Chapter 6: The directions for strategic development Flashcards
DEFINING THE SCOPE OF THE FIRM
= the choice of the range of products and markets in which a firm wishes to compete.
Scope: according to ABELL model: according to 3 dimensions:
- Product functions
- Customer groups
- Technologies used
Based on ABELL’s model, a firm defines its field of operations through 2 variables:
- Scope: of functions, of customers, of technologies – quantitative nature
- Differentiation between segments – qualitative nature
Concept of firm growth: increases in size of variables such as:
- Assets
- Sales
- Profits
- Headcount.
Growth is important to the definition of the strategy because:
- Means health, vitality, strength for the firm.
- Must follow environment and sustain their positioning within
- Firm’s managers are related to this and will seek to boost this.
Concept of strategic development: broader than previous:
- Development of scope
- AND development of future of firm.
Strategic decisions depend on 2 issues:
- Development direction: decision on modifying or not its scope (CHAPTER 6)
- Development method: how to fulfil the goal set in the choosing of the direction. (CHAPTER 7)
DIRECTIONS FOR DEVELOPMENT
Ansoff
Development strategies can be identified according to:
- Definition of scope
- Or composition of the business portfolio
Development strategies can be identified while taking into consideration 4 criteria:
- Whether or not strategy changes scope of the firm
- Whether or not strategy implies growth
- Whether or not operations continue with the same products and in the same markets
- Whether or not new products and markets accessed are related to the traditional ones, and what the type of relationship is
Strategies or directions for development include:
- Consolidation (mature/declining industries)
- Expansion (maintaining current situation: for growth; may mean a change in scope)
- Diversification: related (has got something to do with previous activities of the firm) or unrelated (means growth AND change in scope) quest for synergies can mean diversification. Can be management/marketing strategies between different activities.
- Vertical integration: backward or forward (means growth AND change in scope)
- Restructuring (means change in scope)
Regarding the horizontal/product scope: a firm can decide:
- Consolidation, expansion: remains specialised
- Related or unrelated diversification: enlarge its business portfolio
- Restructure: reduce its portfolio
Regarding the vertical scope:
the firm can increase or decrease the degree of vertical integration
Regarding the geographic scope:
the firm can expand or cut back on its operations
EXPANSION STRATEGY
involves the enlargement or exploitation of a firm’s traditional products and markets.
3 main expansion strategies exist:
- Market penetration
- Product development
- Market development
MARKET PENETRATION
Used for the purpose of increasing its volume of sales.
How?
- By targeting its present customers: making them use product more frequently, or replacing it more quickly, or using more of it in quantity.
- Or by looking for new customers.
No change to the scope of the firm.
May be achieved through: advertising campaigns, promotions, price reductions, etc.
Market penetration is the right strategy in these circumstances:
- When industry is expanding rapidly
- When industry has reached maturity
- In declining industries
- Competitors with smaller shares: can steadily grow because not considered serious rivals.
PRODUCT DEVELOPMENT
Purpose is to remain in the current market while developing product.
May be achieved by: technological innovation, specification.
Used to better attend customer’s needs.
Product development is the right strategy in these circumstances:
- When product life-cycles are very short
- When customer’s needs are diverse or changing
- When a firm is proficient in R&D
MARKET DEVELOPMENT
Used to introduce its traditional products into new markets.
3 different kinds of new markets for a firm:
- New segments (different criteria: type of customer, income, distribution channel…)
- New applications: for current product, but with new functions
- New geographic areas: local, regional, national, international.
Market development is the right strategy in these circumstances:
- New distribution channels that are high quality, reliable, reasonable cost
- Firm already efficient and performing well in current market, now seeking to enter new one
- Production facilities underused in current market, need to find other for better exploitation of them
FIRM DIVERSIFICATION
A firm simultaneously adds new products to new markets.
Firm changes its scope through this expansion.
Means firm is now competitive in new environments.
Diversification implies: new knowledge, new techniques, new premises, changes to structure, management, etc.
Diversification means: risk. So why do it?
Firms diversify for offensive and defensive reasons, and because of:
- General environment (legal, political, economic),
- Specific environment (industry’s characteristics, basic competitive force),
- Diversifying firm’s own traits and performance (low return from core business).
Main reasons firms use diversification strategy:
- Reduction in overall risk: spreading business
- Saturation of the traditional market
- Resources and capabilities surplus
- Investment opportunities
- Generation of synergies= interrelations between activities, resulting in overall performance of the businesses is better than the sum of each one separately. 4 types of synergies:
- Marketing: advertising, brand, distribution channels, etc.
- Operating: product and process, better use of equipment, sharing experience, etc.
- Financial: assets, investments, financial resources, etc.
- Managerial: exploitation of competence, capabilities, experience of top managers.
- Other reasons include: diversification window (technology pushes to change), image diversification (firm can want to enhance or uphold its image in society)
2 different kinds of diversification:
- Related= when there are shared resources across businesses, similar distribution channels, common markets, shared technologies= any attempt to exploit production factors.
- Unrelated= break with the current situation= no relation with new product or new market.
RELATED DIVERSIFICATION STRATEGY: RUMELT distinguishes 2 kinds:
- Related constrained diversification: businesses interrelated by one core competence
- Related linked diversification: related by at least one other activity, but not necessarily to the core asset.
Reasons for related diversification: generation of synergies across the various businesses: 2 ways:
- Sharing the resources and capabilities: because they can be underused or with no limits on their capacity for use.
- Transferring knowledge and/or capabilities from one business to another.
Core competence
Knowledge and capabilities associated with a firm’s technical and economic aspects.
dominant logic
Related diversification is successful also because of the existence of a dominant logic in the business.
Synergies
shared activities/knowledge= reinforcing a firm’s competitive position.
Risks of related diversification: costs. 3 kinds:
- Cost of coordination: number and variety of businesses, mechanisms adopted.
- Cost of compromising: repercussions must be shared as well as common sales.
- Cost of inflexibility.
UNRELATED/CONGLOMERATE DIVERSIFICATION STRATEGY
no relation at all with firm’s traditional activity.
Reasons for unrelated diversification:
- Reduction in the firm’s overall risk
- In search of higher earnings
- Better assignment of financial resources: better channeling the possible surplus
- Management targets: only when there are no clear growth opportunities
Risks of unrelated diversification:
- Absence of synergies across businesses
- Specific new competences are only obtained with time and experience
- Dispersion of interest
- Difficulties of managing and coordinating
- Overcome entry barriers into new industry
VERTICAL INTEGRATION
- Involves a firm’s entry into activities related to the full production cycle of a product/service.
- When a firm becomes its own supplier: integration = backward or upstream
- When a firm becomes its own customer: integration = forward or downstream.
- Vertical integration: present in every firm. But different: suitable level of integration for each one.
Reasons for vertical integration:
- Cost-cutting
- Stronger strategic position/improved competitive position
- Cost-cutting
- Economies of scope: better use of resources
- Reduction in intermediate stock à meaning n°3: removal of intermediate processes
- Streamlined production process
- Elimination of transaction costs
- Assuming supplier/customer margin
- Stronger strategic position/improved competitive position
- Access to supply factors
- Guaranteed outlet for products
- Reinforced differentiation strategy
- Protection of advanced technology
- Market power
- Price manipulation/”price squeezing”
- Creation of entry barriers: difficult to overcome for non-integrated firms
Risks of vertical integration
- Firm’s overall risk increases: everything connected so everything affected.
- Raises an industry’s exit barriers
- Lack of flexibility
- Reduces the capacity for introducing separate innovations
- Margin of suppliers or customers replaced is not assumed automatically
- Production stages non efficient
- Organizational complexity
RESTRUCTURING THE BUSINESS PORTFOLIO
modification or redefinition of the scope of the firm with the possible withdrawal from at least one of its business.
Growth doesn’t mean better performance, growth can lead to:
Business problem
- One or more businesses in the portfolio with losses = performance decrease
Structure problem
- One or more businesses can generate value BUT no synergies =over diversification of the business portfolio
- Overall structure of portfolio not logical. Making it difficult to create synergies.
BUSINESS/CORPORATE RESTRUCTURING: Reason: business poor performance. Withdraw or recover/restructure?
Most common causes:
- Inefficient managing
- Fast growth
- Inappropriate competitive strategy
- High internal costs
- Appearance of new competitors
- Unexpected changes in demand.
Generally business’s poor performance means financial borrowing.
Measures can be adopted:
- Changing management
- Redefining competitive strategy
- Sale of certain assets
- Redefining debt: fire workers, HR, cost controls, etc.
-> BUT could mean business is shit, meaning withdrawal is necessary.
PORTFOLIO RESTRUCTURING: Main reasons for restructuring, i.e. withdrawing from a business:
- Over diversification
- Appearance of major competitors
- Management problems
3 strategies for withdrawing (retirer) a business from the portfolio:
- sale: best option.
- harvest: stopping all investment and exploiting any remaining opportunity: second best option
- winding-up: end to all operations and sales of any remaining assets: risk of bankruptcy if managers try to hold on à least attractive option.
