[Solution] Corporate-Level Strategy Formulation
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Author: Sarah Bennett
When a large organization is engaged in multiple businesses, industries, and/or markets, managers decide which opportunities the organization will pursue and how to manage the various lines of business. These decisions are expressed in the corporate strategy.
Diversification
When an organization operates multiple businesses, the different businesses or sets of related businesses are called strategic business units (SBUs).
Diversification is the number and diversity of businesses in which an organization is engaged. A company with a large number of businesses with little relationship to each other has high diversification. A firm with a small number of businesses or businesses that are closely related has low diversification.
A company has the least amount of diversification when it has a single-product strategy, providing just one product or service, often in a single market. Because the organization specializes in its one offering, it can become very good at making and selling it. However, if customer demand for the product wanes, the company is in trouble. Diversification makes organizations more resilient, because even if some businesses do worse when the environment changes, others may be unaffected or even do better.
Corporate Diversification Spectrum
Single-Product Strategy
No diversification
Related Diversification
Businesses share resources or capabilities
Unrelated Diversification
Businesses have few connections
Related Diversification
In related diversification, the organization operates multiple businesses that share resources, capabilities, or markets. This approach allows the company to leverage synergies between business units, potentially achieving economies of scope.
Related diversification can be:
- Vertical - Operating at different stages of the same production chain
- Horizontal - Operating similar businesses at the same stage of production but in different markets
Unrelated Diversification
With unrelated diversification, a company operates in multiple businesses that have few or no meaningful connections. This approach is often pursued to spread risk across different industries and markets, protecting the organization from downturns in any single sector.
Select the terms that best complete the following sentences.
An organization that sells only one product or service is using a .
View Explanation
An organization offering one product or service is using a single-product strategy. This is the strategy with the least diversification. SBUs are the different businesses or sets of businesses found in organizations that sell multiple products or services.
Select the correct response(s) to the following question.
Which of the following are disadvantages of unrelated diversification? Check all that apply.
- Inability to leverage synergies across businesses
- Unfamiliarity of corporate-level managers with the various businesses
- Poor decisions about resource allocation to different businesses
- Risk that a downturn in an industry or geographic area affects all businesses
View Explanation
In unrelated diversification, the fact that the businesses are very different from each other (or any differences are purely coincidental) is supposed to be a strength, allowing the organization to move into many areas of opportunity and cushioning it against downturns in any one business. It is true that being in many unrelated businesses tends to protect the organization from difficulties in any one business, so this is a strength. However, in unrelated diversification, corporate-level managers usually do not understand the businesses well enough to make good decisions about resource allocation. Moreover, the fact that the corporation makes no effort to find synergies puts it at a disadvantage relative to corporations practicing related diversification.
