L19 - Corporate strategy and diversification Flashcards
What is corporate strategy?
About what business areas to be active in and this will determine which business unit(s) to buy, the direction(s) an organisation might pursue and how resources may be allocated efficiently across multiple business activities
What is scope?
Scope is concerned with how far an organisation should be diversified in terms of two different dimensions: products and markets.
What is parenting advantage?
The value-adding effect of head office to individual SBUs
What is diversification?
Diversification involves increasing the range of products or markets served by an organisation. Related diversification involves expanding into products or services with relationship to existing business.
What are the four corporate strategy directions according to Ansoff?
Market penetration, new products and services, market development, conglomerate diversification. The further along the two axes, the more diversified strategy.
What is market penetration?
Implies increasing share of current markets with current products. Builds on established strategic capabilities. Scope is exactly the same. Implies increased power, greater economies of scale and experience curve benefits.
Which 3 constraints does a firm pursuing market penetration face?
(1) Retaliation from competitors – greater risk in low growth markets, might be more beneficial with acquisitions
(2) Legal constraints
(3) Economic constraints – when economic constraints are severe – consider retrenchment (withdrawal from marginal activities in order to concentrate on the most valuable segments and products in the existing business)
What is product development?
Organisations deliver modified or new products (or services) to existing markets. Can involve varying degrees of diversification along the horizontal axis.
What are 2 reasons product development (and market development) can be an expensive and high-risk activity?
(1) New resources and capabilities – heavy investment and high risk of failure
(2) Project management risk – delays, increased costs
What is market development?
Can potentially be cheaper and quicker to execute than product development. Involves offering existing products to new markets, degree of diversification varies along the downward axis. Essential market development strategies are based on products or services that meet CSFs of the new market.
What are 2 main forms of market development?
(1) New users
(2) New geographies
What is conglomerate diversification?
Conglomerate (unrelated diversification) involves diversifying into new products or services in markets unrelated to existing business. Radically increases scope.
What are advantages and disadvantages of conglomerate diversification?
May benefit from being part of a larger group – increased consumer confidence, may reduce costs of finance
No obvious ways in which the business can work together to generate additional value, over and above the businesses remaining on their own
Often additional bureaucratic costs – conglomerate companies’ share prices can suffer from ‘conglomerate discount’ (a lower valuation than the combined individual businesses would have alone)
What are 4 potentially value-creating drivers for diversification?
(1) Exploiting economies of scope (applying existing resources or competence to new markets or services). Can apply to tangible and intangible resources and competences
(2) Stretching corporate management competences (‘dominant logics’). Special case of economies of scope. The dominant logic – the set of corporate-level managerial competences applied across the portfolio of businesses.
(3) Exploiting superior internal processes – especially relevant where external capital and labour markets do not work well
(4) Increasing market power. Two ways: (a) having the same wide portfolio of products as a competitor increases the potential for mutual forbearance (the ability to retaliate across the whole range of the portfolio acts to discourage the competitor from making aggressive moves) and (b) increases power to cross-subsidise one business from the profits of other
Where diversification creates value, it is described as ‘synergistic’. What are synergies?
Benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts.
