Lecture 11 - (Content of Strategy) Corporate Level Strategy - Diversification

Question 1

How do we compete within our chosen industry(ies)? (Competitive approach)

Answer 1

Business strategy

Question 2

What industry(ies) are we in/want to be in? (Product-Market domain)

Answer 2

Corporate strategy

Question 3

Examples of increasing the scope of an organisation:

Answer 3

Market development, market penetration, product development, diversification (Ansoff’s 4)

Verticial integration

Outsourcing

Question 4

Define diversification

Answer 4

Increasing range of products/markets served by an organisation.

Question 5

Define related diversification

Answer 5

Diversifying into products/services with relationships to the existing business

Question 6

Define conglomerate (unrelated) diversification

Answer 6

Diversifying into products/services with no relationships to the existing businesses.

Question 7

A simple definition of direction…

Answer 7

A move into a new product and/or market domain

Question 8

What is a new product?

Answer 8

An output? (product/service)
A function?
A bundle of capabilities?

Question 9

What is a new market?

Answer 9

An output? (product/service) 	   
An industry?
A function?			  
A segment?
A bundle of capabilities?
A need?

Question 10

A GOOD definition of direction…

Answer 10

Any entry into new product-market activity that requires/implies appreciable increase in available managerial competencies within firm.

Question 11

A simplistic product-market view of this story does not explain what happened but…

Answer 11

A ‘capabilities’ view of the story does explain what happened.

Question 12

Market penetration

Answer 12

Strategy of increasing share of current markets with current product range.

Question 13

4 key aspects of market penetration

Answer 13

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

Question 14

Product development

Answer 14

Delivery of modified/new products to existing markets

Question 15

4 aspects of product development

Answer 15

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)

Question 16

Market development

Answer 16

Offering existing products to new markets

Question 17

6 aspects of market development

Answer 17

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

Question 18

Conglomerate (or unrelated) diversification takes the organisation…. (2)

Answer 18

…beyond both its existing markets & its existing products & radically increases the organisation’s scope.

Question 19

Strategic drivers for diversification

Answer 19

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

Question 20

Non-strategic reasons for diversification

Answer 20

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

Question 21

Measures of Diversified Performance (3)

Answer 21

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)*

Question 22

Related vs. Unrelated Diversification?

Answer 22

Companies adopting related/limited diversification tend to outperform both firms that remain specialised & those which adopt unrelated diversification…

Question 23

“…studies show that acquisitions destroy shareholder wealth more often than they create it…”

Answer 23

(Hamel and Prahalad, 1994)

Question 24

“Managers who lack the foresight and imagination to grow their core business are unlikely to have the foresight and imagination to grow acquired businesses… “

Answer 24

(Hamel and Prahalad, 1994)

Question 25

“Diversification into areas where a company lacks knowledge and capability invites disaster.”

Answer 25

(Hamel and Prahalad, 1994)

Question 26

Top diversified companies create superior value by (5)

Answer 26

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

Question 27

Studies show… (2)

Answer 27

Diversification is frequently unsuccessful (6 studies to 1)

The more unrelated the diversification the more likely the failure (5 studies to 1)

Question 28

The success of a diversification depends on…

Answer 28

Balance between costs and benefits – failure is not inevitable

Question 29

Horizontal integration

Answer 29

Entering activities

Organisation introduces new products,

Do not contribute to the present product line

≈ Related diversification (product development)

Question 30

Vertical integration

Answer 30

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

Question 31

Vertical integration risks:

Answer 31

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)

Question 32

Solution to vertical integration risks?

Answer 32

Outsourcing …one company provides services for another company that could also be or usually have been provided in-house

Question 33

What is scope?

Answer 33

How broad to make a portfolio

Question 34

What is corporate parenting?

Answer 34

How the ‘parent’ adds value