Principales usos

calculated for each FTSE100 company as at 1993, 1998 and 2003.

5.2.3.2 Strategy Schemes Rumelt

The categorisation scheme most widely used in diversification research is that initially devised by Wrigley and further developed/enhanced by Rumelt (1974). The strategy-based scheme provides a practical, albeit inherently more subjective, and logical approach to determining a company‟s level of diversification; single business, dominant business, related diversified and unrelated diversified or conglomerate.

Recognising the almost universal acceptance of turnover as the only valid measure of activity, Rumelt (1974) equated value ranges of two turnover- based ratios - specialisation and related – to 4 separate diversification categories as per the following table:

Table 23: Rumelt’s 4-Category Categorisation Scheme Description Ratios SB Single Business Rs ≥ 0.95 DB Dominant Business 0.95 > Rs ≥ 0.70 RB Related Business Rs < 0.70; Rr ≥ 0.70 UB Unrelated Business Rr < 0.70 Where;

Rs (specialisation ratio) – the proportion of total turnover accounted for by the largest

single business unit,

Rr (related ratio) – the proportion of total turnover attributable to the company‟s

largest group of somehow related business activities.

Source: Adapted from Rumelt (1974)

In addition to developing the „basic‟ 4-category scheme, Rumelt (1974) also created sub-divisions to reflect different degrees of relatedness in the dominant and related categories and the passive or acquisitive nature of companies in the unrelated diversified category. Although this expanded scheme comprising 9 categories used an additional ratio - Vr (vertical ratio) -

to determine the degree of vertical integration amongst dominant companies, the additional categories were heavily dependent on subjective judgements. Rumelt (1977) continued to develop the expanded scheme and by 1982 had reduced it to 7 categories - dominant sub-divided into dominant vertical, dominant constrained and dominant linked and related sub-divided into related constrained and related linked – with categorisation determined more objectively by using a further ratio – Rc (related core).

Table 24: Rumelt’s 7-Category Categorisation Scheme

Description Ratios

SB Single Business Rs ≥ 0.95

DV Dominant Vertical Rv ≥ 0.70

DC Dominant Constrained 0.95 > Rs ≥ 0.70; Rc > (Rr+Rs)/2

DLU Dominant Linked-Unrelated 0.95 > Rs ≥ 0.70; Rc < (Rr+Rs)/2

RC Related Constrained Rs < 0.70; Rr ≥ 0.70; Rc > (Rr+Rs)/2

RL Related Linked Rs < 0.70; Rr ≥ 0.70; Rc < (Rr+Rs)/2

UB Unrelated Business Rr < 0.70

Where;

Rs (specialisation ratio) – the proportion of turnover accounted for by the largest

single business unit,

Rc (related core ratio) – the proportion of turnover attributable to its largest group of

businesses which share or draw on the same common core skill,

Rr (related ratio) – the proportion of a company's turnover attributable to its largest

group of somehow related businesses,

Rv (vertical ratio) – the proportion of turnover attributable to the company‟s largest

group of products, joint-products and by-products.

Source: Adapted from Rumelt (1982, p360)

The sub-division of the related category was dependent on linkages in terms of vertical integration (measured by Rv - the vertical ratio) and use of common

skills (measured by Rc - the related core ratio) between dominant and other

activities while sub-division of the related category was dependent on the interdependence of the related activities. While the expanded 7-category scheme is more detailed and „richer‟ than the original 4-category scheme, it is inherently more subjective as it requires additional assessments of product relatedness according to the degree of vertical integration across business activities and the processes/skills used in those activities.

Notwithstanding the significantly increased level of subjectivity, the additional data requirements of the 7-category scheme make its adoption in this research difficult; it requires information/assessments regarding core skills to

calculate the related core ratio (Rc) and identification/assessments of by-

products and their internal uses to calculate the vertical ratio (Rv).

The basic 4-category Rumelt scheme has been used by the overwhelming majority of researchers in this field (Dess, Gupta, Hennart & Hill, 1995). It uses turnover or its equivalent and through the calculation of 2 simple ratios and an assessment of product and/or service relatedness provides a sound basis for a categorisation that is consistent with those used in the Model of Corporate Development.

Hill & Pickering

Hill & Pickering‟s (1986) strategy-based scheme is one of the simplest; it has only 3 categories – low, medium and high diversification – which are determined according to the distribution of turnover between core and non- core activities. The categories are defined as follows:

Low diversification - non-core turnover less than 5% of total turnover, Medium diversification - non-core turnover between 5% and 25% of total

turnover,

High diversification - non-core turnover greater than 25%.

A major strength claimed for the scheme is its simplicity. However, that simplicity is also a weakness in that it effectively ignores diversification beyond that identified between core and non-core activities. Therefore, the scheme does not reflect the underlying breadth of a company‟s activities nor does it make any distinction between related and conglomerate companies.

An extreme example of the scheme‟s weaknesses would be a company that, by reporting two activities each accounting for 50% of turnover, would be classified as highly diversified which would not be a fair reflection of its limited spread of activities. Furthermore, the low thresholds determining low and medium diversification result in a very large number of companies being categorised as highly diversified, i.e. conglomerates. A revision to the Hill & Pickering (1986) scheme that mitigates this problem is to apply the thresholds to turnover distributions across related groups rather than individual activities. A conglomerate would then be a company with more than one unrelated activity with the smallest – the non-core activity - generating at least 25% of its turnover.

This research has used the modified Hill & Pickering (1986) scheme as an alternative, primarily to support the categorisation of conglomerate or highly diversified companies.

Channon

In the 1970s Channon (1973 & 1978) produced the first research into UK diversification. His initial research (Channon, 1973) concentrated on the largest, by turnover, industrial/manufacturing companies and was part of a Harvard Business School project, administered by Scott (1973) that also included similar research in France and Germany by Dyas & Thanheiser (1976) and in Italy by Pavan (1976). Recognising the increasing importance of the service sector in the UK economy, in 1978 Channon undertook further

research concentrating on the largest, by turnover or its equivalent, UK service companies.

The categorisation scheme adopted by Channon (1973) was effectively the Rumelt (1974) 4-category scheme although the category descriptions were modified to better explain each category and the underlying concepts of relatedness. Channon‟s (1973) definitions are:

Single product - At least 95% of turnover in a single product area.

Dominant product - Single dominant product with at least 70% of total turnover with other products, which may or may not be related to the dominant product or other minor products, comprising 30% of total turnover.

Related product - Multiple related products/markets, no single product line with 70% or more of total turnover and related products/markets account for 70% of more of total turnover.

Unrelated product - Multiple unrelated products/markets, no single product line with more than 70% of total turnover and related products/markets account for less than 70% of total turnover.

The cut-off points used by Channon (1973) are effectively those established by Rumelt (1974) and research into the appropriateness of the category values of the specialisation ratio has found them to be robust (Reed & Sharp, 1987). They also seem reasonable, e.g. setting the cut-off for a single product company at 95% recognises that very few companies have one single product that accounts for 100% of turnover. The cut-offs used by Channon (1973) in

his UK research were also used in other European studies under the Harvard programme; Dyas & Thanheiser (1976) in Germany and France and Pavan (1976) in Italy. The consistency of the categorisation schemes used across the Harvard programme ensure that, in addition to the identification of trends, valid country comparisons may be made.

In adopting this scheme, Channon (1973) retained the simplicity of the Rumelt (1974) scheme and its link to the categories in the Model of Corporate Development, ensured that relatedness between activities was taken into consideration in determining a company‟s degree of diversification and distinguished between diversified and conglomerate companies. However, as with Rumelt (1974), it must be recognised that categorisations under the scheme are, inherently, subjective as they require assessments of the relatedness between activities. While not universally adopted in UK research, the Channon (1973) scheme was also used by Whittington & Mayer (2000) which meant that there are strong methodological links between the key pieces of extant UK conglomerate research.

Whittington & Mayer

Whittington & Mayer (2000), whose research is the most recent covering the 10-year period between 1983 and 1993, adopted Channon‟s (1973) categorisation. Their pragmatic approach not only recognised the scheme‟s heritage, robustness and widespread use and acceptance but also ensured consistency with prior UK research dating back to 1950 allowing meaningful trend analysis to be undertaken. In addition, Whittington & Mayer (2000) also

categorised UK companies according to Rumelt‟s (1982) expanded 7- category scheme an exercise which, apart from being inherently very subjective, would have necessitated more resources, both time and information, than were available for this research.