1. Diversification strategy (Scenario)

Definition and Example:

Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets. Diversification strategy is expected to help firm earn above-average returns while profit came from different sources of market. Perhaps is also should increase firm overall performance.

Value ultimately determined by degree to which the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership. (eg:

Types:

a. Low Levels

Single Business Strategy is Corporate-level strategy in which the firm generates 95% or more of its sales revenue from its core business area (operating in relatively few product markets). Eg: Wrigley only produces chewing and bubble gums.

Dominant Business Diversification Strategy is Corporate-level strategy whereby firm generates 70-95% of total sales revenue within a single business area. Eg: UPS generated 61% of its revenue from its US package delivery biz and 22% from its international package biz, with the remaining 17% coming from the firm’s non-package biz.

b. Moderate to High Levels

Related Constrained Diversification Strategy—Firms generate less than 70% of revenue comes from the dominant business. The firm’s businesses are direct links with each other and share resources and activities between its biz. (i.e., share products, technology and distribution linkages)

Related Linked Diversification Strategy (Mixed related and unrelated). Less than 70% of revenue comes from the dominant business. The diversified company with a portfolio of biz that have only a few links between them is called a mixed related and unrelated firm. Compare with related constrained firms, related linked