value insights

Corporate Levels of Diversification- Valutrics

Diversified firms vary according to their level of diversification and the connections
between and among their businesses. There are five categories of businesses according to increasing levels of diversification. The single- and dominant-business
categories denote relatively low levels of diversification; more fully diversified firms are
classified into related and unrelated categories. A firm is related through its diversification when there are several links between its businesses; for example, businesses may
share products (goods or services), technologies, or distribution channels. The more
links among businesses, the more “constrained” is the relatedness of diversification.
Unrelatedness refers to the absence of direct links between businesses.

Low Levels of Diversification
A firm pursing a low level of diversification uses either a single- or a dominant-business corporate-level diversification strategy. A single-business diversification strategy is a corporate-level strategy wherein the firm generates 95 percent or more of its sales revenue from its core business area.
With the dominant-business diversification strategy, the firm generates between 70 and 95 percent of its total revenue within a single business area. United Parcel Service (UPS) uses this strategy. Recently UPS generated 74 percent of its revenue from its U.S. package delivery business and 17 percent from its international package business, with the remaining 9 percent coming from the firm’s non-package business. UPS may become more diversified, both in terms of the goods and services it offers and the number of countries in which those goods and services are offered. If this were to happen, UPS would likely become a moderately diversified firm.

Moderate and High Levels of Diversification
A firm generating more than 30 percent of its revenue outside a dominant business and
whose businesses are related to each other in some manner uses a related diversification
corporate-level strategy. When the links between the diversified firm’s businesses are
rather direct, a related constrained diversification strategy is being used. Campbell Soup,
Procter & Gamble, Kodak, and Merck & Company all use a related constrained strategy,
as do some large cable companies. With a related constrained strategy, a firm shares
resources and activities between its businesses. Cable firms such as Comcast and Time
Warner Inc., for example, share technology-based resources and activities across their
television programming, high-speed Internet connection, and phone service businesses.
Currently, Comcast and Time Warner are seeking to add another related product offering, wireless services, to their portfolios of businesses. For each firm, adding wireless
would provide another opportunity to share resources and activities to create more
value for stakeholders.

The diversified company with a portfolio of businesses with only a few links
between them is called a mixed related and unrelated firm and is using the related linked diversification strategy.
Compared with related constrained firms, related linked firms share fewer resources and assets between their businesses, concentrating instead on transferring knowledge and core competencies between the businesses. As with firms using each type of diversification strategy, companies implementing the related linked strategy constantly adjust the mix in their portfolio of businesses as well as make decisions about how to manage their businesses.
As explained in the Strategic Focus, GE recently reorganized its businesses in an effort to better manage them and to facilitate the firm’s transition from an industrial firm to a more technology-driven company. GE is seeking to create value through its corporate-level strategy both in terms of the choices made about the businesses in which the firm will compete and how to manage those businesses.
A highly diversified firm that has no relationships between its businesses follows an unrelated diversification strategy.

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