Chapter 9: Developing Corporate Strategies

Question 1

What is Ansoff’s Growth matrix?

Answer 1

1) New product? More variation, more risk, technical skills to satisfy market, a lot of costs involved
2) Existing markets: higher market share, first focus here.

Part of the matrix:
1) Protect/build: existing markets/products
Redraw, consolidate, market penetration

2) Product development
Existing markets, new products: with existing capabilities, with new capabilities

3) Market development:
New markets, existing products: new segments, new territories, new user groups

4) Diversification: new markets and new products
Related diversification (within the industry), unrelated diversification (new industries)

Question 2

What is protect and build?

Answer 2

Why do firms redraw from a market?
Difficult to receive critical mass, lack of growth potential, lack of fit with other activities

Consolidating = strengthen present position
Maintaining present market share

Increase market share: increase market share through marketing, product improvement, price reduction and acquisition

Question 3

What is product development

Answer 3

1) In general: product development is costly but necessary in the long run.
Product development gives a higher profit if the firm has a high market share in advance.

2) Based on existing competences
Further development of existing products/product line.
Can include the capability of performing all value activities

3) Based on new competences
Firms base their new products on newly developed competences, firms can also build on the dynamic capability of developing new models faster than competitors.

Question 4

What is market development

Answer 4

1) In general:
Expansion of new markets when difficult to expand otherwise. New markets create more sales and increased scale of econmics.

2) New segments:
Sales to new types of customers or through new distribution channels, product differentiation through branding can be necessary.

3) New use of the products:
New users or use of the products, eg. Use of competences in new markets

4) New territories (internationalisation)
Sale of existing products in new territories increase volume, engage in international competition

Question 5

What are the types of diversification?

Answer 5

Diversification in general:
Expansion to new products and new markets, the most risky of the four directions of development.

Related diversification:
Development of new products and markets based on existing competencies and within existing industries

Non-related diversification:
Typical development of new products and markets outside the existing industry

Question 6

What is with related diversification and integration?

Answer 6

1) Vertical integration:
Diversificaiton can take place as forward or backward integration in the distribution chain (for instance through acquisition of customers or suppliers)

2) Horizontal integration: Diversification can happen by production and sale of complementary products: eg. Car producers who starts to produce motor bikes or motors for boats: Honda

Question 7

What is non-related diversification

Answer 7

Exploitation of the company’s existing competences in new products and new markets, but not in already established markets

Exploitation of competences to devleop new products in totally new markets.

Developing totally new competences by entering new markets with new products = very difficult and risky

Question 8

What are the reasons for related diversification?

Answer 8

Control over quality, delivery and price through backward integration

Control over distribution, customers and markets through forward integration

Access to information

Reduction of cost and spreading of risk

Utilisation of resources, competences and technology

Question 9

What are the reasons for non-related diversification?

Answer 9

An investment need of extra capital

A need to safe paying taxes = buy a company with a tax deficit

Fulfil personal ambitions: eg. Richard Branson

Utilise and further development of competences

Escape from existing industry

Spread the risk

Question 10

What are the different growth methods?

Answer 10

Strategy methods:
1) Organic development

2) Mergers and acquisitions
3) Strategic alliances

Question 11

What is organic growth?

Answer 11

Internal growth = expand by doing more of the same

Growth based on utilisation and development of own resources and competences

Control over resources and competences and internal learning = developing competences inside company

Possible to decide the terms and speed of growth

This method takes time and the end result is uncertain

Difficult in new areas where the firm does not have any competences

Can be impossible in mature markets

Question 12

What are M&As?

Answer 12

Acquistion happens when one firm buys another firm:
Friendly: both parties agree on the terms
Hostile: against the will of one part

Mergers: among equal parties

However in practice, difficult to make distinction.

Merger and acquisitions of firms often happens in series when companies have excess capital and when and industry is in the state of consolidation.

Question 13

What are the motives for M&A?

Answer 13

1) Strategic motives:
Expanding the firm to new markets and products
Consolidate the firm in existing markets
Increase the firms competences

2) Financial motives
Increase the efficiency of the capital employed as the firms consolidation/gearing may be different.
Take advantages of tax opportunities
Asset stripping or unbundling and trade of hidden assets

3) Managerial motives
Personal managerial ambitions
Bandwagon effects = do the same thing as competitors

Question 14

What is the M&A process?

Answer 14

1) Target choice in M&A?
Is there a strategic fit = extension, consolidating, competences
Is there an organic fit = management and culture

2) Valuation in M&A = Due diligence
Financial analysis and betting, often one have to pay a premium in order to get control.

3) Integration of the M&A companies
Creation of a new management and organsational stucture
Change of IT systems and financial reporting
A political and cultural challenge to integrate organsations

Question 15

What are the approaches to integration?

Answer 15

Integration of M&As often depends on the need for strategic fit and the need for organsational independency between the units:

1) Absorption
Strong strategic interdependence and little need for organsational autonomy. Rapid adjustment of the acquired company’s strategies, culture and systems.

2) Preservation
Low interdependence and a high need for autonomy. Old strategies, cultures and systems can be continued much like before.

3) Symbiosis
Storng strategic interdependence, but a high need for autonomy. Both the acquired firm and acquiring firm learn and adopt the best qualities from each other.

4) Holding: a residual category with little to gain by integration. The acquistion will be held to temporarily before being sold on, so the acquired unit is left alone.

Question 16

What is the series of the M&A processes?

Answer 16

M&As often take place in series depending on the market development and the financial situation of the buying firm.

Divestment of subsidiaries often take place in series as a consequence of the market development and the financial situation of the corporate structure.

Conglomerates contentiously acquire and sell subsidiary companies.

Often M&As are part of a corporate strategy as for instance creating value as a portfolio manager and following a non-related diversification strategy in order to create an attractive return/risk profile for shareholders.

Question 17

What are strategic alliances?

Answer 17

A strategic alliance is where two or more organsation share resources and activities to pursue a strategy.

Collective strategy is about the whole network of alliances, of which an organsation is a member, competes against rival networks of alliances.

Strategic alliances ought to create competitive advantages through collaboration measured against competitive alliances or single competitors.

Question 18

What are the types of strategic alliances?

Answer 18

1) Formalised ownership relations = consortium, joint ventures:
High degree of formalisation through joint company
Assets are managed jointly, but can be separated
Low risk of alliance partner taking over the assets

2) Contract regulated relationships: licenses and franchises
Some degree of formalisation through contracting
Shared management of assets even though assets can be isolated and separated
Low risk of alliance partner taking over the assets

3) Other types of strategic alliances = networks
Informal forms of collaboration
Activities do not need to be collaboratively managed, even though the activities from time to time cannot be easily separated.
High risk of partner taken over activities

Question 19

What are the motives for strategic alliances?

Answer 19

1) Scale alliances: eg. Farmers
Through working together with competitors it can be possible to create scale of economics and increased bargaining power towards customers and suppliers

2) Access alliance
Through collaboration with a distributor in a new market, a company can get fast access to this market

3) Collusive alliance
Through collaboration (in secret) with competitors one can get bargaining power over third parties (limit by competitive laws)

4) Complementary alliances
Through collaboration with suppliers producing complementary products one can achieve customers and competitors advantages.

Question 20

What is strategic alliances as a process?

Answer 20

Strategic alliances often last for long periods

Non of the partners in a strategic alliance have full control.

This means that a strategic alliance ought to be seen as a process which develops over time instead of seeing it as a static phenomena.

Strategic alliances must therefore have a standing forum for negotiation of expectations and achievements between the partners = could be secured by contracts

Strategic alliances are based on trust between the involved partners.

Question 21

What are the phasesin strategic alliances?

Answer 21

Attract potential relevant partners for collaboration

Negotiate the foundation of collaboration

Start-up of the collaboration

Maintenance of the collaboration

The further work:
Divorce and exiting the collaboration (hostile ending)
Gradual and friendly ending
Perhaps a continued and extended collaboration

Question 22

How can we compare M&A, alliances and organice development?

Answer 22

1) Urgency
Internal development may be too slow, alliances can accelerate the process but acquisitions are quickest

2) Uncertainty
An alliance means risks are shared and thus a failure does not mean the full cost is lost

3) Type of capabilities
Acquisitions work best with hard resources (eg. Production units) rather than soft resources (eg. People). Culture clash is the big issue

4) Modularity of capabilities
If the needed capabilities can be clearly separated from the rest of the organsation an alliance might be the best