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corporate strategy and diversification Flashcards

1
Q

scope - how broad to make the portfolio

A

scope is concerned with how far an organisation should be diversified in terms of two different dimensions - products and markets

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2
Q

corporate parenting - how should the parent add value

A

A corporate parent should add value by leveraging its resources, expertise, and synergies to improve the performance of its business units.

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3
Q

portfolio matrices - which SBUs to invest in?

A

A company should invest in Strategic Business Units (SBUs) that offer high potential for growth and profitability.

According to portfolio matrices like the BCG Matrix and GE-McKinsey Matrix, investment is typically directed toward:
Stars - high market growth/high market share
High attractiveness and high strength SBUs - strong competitive position in attractive markets

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4
Q

diversification - details

A

a company is diversified when it is in two or more lines of business
a diversified compnay needs a multi industry , business overarching corporate strategy covering several strategic business units - SBUs

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5
Q

SBUs - details

A
  • SBU is a relatively autonomous part of a large company that operates as an independent enterprise with responsibility for a discrete range of products or services
    • SBUs have their own bottom line and contribute to the corportate bottom line which is the sum of the profits/losses of all SBUs within the company - the business units feed up their margins/earnings up to the corporate level
    • SBUs are located within industries and compete within product markets
      They have competitive strategies and are subject to competitive forces
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6
Q

three main types of company:

A
  1. Specialised : one SBU, one corporate strategy, one competitive strategy
    1. Related diversified: operating in several markets within a sector - many SBUs , one corporate strategy , several conjoined competitive strategies
      Unrelated diversified: operating in several markets across sectors - many SBUs, one corporate strategy, several independent competitive strategies
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7
Q

Ansoffs matrix

A

existing market and existing product/service: market penetration

existing market and new product/service = new products and services

new market and existing products/services = market development

new market and new products/ services = conglomerate diversification

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8
Q

types of diversification

A

related and unrelated diversification

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9
Q

related diversification

A

Related diversification: entry into new business activity based on shared commonalities in the components of the value chains of the firms . Current resources and capabilities add value

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10
Q

unrelated diversification

A

Unrelated diversification:
Entry into a new business area that has no obvious relationship with an existing business
- Multiple revenue streams
- Diversified the money coming in

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11
Q

market penetration

A

implies increasing share of current markets with the current product range

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12
Q

what does market penetration strategy mean?

A
  • Builds on established strategic capabilities
    • Means the organisation’s scope is unchanged
    • Leads to greater market share and increased power vis a vis buyer and suppliers
      Provides greater economies of scale and experience curve benefits - the more you do delivering that product to a service the more revenue stream, the more dominance you have in that market - increasing the business
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13
Q

what are the constraints of market penetration?

A
  • Retaliation from competitors eg price wars
    Legal constraints eg restrictions imposed by regulators - preventing one company from controlling the market eg monopoly
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14
Q

what does consolidation refer to?

A

consolidation refers to a strategy by which an organisation focuses defensively on their current markets with current products

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15
Q

what does retrenchment refer to?

A

retrenchment refers to a strategy of withdrawal from marginal activites in order to concentrate on the most valuable segments and products within their existing business - selling off a part of the revenue stream to concentrate on other areas of the business with higher margins

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16
Q

what is product development?

A

this is where an organisation delivers modified or new products to existing markets

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17
Q

how does product development fit into strategy?

A
  • Involves varying degrees of related diversification - in terms of products
    • Can be expensive and high risk
    • May require new resources and strategic capabilities
    • Typically involves project management risks
      Huge investment before we know the product works
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18
Q

what are the key motives to diversification?

A

growth
risk spreading
synergy

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18
Q

what are the key drivers of diversification?

A
  • Exploiting economies of scope - efficiency gains through applying the organisations existing resources or competences to new markets or services
    • Stretching corporate management competences (dominant logics) ie applying these competences across a portfolio of businesses
    • Exploiting superior internal processes - supply chain management is really good , we can continue to improve and diversify across different sectors
    • Increasing market power via mutual forbearance or cross subsidisation
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18
Q
A
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19
Q

motives for diversification

A

growth
risk spreading
synergy

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19
Q

growth from diversification means

A
  • The desire to escape stagnant or declining industries is a powerful motive for diversification (eg tobacco, newspapers)
    • But growth satisfies managers not shareholders
      Growth strategies (esp by acquisition), tend to destroy shareholder value
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20
Q

risk spreading from diversification means

A
  • Diversification reduces variance of profit flows
    But doesn’t create value for shareholders - they can hold diversified portfolios of securities
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21
Q

synergy from diversification leads to…

A

Synergy refers to the benefits gained where activites or assets complement each other so that their combined effect is greater than the sum of the parts (eg A film company and a music company can add value by working together)

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22
limits of diversification
Number of businesses: - Information overload can lead to poor resource allocation decisions and create inefficiencies Coordination among businesses: can be very complicated - they are very close together they can start to compete - As the scope of diversification widens, control and bureaucratic costs increase - Resource sharing and pooling arrangements that create value also cause coordination problems - The extend of diversification must be balanced with its bureaucratic costs
23
downside of specialised companies
high level of vulnerability to competitive rivalry, supplier power, changing tastes and substitution effects
24
related diversified companies - limitations
costly overheads resulting from matrix management monitoring and capability development such as R&D
25
unrelated diversified companies - limitations
inadequate understanding of different markets and operating contexts can lead to large scale value destroying errors
26
vertical integration description
entering activities where the organisation is its own supplier or customer
27
backward integration description
refers to develop into activites concerned with the inputs into the companys current business
28
example of forward integration
car manufacture -> car retail
29
example of horizontal integration / diversification
car manufacture -> truck / bus manufacture
30
example of backward integration
car manufacture -> components manufacture
31
diversification tests
1. market attractiveness - the industries chosen for diversification must be structurally attractive 2. the cost of entry test - must not canabalise all future profits 3. the better off test - either the new unit must gain competitive advantage from its link with the corporation or vice versa
32
what is outsourcing?
the process by which activites previously carried out internally are subcontracted to external suppliers
33
example of outsourcing
- Subcontracting the manufacture of components to a specialist supplier - Outsourcing non-core activities to a cheaper location (eg call centres Outsourcing to a specialist supplier eg IT
34
the decision to integrate or subcontract rests on the balance between two distinct factors
- relative strategic capabilities : does the subcontractor have the potential to do the work better - risk of opportunism: the subcontractor might take advantage of the relationship over time
35
value adding activities
envisioning facilitating synergies coaching providing central services and resources intervening
36
value destroying activities
adding management costs adding bureaucratic complexity obscuring financial performance
37
what is a portfolio matrices?
models which can determine financial investment and divestment within porfolios of business
38
what are the criteria of portfolio matrices?
balance of the portfolio the attractiveness of the business units the fit of the business units
39
why do companies do a portfolio analysis?
evaluate SBUs that make up the company, helping guide corporate strategy how much should the company invest in their best product to ensure the longevity of its success how much should companies invest in R&D should a strategic business unit be retained or sold?
40
portfolio matrices - three main matrices
BCG (or growth/share) matrix The GE-McKinsey directional policy matrix Parenting matrix
41
BCG (or growth/share) matrix
uses market share and market growth criteria for determining the attractiveness and balance of a business portfolio
42
The GE-McKinsey directional policy matrix
which categorises business units into those with good prospects and those with less good prospects
43
Parenting matrix
introduces parental fit as an important criterion for including a business in a portfolio
44
industry growth rate = high relative market share (against competitors) = high
Star
45
industry growth rate - low relative market share (against competitors) - high
cash cow
46
industry growth rate = high relative market shaare = low
problem child
47
industry growth rate = low relative market share = low
Dog
48
star - details
earning are high , stable and growing strategy : invest to consolidate, stretch and leverage capabilities
49
cash cow - details
earnings are high and stable strategy : harvest revenues (milk) or sell
50
problem child - details
earning are low and unstable but good industrial context strategy: develop capabilities or abandon
51
dog - details
earnings are low and unstable strategy : divest or seek economies and persist?
52
problems with the BCG matrix
- definitional vagueness - capital market assumptions - motivation problems -ignores commercial linkages
53
Mckinsey - GE Model (MK-GE) - details
a nine cell matrix for analysing and SBUs internal (business strength) against external (industry attractiveness) broader set of criteria applied to derive scores on two key dimensions than used in the BCG matrix
54
assessment of MK-GE model?
more sophisticated than BCG - uses more variables to evaluate and uses 3 categoies per dimension rather than 2 in deriving recommendations condenses too much information into two variables excessively complex numerical scoring can be subjective
55
The parenting matrix - the two factors it assesses
the fit between the business and the parent's skills/resources the potential to add value - or destroy it
56
types of businesses - and how they fit into the parenting matrix
Heartland businesses Ballast Businesses Value trap businesses Alien Businesses
57
Heartland business - details in the parenting matrix
strong fit / high value add potential The parent company understands the business deeply and has the capabilities to enhance its performance. These are core strategic assets and should be nurtured and invested in.
58
example of a heartland business
Example: Disney’s film studios—aligned with Disney’s creative, marketing, and brand strengths.
59
Ballast Businesses - details fitting into the parental matrix
strong fit / low value add potential The parent understands these businesses but can’t significantly improve them. They are usually stable and profitable, but not central to growth. May be kept for cash flow, but risk being dragged down by bureaucracy.
60
example of ballast businesses
Example: A traditional publishing arm in a tech conglomerate.
61
value trap businesses - details fitting into the parental matrix
weak fit / high value - add potential These units look promising, but the parent lacks the capabilities to unlock their full potential. Trying to manage them without proper expertise can do more harm than good. Either develop new capabilities or divest to a better-suited owner.
62
example of value trap businesses
Example: A high-tech AI startup owned by a consumer goods giant
63
Alien Businesses - details related to the parental matrix
weak fit/ low value-add potential No strategic or operational alignment with the parent. The parent can’t add value and doesn’t understand the business. Best option is to exit or divest.
64
example of an alien business
Example: A telecom firm owning a fast-fashion retail brand.

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