Module 6 Discussion

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zrbj92

Business Finance

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Read Chapter 6 and the PowerPoint slides of the chapter 6. Analyze the diversification strategies of Procter & Gamble, Nike, Microsoft, Coca-Cola, and 3M by explaining

  1. Which diversification strategies doe the firm most likely use?(1 point)
  2. How does the firm benefit from the diversification strategy? (2 points)

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Chapter 6 Corporate-Level Strategy Two Strategy Levels • Business-level Strategy (Competitive) – Each business unit in a diversified firm chooses a business-level strategy as its means of competing in its individual product markets. • Corporate-level Strategy (Companywide) – Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets. Expanding Beyond a Single Industry Staying inside a single industry allows a company to: • Focus its resources  ‘Stick to the knitting’ BUT staying within a single industry: • • • Can be dangerous if the industry matures and goes into decline May cause firms to miss the opportunity to leverage their core competencies in new industries Can cause firms to develop a tendency to rest on their laurels and not engage in constant learning To stay agile, companies must leverage – find new ways to take advantage of their core competencies and core business model in new markets and industries. Corporate-Level Strategy: Key Questions • Corporate-level Strategy’s Value – The degree to which the businesses in the portfolio are worth more under the management of the firm than they would be under other ownership. – What businesses should the firm be in? – How should the corporate office manage the group of businesses? Business Units Levels of Diversification Procter & Gamble Three GBUs  Beauty (34.0% of 2010 sales) The Beauty GBU includes all hair and skin products, medications, razors, electric shavers, and batteries. This business unit includes several product lines acquired when the P&G bought consumer products company Gillette in 2005.  Health and Well-Being (18.3% of 2010 sales) The Health and Well-Being GBU provides oral care, feminine health, pharmaceuticals, snacks, coffee, and pet care products.  Household Care (48.4% of 2010 sales) The Household Care GBU manufactures a wide range of products from laundry detergent to diapers. Nike’s Business Segments • Footwear (54% of Revenue) Nike specializes in athletic footwear, particularly in running, crosstraining, basketball, and soccer, although Nike also sells sportinspired casual footwear like its Air Force Ones footwear line. • Apparel (27% of Revenue) Nike sells sports apparel such as running shorts, t-shirts, and licensed apparel (with logos of college and professional sports teams). • Equipment (6% of Revenue) Nike also sells sports equipment such as balls, protective equipment, and golf clubs. • Other (13% of Revenue) Nike also sells apparel and footwear under the Nike Golf, Cole Haan, Converse, Hurley International, and Umbro brand names. Nike earned approximately 13% of its revenue, or $2.5 billion in 2009, from these segments. Microsoft’s Product Divisions • Client (28% of revenue in FY2009) The client segment includes sales and marketing expenses for the Windows operating system. • Server and Tools - Products for IT Professionals (22% of revenue in FY2009): The Server and Tools segment develops and markets software server products, services, and solutions such as Windows Server 2008 and Visual Studio 2008. • Business (32% of revenue in FY2009) Microsoft Business Division (“MBD”) includes the Microsoft Office system (about 90% of MBD revenue) and Microsoft Dynamics business solutions. • Online Services (5% of revenue in FY2009) The Online Services Business (“OSB”) consists of the Bing search engine, personal communications services such as email and instant messaging, online information offerings such as Live Search, and the MSN portals and channels around the world. • Entertainment and Devices (13% of revenue in FY2009) Entertainment and Devices includes the highly successful Xbox and Xbox 360 video game consoles, a large collection of Microsoft-licensed video and computer game titles (including Halo and the Age of Empires series), Windows Mobile and Automotive (operating systems for mobile and car navigation devices), and the Zune MP3 player. Coca-Cola Company’s Product Portfolio • Carbonated Soft Drinks (74%) The Coca Cola Company's products classified as carbonated soft drinks (CSD) include: Coca-Cola, Diet Coca-Cola, Sprite, Fanta, Barq's Root Beer, Coke Zero • Non-carbonated Soft Drinks (26%) The Coca-Cola Company's major non-CSD offerings (>$1 billion in annual sales) include: Dasani bottled water, Glaceau VitaminWater, POWERade sports drinks, Minute Maid and Minute Maid To Go juices, Aquarius sports drinks, Nestea, Sokenbicha, Odwalla 3M Company’s Business Segments • Healthcare (18.6% of sales) Medical Supplies; Skin Products; Pharmaceuticals (sold in 2007); Drug Delivery Systems; Dental / Orthodontic; Health Information Systems; Microbiology • Industrial & Transportation (30.8% sales) Abrasive Systems; Industrial Adhesives; Personal Care; 3M Dyneon; CUNO; Specialty Materials; HighJump Software; Aerospace; Packaging; Automotive • Consumer & Office (15% of sales) Stationary; Office; Home Care; Protection; Construction; Home Improvement; Visual Systems • Display & Graphics(13.5% of sales) Optics Systems; Commercial Graphics, Traffic Safety Systems; Touch Systems • Electro & Communications (9.8% of sales) Electronics Solutions; Electric Markets; Communications Markets; Electronics Material Markets • Safety, Security & Protection (13.8% of sales) Industrial Minerals; Commercial Care; Security Systems; Building Safety; Corrosion Protection; Occupational health; Environmental Safety Reasons for Diversification • A number of reasons exist for diversification including – Value-creating • Operational relatedness: sharing activities between businesses • Corporate relatedness: transferring core competencies into business – Value-neutral – Value-reducing Value Creating Strategies: Operational and Corporate Value-Creating Diversification (VCD): Related Strategies • 1. Operational Relatedness: Sharing activities – Can gain economies of scope – Share primary or support activities (in value chain) • Risky as ties create links between outcomes – Related constrained share activities in order to create value – Not easy, often synergies not realized as planned Sharing Resources at Procter & Gamble Value-Creating Diversification (VCD): Related Strategies (Cont’d) • 2. Corporate Relatedness: Core competency transfer – Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience and expertise – Two sources of value creation • Expense incurred in first business and knowledge transfer reduces resource allocation for second business • Intangible resources difficult for competitors to understand and imitate, so immediate competitive advantage over competition – Use related-linked diversification strategy Transfer of Competencies at Philip Morris Value-Creating Diversification (VCD): Related Strategies (Cont’d) • Market Power – Exists when a firm is able to sell its products above the existing competitive level, to reduce costs of primary and support activities below the competitive level, or both. – Multimarket (or Multipoint) Competition • Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets. – Related diversification strategy may include • Vertical Integration • Virtual integration How Does Diversification Benefit Them? • • • • Apple: Macs, iPods, iPhones, iPads FedEx: Air Service & Ground Service Honda: Automobile & Motorcycle Walt Disney Company: Filmmaking & Theme Parks • PepsiCo: Foods & Beverages • A newspaper company purchases a TV station and uses the company’s helicopter for both units 18 Value-Creating Diversification (VCD): Unrelated Strategies • Creates value through two types of financial economies – Cost savings realized through improved allocations of financial resources based on investments inside or outside firm • Efficient internal capital market allocation – Restructuring of acquired assets • Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market Value-Neutral Diversification: Incentives and Resources • Incentives to Diversify – – – – – Antitrust Regulation and Tax Laws Low Performance Uncertain Future Cash Flows Synergy and Firm Risk Reduction Resources and Diversification External Incentives to Diversify Anti-trust Legislation • Antitrust laws in 1960s and 1970s discouraged mergers that created increased market power (vertical or horizontal integration. • Mergers in the 1960s and 1970s thus tended to be unrelated. • Relaxation of antitrust enforcement results in more and larger horizontal mergers. • Early 2000: antitrust concerns seem to be emerging and mergers are now more closely scrutinized. Value-Reducing Diversification: Managerial Motives to Diversify • Top-level executives may diversify in order to diversity their own employment risk, as long as profitability does not suffer excessively – Diversification adds benefits to top-level managers but not shareholders – This strategy may be held in check by governance mechanisms or concerns for one’s reputation
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Explanation & Answer

Attached.

Running head: DIVERSIFICATION STRATEGIES

Diversification Strategies
Institution Affiliation
Date

1

DIVERSIFICATION STRATEGIES

2

Procter & Gamble
The company is known as the world leader in the household package products industry.
Initially, the company was under limited diversification only providing consumers with soaps and
candles. After some years of operations, the company saw the need to use diversification strategies
by introducing new products in the market. Today Procter and Gamble offer one of the strongest
and most trusted product lines, which includes products such as Tide, Pampers, Duracell, and Crest
(Hanson et al. 2001). The company has emerged the best in beauty and grooming, health and
wellbeing, and household care. The type exhibited by Procter & Gamble is referred to as
Concentric Diversification Strategy, that is, the introduction of new products that are related to the
marke...


Anonymous
Excellent! Definitely coming back for more study materials.

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