Lecture 11 - (Content of Strategy) Corporate Level Strategy - Diversification Flashcards
How do we compete within our chosen industry(ies)? (Competitive approach)
Business strategy
What industry(ies) are we in/want to be in? (Product-Market domain)
Corporate strategy
Examples of increasing the scope of an organisation:
Market development, market penetration, product development, diversification (Ansoff’s 4)
Verticial integration
Outsourcing
Define diversification
Increasing range of products/markets served by an organisation.
Define related diversification
Diversifying into products/services with relationships to the existing business
Define conglomerate (unrelated) diversification
Diversifying into products/services with no relationships to the existing businesses.
A simple definition of direction…
A move into a new product and/or market domain
What is a new product?
An output? (product/service)
A function?
A bundle of capabilities?
What is a new market?
An output? (product/service) An industry? A function? A segment? A bundle of capabilities? A need?
A GOOD definition of direction…
Any entry into new product-market activity that requires/implies appreciable increase in available managerial competencies within firm.
A simplistic product-market view of this story does not explain what happened but…
A ‘capabilities’ view of the story does explain what happened.
Market penetration
Strategy of increasing share of current markets with current product range.
4 key aspects of market penetration
builds on established strategic capabilities
organisation’s scope is unchanged
greater market share – increased power with buyers and suppliers
economies of scale and experience curve benefits
Product development
Delivery of modified/new products to existing markets
4 aspects of product development
involves varying degrees of product related diversification;
(Sony Example)
can be an expensive and high-risk strategy; (Banks going online)
may require new strategic capabilities, mastering new processes or technologies unfamiliar to the organisation (MOOCs);
typically involves project management risks. (Boeing’s Dreamliner 787)
Market development
Offering existing products to new markets
6 aspects of market development
involves varying degrees of market related diversification
attracting new users (e.g. Nintendo)
can take the form of new geographies (e.g. extending the market covered to new areas – international markets being the most important)
some product development (e.g. new styling or packaging)
must meet the critical success factors of the new market
may require new strategic capabilities especially in marketing
Conglomerate (or unrelated) diversification takes the organisation…. (2)
…beyond both its existing markets & its existing products & radically increases the organisation’s scope.
Strategic drivers for diversification
1) Exploiting economies of scope – efficiency gains through applying organisation’s existing resources or competences to new markets or services.
2) Enhance industry attractiveness: deter entry / increase bargaining power
3) Develop synergy of resource use through transfer of capabilities: benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts. ‘2+2=5’
4) Exploiting superior internal processes
5a) Maintain growth/survival: Avoid decline stage of PLC
5b) Maintain growth/survival: “Balance the portfolio” - e.g. BCG (Growth-Share) matrix
Non-strategic reasons for diversification
1) Spread risk: Counter-cyclical / Counter-seasonal
2) Surplus Liquidity
3) Managerial: Status/Empire building/Hubris (arrogance)
4) Growth for Growth’s sake: Responding to stock market expectations - easier than by internal (organic) growth means
Measures of Diversified Performance (3)
1) Shareholder value (profitability) created (or destroyed),
2) Fraction of new businesses created or acquired and retained
3) Impact on combined market share
* Normally in the long-run (over a 5 year, or 10 year, time scale)*
Related vs. Unrelated Diversification?
Companies adopting related/limited diversification tend to outperform both firms that remain specialised & those which adopt unrelated diversification…
“…studies show that acquisitions destroy shareholder wealth more often than they create it…”
(Hamel and Prahalad, 1994)
“Managers who lack the foresight and imagination to grow their core business are unlikely to have the foresight and imagination to grow acquired businesses… “
(Hamel and Prahalad, 1994)
“Diversification into areas where a company lacks knowledge and capability invites disaster.”
(Hamel and Prahalad, 1994)
Top diversified companies create superior value by (5)
1) Efficient capital allocation
2) Clear & consistent portfolio strategy
3) Lean organisation structure with clear responsibilities (Ansoff, 1957 - fewer management levels)
4) CEO-Driven Management Initiatives (one initiative at a time with total support and control)
5) Management development & skill transfer
Studies show… (2)
Diversification is frequently unsuccessful (6 studies to 1)
The more unrelated the diversification the more likely the failure (5 studies to 1)
The success of a diversification depends on…
Balance between costs and benefits – failure is not inevitable
Horizontal integration
Entering activities
Organisation introduces new products,
Do not contribute to the present product line
≈ Related diversification (product development)
Vertical integration
Entering activities where organisation is its own supplier or customer
Backward integration refers to development into activities concerned with the inputs into the company’s current business (Branch out into production of components, parts, and materials).
Forward integration refers to development into activities concerned with the outputs of a company’s current business.
Implies both catering to new missions and introduction of new products
Vertical integration risks:
1) Involves investment which can affect the performance of the organisation if it is in less profitable activities than the original core business
2) Requires different strategic capabilities (especially the forward and backward integration)
Solution to vertical integration risks?
Outsourcing …one company provides services for another company that could also be or usually have been provided in-house
What is scope?
How broad to make a portfolio
What is corporate parenting?
How the ‘parent’ adds value
