Corporate Strategy: Diversification

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Questions and Answers

What advantage do corporate executives have over the market in terms of capital allocation?

Executives can negotiate better deals with investors.

Executives can predict market trends more accurately.

Executives can better assess their business units' potential performance. (correct)

Executives have access to more funding sources.

Which diversification strategy is most likely to increase performance?

Dominant-business strategy

Single-business strategy

Unrelated diversification strategy

Related diversification strategy (correct)

What must be considered to ensure that diversification creates additional value?

The company must focus on a single market.

The business should invest solely in high-risk ventures.

The benefits of diversification must exceed associated costs. (correct)

The size of the company must increase.

What are the main costs associated with related diversification?

Coordination costs and influence costs. Signup and view all the answers

Why might a company divert investments toward a specific unit?

Market information about the specific unit is misleading. Signup and view all the answers

What characterizes a single business in terms of revenue diversification?

It generates 95% or more of the revenue from a single business unit. Signup and view all the answers

Which type of diversification involves a business unit generating between 70% and 95% of the revenue?

Dominant business Signup and view all the answers

What is the maximum revenue percentage for the main business in related diversification?

70% Signup and view all the answers

Which type of related diversification allows for the entry into new businesses only when they leverage existing resources?

Limited Related Diversification Signup and view all the answers

In linked related diversification, how do executives feel about the limitations of resources and skills?

They see them as flexible and non-restrictive. Signup and view all the answers

Which example best represents a single business model?

Netflix Signup and view all the answers

What is a key feature of dominant business diversification?

Engage in multiple business activities sharing core competencies. Signup and view all the answers

Which of the following best describes limited related diversification?

New business units should leverage the company's skills. Signup and view all the answers

What characterizes unrelated diversification?

Few resources or skills are shared between business units. Signup and view all the answers

Which company is not an example of leveraging core skills for diversification?

General Motors Signup and view all the answers

What drives companies to grow according to the content?

The demand for continuous growth to benefit shareholders. Signup and view all the answers

How should companies approach new market opportunities?

By building new core skills to compete in future markets. Signup and view all the answers

What is the primary aim of a diversification strategy?

To determine which products or services to offer and in which geographic markets Signup and view all the answers

Why is related diversification significant in emerging economies?

It helps overcome structural deficiencies in those economies. Signup and view all the answers

What role do strategic leaders play in the context of core skills?

They aim to identify core skills for future growth opportunities. Signup and view all the answers

Which of the following is NOT a type of diversification as identified by Rumelt?

Geographic diversification Signup and view all the answers

Which type of diversification involves having a primary business while still earning revenue from other related activities?

Dominant business Signup and view all the answers

Which statement is true about core skills?

They help create value and enhance customer benefits. Signup and view all the answers

What is a primary focus for companies leveraging core skills?

To identify and protect their current market position. Signup and view all the answers

Which of the following best defines product diversification?

Expanding the range of products or services offered by a company Signup and view all the answers

What is a possible outcome of an effective diversification strategy?

Enhanced market stability and reduced risks by spreading revenue sources Signup and view all the answers

Which statement correctly reflects the characteristics of a single business type of diversification?

The company primarily earns revenue from one dominant business Signup and view all the answers

The classification of diversification types is based on which two key variables?

Percentage of revenue from the main business and relationships between core skills Signup and view all the answers

What is a key strategy for leveraging core skills in diversification?

Improving market position Signup and view all the answers

Which bank acquired Bank of America in 1997?

NationsBank Signup and view all the answers

During which decades did NationsBank significantly expand by buying regional banks?

1970s and 1980s Signup and view all the answers

What was the original name of Bank of America when it was founded?

Bank of Italy Signup and view all the answers

What was NationsBank’s core skill that led to its success in acquiring other banks?

Valuation and acquisition Signup and view all the answers

Which strategy is NOT related to leveraging existing core skills according to the concept of diversification?

Entering completely unrelated markets Signup and view all the answers

What year was Bank of America renamed from Bank of Italy?

1922 Signup and view all the answers

Which of the following best describes the term 'core competencies' in the context of diversification?

Unique skills that differentiate a business Signup and view all the answers

What was the primary strategy used by NationsBank to grow in size and geographic reach?

Acquiring and integrating other commercial banks Signup and view all the answers

What significant acquisition did Bank of America make during the 2008 crisis?

Merrill Lynch Signup and view all the answers

What market segment did Bank of America enter after acquiring Merrill Lynch?

Investment banking and wealth management Signup and view all the answers

What challenge does Bank of America face after diversifying its services?

Leveraging economies of scope Signup and view all the answers

In which decade did Gatorade first dominate the sports drink market?

1990s Signup and view all the answers

What is the core competency highlighted in the context of NationsBank's strategy?

Acquisition and integration of banks Signup and view all the answers

What does it mean to 'redeploy and recombine existing core skills'?

To apply existing abilities in new markets Signup and view all the answers

What sector does Gatorade primarily belong to?

Sports drinks Signup and view all the answers

Study Notes

Diversification

Diversification is a corporate strategy aiming to answer the question of which products or services a company should offer and in which markets.
It involves product diversification (number of products/services) and geographic diversification (number of geographic markets).
A diversified company may offer a set of products/services in one market, one product/service in multiple markets, or a combination of both.

Types of Diversification

Rumelt's classification of diversification types uses two key variables: (1) revenue percentage from the primary business; and (2) relationship between core skills of different business units.
Single business: 95% or more of revenue comes from a single business unit (e.g., Netflix).
Dominant business: 70% to 95% of revenue generated from the dominant business unit, while undertaking other business activities (e.g., Harley-Davidson).
Related diversification (RD): The main business unit contributes less than 70% of the revenue. This strategy leverages economies of scale and scope, given common skills and resources among business units.
Limited Related Diversification: The core business generates less than 70% of revenue with the remaining coming from related units. Entry into new businesses is limited by competencies and resources.
Linked Related Diversification: Similar skills or resources are used in the different units of the company but there might not be a direct link between them (e.g., Amazon).
Unrelated Diversification (or Conglomerate): The primary business contributes less than 70% of revenue, and there are few, if any, links between business units (e.g., Berkshire Hathaway).

Leveraging Core Skills to Diversify

Core skills are unique strengths that increase perceived customer value or reduce costs.
Examples include Walmart, Google, Inditex, Ikea, and Coca-Cola.
Companies need to grow continuously to survive and thrive, especially publicly traded companies.
Companies needing to diversify need to identify their core skills to understand their current market position.
Leveraging existing core skills can be done in existing or new markets.

Diversification and Results

Executives aim to maintain a competitive advantage through diversification, but it's not always successful.
Diversification's success hinges on exceeding its costs with benefits.
An inverted U-shaped relationship exists between diversification and performance, showing that very low and very high levels of diversification exhibit poorer performance, compared to moderate levels.
Single-business models can improve if core competencies are applied to similar adjacent businesses.
Unrelated diversification often experiences a "diversification discount."
Related diversification more often than not exhibits a diversification premium.
Sources of value creation and costs exist for various corporate strategies, including vertical integration, related, and unrelated diversification.
Internal capital markets can be a source of value creation, as corporate executives possess a more accurate understanding of potential returns than external markets; therefore the company allocates capital in a more efficient manner.
Diversification strategies must be assessed and managed, with factors such as market share and growth rate taken into consideration.

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Description

This quiz explores the concept of diversification in corporate strategy, focusing on product and geographic diversification. It delves into Rumelt's classification of different types of diversification, including single, dominant, and related diversifications. Test your understanding of how companies choose their markets and products through diversification approaches.