Diversification

The status of SBUs in the BCG matrix can _____________ over time!

Change

Conglomerate:

Company that combines 2+ strategic business units under one overarching corporation, and *follows an unrelated diversification strategy*

Product-market diversification strategy:

Firm is active in multiple product markets & multiple geographic markets (mix of both strategies)

Core competence-market matrix:

Framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets.

Diversification definition:

An increase in the variety of products and services a firm offers, or markets and geographic regions in which it competes.

Diversification

(product & geographic diversification), is an additional way that corporate strategy can seek growth. This is kind of like how a firm grows wider!

Core competence-market matrix: Building (2)

*Building* new core competencies to create and compete in markets of the future Position in matrix: Top right (new core comp. and new market)

Core competence-market matrix: Building (1)

*Building* new core competencies to protect and extend current market position Position in matrix: Top left (new core comp. and existing market)

Core competence-market matrix: Leveraging

*Leveraging* core competencies to improve current market position. Position in matrix: Bottom left (existing core comp. and existing market)

Core competence-market matrix: Redeploying and recombining

*Redeploying and recombining* core competencies to compete in markets of the future Position in matrix: Bottom right (existing core comp. and new market)

Richard Rumelt's product market diversification typology----Related diversification strategy:

-Firm derives less than 70% of its revenue from a single product/service -Obtains the rest of its revenue from activities that are linked/related to the primary product/service 2 types: -Related-linked -Related-constrained

Richard Rumelt's product market diversification typology----Unrelated diversification strategy:

-Firm derives less than 70% of revenues from a single product/service -Few, if any, linkages among the business

Richard Rumelt's product market diversification typology----Single business:

-Low level of diversification -Derives 95% or more of revenue from a single product

Two types of Diversification:

-Product diversification -Geographic diversification

Richard Rumelt's product market diversification typology

1. we need to know the percentage of revenue from the dominant or primary business. 2. the extent to which core competencies used across product markets are related or unrelated 3.

Boston Consulting Group (BCG) Growth-Share Matrix:

A corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into four categories: -dogs, -cash cows, -stars, and -question marks, each of which warrants a different investment strategy.

Richard Rumelt's product market diversification typology----Related diversification strategy: *Related-linked diversification strategy*:

A kind of related diversification strategy in which executives pursue *various* business opportunities that *share only a limited number of linkages*

Richard Rumelt's product market diversification typology----Related diversification strategy: *Related-constrained diversification strategy*:

A kind of related diversification strategy in which executives pursue only businesses where they can *apply the resources and core competencies* already available in the primary business

Geographic diversification:

Corporate strategy in which a firm is active in several different geographic markets (e.g., different regions or national markets). Where should the firm compete in terms of regional, national, or international markets?

Product diversification:

Corporate strategy in which a firm is active in several different product markets. What range of products and services should the firm offer?

Geographic diversification strategy:

Corporate strategy with a singular focus on geographic variety.

Richard Rumelt's product market diversification typology----Dominant Business:

Derives 70-95% of revenue from a single product

BCG Matrix: Cash cows

Earnings: High, stable Cash Flow: High, stable Strategy: Hold

BCG Matrix: Stars

Earnings: High, stable, or growing Cash Flow: Neutral Strategy: Hold or invest for growth

BCG Matrix: Dogs

Earnings: Low, unstable Cash Flow: Neutral or negative Strategy: Sell/divest

BCG Matrix: Question marks

Earnings: Low, unstable, or growing Cash Flow: Negative Strategy: Increase market share, or divest/sell

Diversification discount:

Situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units

Diversification premium:

Situation in which the stock price of related diversification firms is valued at greater than the sum of their individual business units.

SBUs =

Strategic Business Units