Lecture 1 - Corporate Strategy - Managing the Multi-Business Firm Flashcards
Define ‘Diversification’
Any entry into a new product-market activity that requires an appreciable increase in the available managerial competencies within the firm (Rumelt 2974)
What 2 sources does superior profit derive from?
Industry attractiveness
Competitive advantage
What 2 issues does a diversification decision involve?
How attractive is the industry to be entered?
Can the firm achieve a competitive advantage?
What are the 3 strategic motivations for diversification?
Growth
Risk spreading
Value creation
How would one gain competitive advantage from diversification?
Economies of scope
Economies of internalising transactions
Parenting advantage
Diversified firm as an internal market
What does economies of scope mean?
The reduction of costs that is the result of sharing resources, processes, and skills in producing a larger range of products:
What does parenting advantage mean?
When the parent company may have capabilities that it can push down into daughter businesses (e.g. Berkshire Hathaway always using their own managers in new ventures)
What two types of relatedness does economies of scope in diversification derive from?
1) Operational readiness (i.e. operational relatedness)
2) Strategic readiness (i.e. corporate relatedness)
What does Operational Readiness mean?
Synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D etc)
What does strategic readiness mean?
Synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses
What are 4 options in managing the product mix?
1) Retain and maintain existing products so they continue to meet their objectives
2) Modify and adapt exsting products to take advantage of new tech, emerging opportunities or changing market conditions
3) Delete old products that are close to the end of their working lives and no longer serve their purpose
4) Introduce a flow of new products to maintain or improve sales and profit levels
What are the Pros of product portfolio management?
1) Resource optimisation: allocate resources effectively
2) Risk management: diversify risks by banalcing high risk products with more stable ones
3) Strategic alignment: ensures products align with overall business strategy and trends
4) Improved decision making:
5) Enhanced market understanding
5) Focus on innovation: identifies gaps in the portfolio, prompting innovation and development
What are the Cons of product portfolio management?
1) Complexity: managing a diverse portfolio is complex, requiring significant analysis and understanding
2) Resource constraints: Limited resources can lead to difficult trade offs, potentially neglecting some products or markets
3) Potential for bias: decisions may be influenced by internal politics or biases, rather than by objectivity
4) Overemphasis on metrics: too much focus on quantitative metrics may overlook qualitative metrics, such as customer satisfaction
5) Short term focus: Pressure to deliver immediate results may lead to neglecting long term goals
6) Resistance to change: Changes in portfolio can face internal resistance, especially if established products/ processes are threatened
What does Rust et al (2004) argue that firms should do to be successful?
They should focus on maximising customer lifetime value
What is customer lifetime value?
the net profit a company accrues from transactions with a given customer during the customer-company relationship
What is brand equity?
the sum of customers assessments of a brands intangible qualities (positive or negative)
What are 7 strategic directives that go against the status quo?
1) Make brand decisions subservient to decisions about customer relationships
2) Build brands around customer segments, not the other way around
3) Make your brands as narrow as possible
4) Plan brand extensions based on customer needs, not component similarities
5) Develop the capability and the mindset to hand off customers to other brands in the company
6) Take no heroic measures
7) Change how you measure brand equity
Explain the 1st directive against the status quo?
Make brand decisions subersvient to decisions about customer relationships
Creating/ strenghtening role of customer segment manager and allocating resources to that function rather than to traditional brand managers
Explain the 3rd directive against the status quo?
Make your brands as narrow as possible
Purpose of a brand should be to satisfy a small a customer segment as economically feasible
Explain the 4th directive against the status quo?
Plan brand extensions based on customer needs, not component similarities
Many companies guilty of brand overextension based on how similar new and old products are
Must think about whether customer bases are similar, even if products are not
Yet best results come when both products and customer bases are similar
Explain the 5th directive against the status quo?
Develop the capability and the mindset to hand off customers to other brands in the company
Need to know customers well enough to know when its time to hand them off
Explain the 2nd directive against the status quo?
Build brands around customer segments, not the other way around
E.g. P&G markets an extensive portfolio of soap brands, each targeted at different psychographic or demograogc segment, much alike its very similar array of laundry detergents
Explain the 6th directive against the status quo?
Take no heroic measures
Suppose a ‘lingering stench’ has attached to your brand. At what point would you cut losses and invest elsewhere?
Explain the 7th directive against the status quo?
Change how you measure brand equity
Brand equity varies dramatically from customer to customer
For measurements to be reuly useful. brand values must be calculated on an individual customer basis and rolled up only at the highest level
How would one measure brand equity?
1)Put it in the context of customer equity
2) Recognise that it varies by individual
What drives a customers lifetime value?
Choices
What 3 considerations drive he choices that drive customer lifetime value?
1) Value equity
2)Brand equity
3) Relationship equity
What is value equity?
the objectively considered wuality, price, and convenience of the offering
What is relationship equity?
factors in switching costs -the customrs reluctance to go elsewhere because of learning curves
Describe step 1 in measuring brand equity?
Determine the relative influence of the 3 drivers of a given companys customer equity
Figure out what drives brand equity in a particular company, including consumer awareness, attitudes, and perceptions of company ethics and corporate citizenship
Statistically link customer equity drivers to customer lifetime value
What does operational relatedness mean?
Synergies derived from sharing resources such as distribution channels, brands, or R&D facilities across different business units.
What does strategic relatedness mean?
Synergies derived from applying common management capabilities or strategies across different business units
Summarise the Growth-Share (BCG) matrix?
A portfolio planning tool that evaluates business units based on relative market share and market growth rate
Summarise the GE/ McKinsey Matrix
A portfolio planning tool that evaluates business units based on industry attractiveness and business unit strength.
Summarise the Ashbridge Portfolio display
A portfolio planning tool that assesses the potential for parenting advantage based on the fit between the parent company’s management style and the needs of the business.
Define diversification strategy and explain why it requires an ‘appreciable increase’ in managerial competencies?
Diversification strategy involves entering new product-market activities that require an appreciable increase in managerial competencies.
This is because managing diverse businesses demands new skills and knowledge related to unfamiliar industries, technologies, and customer segments.
If managerial competencies don’t expand, the diversified firm risks inefficiencies and a loss of competitive advantage.
What are the three main strategic motivations for diversification, and how has their relative importance changed over time?
The three main strategic motivations for diversification are growth, risk spreading, and value creation.
While growth and risk spreading were initially prioritised, the focus has shifted towards value creation as companies recognise that diversification must generate returns exceeding the cost of capital.
Provide the two sources of economies of scopeh
The two cources are operational relatedness and strategic relatedness
What is ‘parenting advantage’ and why is it important for the multi-business firm?
Parenting advantage is the ability of a parent company to create more value for its business units than another parent would
It is crucial as diversification should increase shareholder value, and a strong parentcan provide resources, expertise, and strategic guidance that improves business unit performance
