diversification: Levels of Diversification: Low Level Low Level Dominant Business Between 70% and 95% of revenue comes from a single business . A A B B Single Business More than 95% of revenue comes from a single business.
Levels of Diversification: Levels of Diversification: Moderate to High Moderate to High Related Constrained Less than 70% of revenue comes from a single business and all businesses share product, technological and distribution linkages. Related Linked (mixed related and unrelated) Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses. C C A A B B C C A A B B
Levels of Diversification: Levels of Diversification: Very High Levels Very High Levels Unrelated Diversification Less than 70% of revenue comes from the dominant business, and there are no common links between businesses. C C
Choosing a Strategy Choosing a Strategy Related diversification When company’s competencies can be applied across a greater number of industries and Company has superior capabilities to keep bureaucratic costs under control Unrelated diversification When functional competencies have few useful applications across industries and Company has good organizational design skills to build distinctive competencies Web of corporate level strategy May pursue both related and unrelated diversification As well as other strategies that improve long-term profitability
Sony’s Web of Corporate-Level Strategy Sony’s Web of Corporate-Level Strategy
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- Fall '19