Podcast
Questions and Answers
What advantage do corporate executives have over the market in terms of capital allocation?
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?
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?
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?
What are the main costs associated with related diversification?
Why might a company divert investments toward a specific unit?
Why might a company divert investments toward a specific unit?
What characterizes a single business in terms of revenue diversification?
What characterizes a single business in terms of revenue diversification?
Which type of diversification involves a business unit generating between 70% and 95% of the revenue?
Which type of diversification involves a business unit generating between 70% and 95% of the revenue?
What is the maximum revenue percentage for the main business in related diversification?
What is the maximum revenue percentage for the main business in related diversification?
Which type of related diversification allows for the entry into new businesses only when they leverage existing resources?
Which type of related diversification allows for the entry into new businesses only when they leverage existing resources?
In linked related diversification, how do executives feel about the limitations of resources and skills?
In linked related diversification, how do executives feel about the limitations of resources and skills?
Which example best represents a single business model?
Which example best represents a single business model?
What is a key feature of dominant business diversification?
What is a key feature of dominant business diversification?
Which of the following best describes limited related diversification?
Which of the following best describes limited related diversification?
What characterizes unrelated diversification?
What characterizes unrelated diversification?
Which company is not an example of leveraging core skills for diversification?
Which company is not an example of leveraging core skills for diversification?
What drives companies to grow according to the content?
What drives companies to grow according to the content?
How should companies approach new market opportunities?
How should companies approach new market opportunities?
What is the primary aim of a diversification strategy?
What is the primary aim of a diversification strategy?
Why is related diversification significant in emerging economies?
Why is related diversification significant in emerging economies?
What role do strategic leaders play in the context of core skills?
What role do strategic leaders play in the context of core skills?
Which of the following is NOT a type of diversification as identified by Rumelt?
Which of the following is NOT a type of diversification as identified by Rumelt?
Which type of diversification involves having a primary business while still earning revenue from other related activities?
Which type of diversification involves having a primary business while still earning revenue from other related activities?
Which statement is true about core skills?
Which statement is true about core skills?
What is a primary focus for companies leveraging core skills?
What is a primary focus for companies leveraging core skills?
Which of the following best defines product diversification?
Which of the following best defines product diversification?
What is a possible outcome of an effective diversification strategy?
What is a possible outcome of an effective diversification strategy?
Which statement correctly reflects the characteristics of a single business type of diversification?
Which statement correctly reflects the characteristics of a single business type of diversification?
The classification of diversification types is based on which two key variables?
The classification of diversification types is based on which two key variables?
What is a key strategy for leveraging core skills in diversification?
What is a key strategy for leveraging core skills in diversification?
Which bank acquired Bank of America in 1997?
Which bank acquired Bank of America in 1997?
During which decades did NationsBank significantly expand by buying regional banks?
During which decades did NationsBank significantly expand by buying regional banks?
What was the original name of Bank of America when it was founded?
What was the original name of Bank of America when it was founded?
What was NationsBank’s core skill that led to its success in acquiring other banks?
What was NationsBank’s core skill that led to its success in acquiring other banks?
Which strategy is NOT related to leveraging existing core skills according to the concept of diversification?
Which strategy is NOT related to leveraging existing core skills according to the concept of diversification?
What year was Bank of America renamed from Bank of Italy?
What year was Bank of America renamed from Bank of Italy?
Which of the following best describes the term 'core competencies' in the context of diversification?
Which of the following best describes the term 'core competencies' in the context of diversification?
What was the primary strategy used by NationsBank to grow in size and geographic reach?
What was the primary strategy used by NationsBank to grow in size and geographic reach?
What significant acquisition did Bank of America make during the 2008 crisis?
What significant acquisition did Bank of America make during the 2008 crisis?
What market segment did Bank of America enter after acquiring Merrill Lynch?
What market segment did Bank of America enter after acquiring Merrill Lynch?
What challenge does Bank of America face after diversifying its services?
What challenge does Bank of America face after diversifying its services?
In which decade did Gatorade first dominate the sports drink market?
In which decade did Gatorade first dominate the sports drink market?
What is the core competency highlighted in the context of NationsBank's strategy?
What is the core competency highlighted in the context of NationsBank's strategy?
What does it mean to 'redeploy and recombine existing core skills'?
What does it mean to 'redeploy and recombine existing core skills'?
What sector does Gatorade primarily belong to?
What sector does Gatorade primarily belong to?
Flashcards
Diversification
Diversification
A corporate strategy that aims to expand a company's product or service offerings or geographic markets, seeking to reduce risk and enhance growth.
Single Business Diversification
Single Business Diversification
A company that focuses its activities on a single product or service.
Dominant Business Diversification
Dominant Business Diversification
A company deriving a majority of its revenue from a single product or service but also offers a limited range of other products or services.
Related Diversification
Related Diversification
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Unrelated Diversification
Unrelated Diversification
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Diversification Strategy
Diversification Strategy
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Product Diversification
Product Diversification
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Geographic Diversification
Geographic Diversification
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Limited Related Diversification
Limited Related Diversification
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Linked Related Diversification
Linked Related Diversification
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Leveraging Core Competencies
Leveraging Core Competencies
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Economies of Scope
Economies of Scope
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Acquiring and Integrating
Acquiring and Integrating
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Merging
Merging
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Single Business
Single Business
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Dominant Business
Dominant Business
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Leveraging Core Skills
Leveraging Core Skills
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Redeploying and Recombining Core Skills
Redeploying and Recombining Core Skills
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Acquiring Other Businesses (Mergers & Acquisitions - M&A)
Acquiring Other Businesses (Mergers & Acquisitions - M&A)
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Unrelated Diversification (Conglomerate)
Unrelated Diversification (Conglomerate)
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Core Skills
Core Skills
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Leveraging Core Skills to Diversify
Leveraging Core Skills to Diversify
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New core skills for existing markets
New core skills for existing markets
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New core skills for new markets
New core skills for new markets
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Building new core skills to protect and extend current position
Building new core skills to protect and extend current position
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Building new core skills to create and compete in future markets
Building new core skills to create and compete in future markets
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Efficient Capital Allocation
Efficient Capital Allocation
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Coordination Costs
Coordination Costs
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Influence Costs
Influence Costs
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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.
