Ch.9 Corporate Strategy Flashcards
What does corporate strategy deal with?
deals with the overall scope of the organisation and how value is added across different businesses of the organisation as a whole.
Central concept: Determining the ‘scope’ of an organization based on strategic decisions.
What is scope?
Scope is fundamental in strategy, determining how firms adjust for growth or contraction, especially in turbulent times.
It involves decisions on diversification based on products and markets.
Ansoff’s Corporate strategy Matrix provides 4 growth directions, what are those?
- Market Penetration
- Market Development,
- Product/Service Development
- Diversification (both related and unrelated).
Organizational growth can be approached from various strategic directions. Whether penetrating
existing markets, expanding into new markets with existing products, innovating new products for current markets, or diversifying into unrelated areas, each strategy comes with its set of advantages and challenges. The optimal choice
depends on the organization’s capabilities, market conditions, and long-term objectives.
What is diversification, Related diversification, Unrelated diversification?
Diversification increased product/market range.
Related Diversification: expanding into related product or services/markets.
Unrelated diversification: moving into products or services with no relationship to existing businesses.
What is market penetration?
Focuses on increasing (current market) market share with current products in existing
markets.
Benefits:
Builds on established capabilities, no need to venture into uncharted territory, increased.
Constraints:
1. Possible retaliation from competitors.
- They defend their shares, increased rivalry - price wars/expensive marketing battles which may cost more
than market-share gains are worth.
- Legal constraints:
- Legal issues from monopolistic control.
- Greater market penetration can raise conerns from official competition regulators concerning excess power. Ex M&A in UK more than 25% of national market - Economic constraints like market downturns.
What is market development?
Involves introducing existing products/services to new markets, either targeting new user
segments or expanding geographically.
Can be more attractive than product and service development by being potentially cheaper and quicker to execute. a form of related diversification.
Challenges:
catering to unfamiliar customer needs, coordinating diverse user needs, and adapting
marketing strategies.
What is product and service development?
Introduces modified or new products/services to existing markets.
EX: Apple’s expansion from iPhone to iPad to Apple Watch.
Challenges:
1. Acquiring new resources and capabilities.
- Project management risks. High risks due to project complexities, potential delays, and rising costs.
What is unrelated diversification?
Expansion into completely different markets, products, or services.
Motives: Growth, risk diversification, and financial cost reductions.
Distinction between related and unrelated diversification can be fluid. Conglomerate diversification is an extreme form of unrelated diversification with no operational links between businesses.
Issues with conglomerates:
Lack of synergy, additional bureaucratic costs, and potential ‘conglomerate discount’ affecting share prices. No obvious way for businesses to work together to gain additional value
What are some Value-creating drivers for diversification?
- Exploiting Economies of Scope:
Achieving cost savings by sharing inputs, distribution, and applying existing resources to new services or markets. Ex. Uni dorms to tourists during summer. - Stretching Corporate Management Capabilities:
- Utilizing corporate-level managerial talents across different (new) businesses. (corporate parenting skills)
- Dominant logic is the set of corporate-level managerial capabilities applied across the portfolio of businesses.
Ex: LVMH, diversifies into various businesses and leverages its
corporate-level skills in brand development. share few operational resources or business level capabilities. - Exploiting Superior Internal Processes:
Internal processes can be more efficient than external processes in the open market, especially in emerging markets.
EX: China’s conglomerates, such as the Fosun Group, due to their ability to mobilize internal investment
and utilize networks. - Increasing Market Power:
Diversifying can enhance power against competitors by discouraging aggressive competition and enabling cross-subsidization across businesses.
Synergistic Diversification:
What is synergistic diversification?
Where diversification creates value = synergistic. Synergies - benefits gained where activities or assets
complement each other so that their combined effect is greater than the sum of the parts (2+2=5)
This creates value when the combined impact of businesses is more than the sum of their individual contributions.
Example: Disney’s acquisition of Marvel allowed it to leverage Marvel’s characters across its various business sectors.
What are some Value-destroying drivers for diversification?
- Responding to Market Decline:
- Diversifying as a response to declining markets can be a poor choice.
- EX: Kodak diversified into various sectors but eventually went bankrupt. - Spreading Risk:
While diversification can spread risk, shareholders can do this on their own by investing in different
companies. Diversification within a company may not benefit shareholders. - Managerial Ambition:
- Sometimes, managerial desires can drive diversification without strategic reasoning.
- Example: Vijay Mallya’s Kingfisher Airlines expansion lacked clear synergies, leading to its downfall.
Performance of diversified companies vs undiversified: Results of Related Diversification, Unrelated Diversification, Conglomerate Diversification
- Related Diversification:
Companies that diversify into related areas generally outperform both specialized firms and those diversifying extensively into unrelated areas.
Advantages: Familiar resources, capabilities, and technologies allow for internal resource reconfiguration and agility.
EX: The US banking industry redeploys resources for superior performance.
- Unrelated Diversification:
There’s evidence of a U-shaped relationship between diversification and performance: some diversification is good, but too much might be detrimental.
Big tech giants like Meta (Facebook), Amazon, and Alphabet (Google) show varied diversification patterns.
Some acquisitions make sense, like Amazon Web Services (AWS), but others, like Google’s acquisition of
Motorola, can be more contentious. FAANG’s acquisitions seem varied in industries, but from a capability
standpoint, there might be more synergies.
- Conglomerate Diversification:
Might be suitable in national contexts with institutional weaknesses. In such scenarios, internal processes
could be more effective than external market processes.
EX: In areas with poor law enforcement or illiquid capital markets, unrelated diversification can be logical.
Main Takeaway: While on average, related diversification tends to yield better results than unrelated diversification, the context plays a crucial role. Any diversification strategy must consider the context and undergo rigorous evaluation for its specific merits.
What is Vertical integration?
Describes entering activities where the organisation is its own supplier or customer. → Thus involves operating at another stage of the value system.
(vertical disintegration - outsourcing)
Vertical integration increases corporate scope, while diversification involves different value systems. Brings
together activities up and down the same value system.
Appears attractive as it seems to capture some of the profits gained by retailers/suppliers in a value systems - one way of which the power of buyers and suppliers identified in the competitive forces framework can be neutralised.
2 dangers:
1. Investments, expensive investments in activities that are less profitable the original core business - unattractive to shareholders - reducing their average or overall rate of return on investment.
- Even if there is a degree of relatedness through the value system, vertical integration is likely to involve quite different resources and capabilities.
What is backward integration?
Moving into input activities. For example, a car manufacturer acquiring a component supplier. (further back in the value system)
What is Forward integration?
Moving into output activities. For instance, a car manufacturer venturing into car retail and
servicing. (further forward in the value system).
Outsourcing and Transaction Cost Framework - To integrate or to outsource?
Outsourcing: Subcontracting activities that were previously internal. This process can be beneficial if the supplier
has unique capabilities.
The transaction cost framework: suggests that the costs of opportunism can outweigh the benefits of subcontracting to organisations with superior resources and capabilities.
- Oliver Williamson’s theory suggests considering the long-term costs of opportunism by external subcontractors. If there are few alternatives, complex changing activities, or significant
investments, vertical integration might be preferable.
Decision criteria:
1. Subcontractor’s (Superior resources and capabilities: Can they do the work better?
- Risk of opportunism: Will they (the subcontractor) exploit the relationship over time?
What is Divestment and what to consider before doing it? Types?
Divestment: Withdrawing from one or more businesses, commonly seen in unrelated diversified businesses or underperforming units.
Divestment can increase the overall value of the organization. (as it allows the parent to reduce the scope of its portfolio of businesses)
Considerations:
Before divesting, it’s crucial to evaluate potential restructuring, interdependencies with other
SBUs, or if a better corporate parent exists.
Types of divestments:
1. Sell-off
Selling the SBU to another company. Variants include leveraged buy-outs (LBO) and management
buy-outs (MBO).
- Spin-off
Distributing the SBU’s shares to parent organization shareholders and listing the business on the
stock exchange. (Hitachi, ABB, GE) - Equity Carve Out
Selling a portion of SBU shares in an IPO (initial public offering) while retaining significant
shares for control.
What values can the Corporate parent bring or destroy?
Evidence suggests that corporate parents can add value to their constituent businesses. However, not all corporate parents succeed in doing so.
Corporate parents must show that they have parenting advantage, on the same principle that business units must demonstrate competitive advantage.
The different managers and their roles?
- The Portfolio Manager:
Operates as an active investor.
Ex: Private equity firms like Blackstone. - The Synergy Manager:
Aims to enhance value by managing synergies across business units.
Synergies likely rich when new activities are closely related to the core business. - The Parental Developer:
Employ its own central capabilities to add value to its businesses.
Focuses on resources or capabilities they possess as a parent which can be transferred downwards to enhance business units.
Portfolio matrices: What is the BCG (growth/share) Matrix?
Classifies business units based on market share and market growth.
Categories:
* Star: High market share, growing market.
* Question Mark (Problem Child):
* Growing market, low market share.
* Cash Cow: High market share, mature market.
* Dogs: Low share, static/declining markets.
Advantages: Provides visualization of different needs and potential of all diverse businesses, warns of financial demands, and provides a discipline for business unit managers.
What is the The Directional Policy (GE–McKinsey) Matrix?
Recommends strategies like investing for growth or divesting based on positioning.
Categorizes business units based on market attractiveness and competitive strength.
* Attractiveness can be identified with PESTEL or 5 forces analyses.
* Business strength can be defined by competitor analysis, ex strategy canvas (ch. 8)
What is the Parenting Matrix?
Focuses on synergy creation from parenting.
Introduces parental fit as a crucial criterion for including businesses in the portfolio.
Important to assess the fit between SBUs critical success factors and the capabilities (in terms of competences and resources) of the corporate parent. Does the corporate parent have the necessary ‘feel’ or understanding for
the business it will parent? For the benefit to be realised the parens must have the right capabilities to match the parenting opportunities.
- Alien Businesses: Lack of understanding and no added benefit.
- Ballast Businesses: High understanding but little added benefit.
- Heartland Businesses: Well-understood and added value.
- Value Trap Businesses: Opportunities to add value but potential for harm due to lack of understanding.
For optimal synergies, parents should focus on businesses where there’s both high understanding and high potential benefit.
