Chapter 9 - Corporate strategy

Question 1

Corporate strategy

Answer 1

is about the overall scope of the organisation and how value is added to the constituent businesses of the organisation as a whole.

When organisations add new units and capabilities, their strategies may no longer be solely concerned with competitive strategy in one market space at business level, but with choices concerning different businesses or markets.

Question 2

Strategy directions

Answer 2

Central corporate strategy choice is the direction in which a company should grow. Ansoff Corporate strategy matrix, four basic directions for organisational growth.:
1. Market penetration
2. Market developement
3. Prodicts and service development
4. Unrelated diversification

Question 3

Market penetration

Answer 3

Implies increasing share of current markets with the current product or service range.
* Greater market share implies greater economies of scale and experience curve benefits.
* This strategy builds on established capabilities, no need for uncharted territory. The organisation’s scope is exactly the same.

Question 4

Market developement

Answer 4

Involves offering exisitng products/services to new markets. Can be more attractive
Two basic forms:
1. New users.
2. New geographies

It is essential that market developement strategies be based on products or services that meet needs in the new market.

Question 5

Product and service developement

Answer 5

where organisations deliver modified or new products (or services) to existing markets. Involve varying degrees of diversification.

The potential for benefits from relatedness, product development can be an expensive and high-risk activity for at least two reasons:
1. New resources and capabilities. Product development strategies involve mastering new processes or technologies that are unfamiliar to the organisation.
2. Project management risk. Product development projects are subject to the risk of delays and increased costs as extension of current strategy focus often leads to growing project complexity and changing project specifications over time.

Question 6

Unrelated diversification

Answer 6

Is when an organisation expands into markets, products and services completely different from its own.

Motives: pure growth desires or risk diversification, as good performing businesses could balance out poor performing ones, or financial cost reductions due to becoming a larger organisation.

Question 7

Diversification drivers

Answer 7

Diversification can be motivated by many reasons, with some more value-creating than others. Growth in size is not a good reason for diversification on its own. Diversification decisions need to be approached sceptically.

1. Exploiting economies of scope - Refers to cost savings through sharing inputs, sharing distribution, through applying the organisation’s existing resources or capabilities to new markets or services.
2. Refers to cost savings through sharing inputs, sharing distribution, through applying the organisation’s existing resources or capabilities to new markets or services.
3. Exploiting superior internal processes: can be more efficient than external processes in the open market. In emerging markets, where markets for capital and labour sometimes work less well, it may be necessary to internalize these.
4. Increasing market power. Being diversified in many businesses can increase power vis-à-vis (gentemot) competitors

Question 8

Synergies

Answer 8

are benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts (the famous 2 + 2 = 5 equation).

Where diversification creates value, it is described as ‘synergistic

Question 9

Vertical integration

Answer 9

describes entering activities where the organisation is its own supplier or customer.
* Another form of diversification and direction for corporate strategy,
* involves operating at another stage of the value system

Can go in two directions, backwards or forwards

Question 10

Backward integration

Answer 10

Is movement into input activites concerned with the company´s current business (I.e., further back in the value system, like acquiring a tire supplier for a car manafacturer)

Question 11

Forward integration

Answer 11

is movement into output activities concerned with the company´s current business (i.e. forward in the value system, ex. car manafacturer moving in to car retail or repairs)

Question 12

Outsourcing

Answer 12

is the process by which value chain activities previously carried out internally are subcontracted to external suppliers.
Organisation continues to offer its products and services based on external inputs, NOT in-house.

Question 13

Integrate or subcontract?

Answer 13

The decision to integrate or subcontract rests on the balance between:
* Superior resources and capabilities. Does the subcontractor have the potential to do the work significantly better?
* Risk of opportunism. Is the subcontractor likely to take advantage of the relationship over time?

Question 14

Divestment

Answer 14

Occurs when the organisation decides to pull out of one or more of its businesses.
* Occurs with unrelated diversified businesses, SBUs with poor operating performance, poor stock market performance and the arrival of a new CEO.
* Divestment allows the parent to reduce the scope of its portfolio of businesses and this can raise the overall value of the organisation.

Question 15

Sell-off

Answer 15

A type of divetment, where the SBU is sold to another company
* If the acquirer uses a lot of debt to buy the sell-off this is termed a leveraged buy-out (LBO).
* If the SBU management team raises finance to buy the business, it is a management buy-out (MBO).

Question 16

Spin-off

Answer 16

A type of divestment, where the shares of the SBU are distributed to paren organisations shareholders and the busness is listed on the stock exchange.

Examples: ABB, Thyssenkrupp, GE, Johnson& Johnson, Toshiba, Hitachi

Question 17

Value-adding activities

Answer 17

Five main types of value activity for corporate parents:
* Envisioning. The corporate parent can provide a clear overall vision or strategic intent for its business units.
* Facilitating synergies. Facilitate cooperation and sharing across business units, improving synergies in the same corporate organisation.
* **Coaching. **Help business unit managers develop capabilities, by coaching them to improve their skills and confidence.
* Providing central services and resources. The centre can provide capital for investment as well as central services such as treasury, tax and human resource advice. If these are centralised, they may have sufficient scale to be efficient and can build up relevant expertise.
* Intervening.Intervene within its business units to ensure appropriate performance. The corporate parent should be able to closely monitor business unit performance.

Question 18

Value-destroying activities

Answer 18

Three ways corporate parents can destroy value:
* Adding management costs. Corporate staff managers and luxury facilities are expensive. - If corporate centre costs are greater than the value they create, then corporate staff are net value-destroying.
* Adding bureaucratic complexity. ‘bureaucratic fog’ created by an additional layer of management and the need to coordinate with sister businesses.
* Obscuring financial performance. Danger in a large diversified company is that the under-performance of weak businesses can be obscured (hard to identify).

Question 19

The portfolio manage

Answer 19

A corporate parent role, who operates as an active investor in a way that shareholders in the stock market are either too dispersed or too inexperienced to be able to do.
* Act as an agent on behalf of financial markets and shareholders to extract more value from the various businesses than they could achieve themselves.
* They identify and acquire under-valued assets or businesses and improve them.
* Do not get closely involved in the routine management of the businesses
* Seek to keep the cost of the centre low, small corporate staff, few central services → leaving the SBU alone too have autonomy.

Question 20

The synergy manager

Answer 20

A corporate parent seeking to enhance value for business units by managing synergies across business units.
* Obtaining synergy is often seen as the prime rationale for the corporate parent. Synergies are likely to be particularly rich when new activities are closely related to the core business.
* Value-creating activities, the focus is threefold: envisioning building a common purpose; facilitating cooperation across businesses; and providing central services and resources.

Question 21

The parental developer

Answer 21

seeks to employ its own central capabilities to add value to its businesses.
* Focus on the resources or capabilities they have as parents which they can transfer downwards to enhance the potential of business units.
* More common in related diversified strategies, involves exchanges of managers and other resources across the businesses.

Question 22

The BCG matrix

Answer 22

Uses market share and market growth criteria for determining the attractiveness and balance of a business portfolio.
* High market share and high growth are, of course attractive

The BCG matrix define four sorts of businesses:
1. Stars - a business unit within a portfolio that has a high market share in a growing market.
2. Questions Marks - a business unit within a portfolio that is in a growing market, but does not yet have high market share. You develop question marks into stars, but it takes heavy investment.
3. Cash Cows - a business unit within a portfolio that has a high market share in a mature market.
4. Dogs - business units within a portfolio that have low share in static or declining markets and are thus the worst of all combinations.

Weaknesses of the BCG matrix include:
* Definitional vagueness
* Capital market assumptions
* Motivation problems for cash cows and dogs which get treated “badly”
* Ignores commercial linkages

Question 23

Directional policy matrix (McKinsey)

Answer 23

categorises business units into those with good prospects and those with less good prospects.

Positions business units according to:
1. How attractive the relvant market is in which they are operating (Identified by PESTEL or five forces)
2. The competetive strength of the SBU in that market (defined by competitor analysis, ex. strategy canvas)

Shares the weaknesses of the BCG matrix; vague definitions, motivation etc.

Question 24

The parenting matrix

Answer 24

focuses upon synergy creation from parenting and introduces parental fit as an important criterion for including businesses in the portfolio. Makes sure that the parent can add value to business, making it worth to acquire/retain the business.
Types of business in the parenting matrix:
* Alien businesses that the parent has no feel for and can’t benefit from
* Ballast businesses for which a corporate parent has high feel but can add little benefit should either be run with a very light touch or be divested.
* Heartland businesses the parent understands well and can continue to add value to, should be at the core of the future strategy.
* Value trap businesses are dangerous as there are opportunities to add value, but the parent’s lack of feel may do more harm than good

Maximum synergies, parents should concentrate on actual or potential businesses, where there is both high feel and high benefit.