As a final comment, portfolio matrices may create the illusion of objectivity when in fact a considerable amount of personal judgment is involved when classifying businesses into particular boxes. As noted by
one observer, "ls BMW's North American auto business a 'dog' because
it holds less than 1 percent of a low-growth market or a cash 'cow' because it is market leader in the luxury car segment?"Y
III
I \ II'
I
TYPES OF DIVERSIFICATION
Firms may be classified according to
the mix of businesses owned by the firm. Four major types of business
mix are concentration strategy, vertical integration strategy, concentric diversification strategy, and conglomerate diversification.
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.'concentration
strategy
A form of diversification
strategy that focuses on a
single business operating
in a single industry
segment.
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vertical integ(at'ion'strategy
"
A form of diversification
strategy in which a firm
integrates vertically by
acquiring businesses that
are supply channels or
distributors
to the primary
business; producing its
own inputs is backward
integration,
and distributing its own outputs is
forward integration.
f?~;~{~fr~fE'~r~~lf[a1j~~1~
strategy
.
A form of diversification
strategy in which the firm
expands by creating or
acquiring new businesses
that are related to the
firm's core business.
312
Concentration
Strategy
A firm following the concentration
strategy focuses on a simple business operating in a single industry segment. A firm
is classified as a single business if 95 percent or more of its total sales come
from that business. A concentration strategy allows the firm to become
the best at a particular competency, which may provide a sustained competitive advantage. For example, Wm. Wrigley specializes in chewing
gum and is a leader in that market. The disadvantage
of a concentration
strategy is that a firm assumes a higher degree of risk when most earnings come from a single source.
Vertical Integration Strategy
Another method to grow quickly is to buy
the company that sells you supplies. Or set up retail outlets to sell your
own goods and services, rather than going through others. In vertical
integration, a firm acquires businesses that are supply channels or distributors to the primary business. Producing its own inputs is called backward
integration, and distributing its own outputs is forward integration. Either
may give the firm greater control and allow it to reduce costs and uncertainty. For instance, Time Warner acquired Turner Broadcasting in part to
help distribute Turner's classic movies and also so that the Turner cartoon
network would show Warner Brothers cartoons. A potential disadvantage
of a vertical integration strategy is that the firm may be unfamiliar with the
business of suppliers or distributors, and make mistakes as a result.
Concentric Diversification
Strategy
In concentric diversification,
the
firm expands by creating or acquiring new businesses related to the firm's
core business. This would be the case, for instance, in the recent purchase
of Compaq by Hewlett-Packard.
Concentric diversification strategies offer two advantages. First, it may be possible to reduce costs, because two
similar businesses may share HR departments,
shipping processes, inventory systems, or other activities. Second, the ,core competency of the
original company can be transferred to the newly acquired company. Two
potential disadvantages
of this strategy are that business-unit
managers
do not always cooperate with one another and that corporate headquaramong
ters may not be able to effectively manage the interrelationships
the business units.
part three
Management
Strategy and Decision Making
onglomerate Diversification
Conglomerate
diversification
involves
o';o;{]11anaginga portfolio of businesses that are unrelated to each other. For
}ctifustaIlCe, Union Pacific Corporation's
original focus was building and
"i:"fnanaging railroads. It has now expanded into oil and gas exploration,
:?hUning, microwave technology, fiber optic systems, waste disposal,
.,--trucking, and real estate. One advantage of conglomerate diversification
is that risks are spread across different markets and industries so that potential downturns in one business segment may be offset by higher earnings from other business units.
Research suggests that as a whole conglomerates
are not as profitable as the other types of corporate diversification strategies.22 The main
problems appear to be that conglomerate diversification does not build
on a firm's core competencies and that corporate executives do not have
sufficient knowledge to effectively manage disparate business units.
diversification
Aform of diversification
strategy that involves
managing a portfolio of
businesses that are
unrelated to each other.
"
PROCESS OF DIVERSIFICATION
A firm's corporate diversification
strategy may also be examined in terms of the way it diversifies. Diversification occurs by acquisition and restructuring, and by internationalization.
Acquisition and Restructuring
Strategies
The primary means for conducting a diversification strategy are through acquisition-purchasing
other firms-and
merger-integrating
two firms. Firms engage in mergers and acquisitions to gain greater market power, move into new markets, avoid the cost of new product development,
and spread business
risks. Among the problems that can arise are failure to integrate different
corporate cultures, overvaluation
of the target firm, inability to achieve
successful synergies between the firms, and increased inefficiencies and
poor cost controls attributed to large size. For example, a recent survey
suggests that companies that are merging often focus on cost-cutting, not
consumer service.23
"I
:!
The process of purchasing
other firms.
The process of integrating
two firms.
International
Strategy
Firms are increasingly moving some manufacturing operations overseas. Even small companies seek to secure access to
markets outside domestic borders. Firms internationalize
for a variety of
reasons, including a desire to increase market size, share resources and
knowledge between units, lower costs, and spread business risks across
diverse markets. Internationalization
issues were discussed at length in
Chapter 2.
Business-level
Strategy
Once company leaders determine a diversification
strategy, they must
decide how to compete in each business area or market segment. This is
referred to as business-level strategy. For instance, Kmart and Wal-Mart
have traditionally
emphasized
the low-cost end of the retail market
while Dillard's and Dayton's have focused on high-quality,
higherpriced leading-edge fashion.
chapter seven
Strategic Management
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313