Lecture 6 - Sustainable Growth and Diversification

Question 1

In terms of Sustainable growth, and moreover Priorities & Rythm, what do we need to do?

Answer 1

1) Priorities:
i) Need a focus, a specialisation, a successful base.
ii) ➢ Strong engine of growth: do not spread resources and activities thin.

2) Sustainable rythm:
- Grow fast to the extent that you have a successful base
• ROIC > WACC
- Use mix of return ratios

Question 2

What was the 3 priorities Steve Jobs did to turnaround Apple’s growth?

Answer 2

1) SHRUNK Apple to a scale/scope suitable to niche player
2) IMPROVED: focus on simplicity and elegance of design with iMac/OS
3) Use HAPPY accident (shift to mobile internet): Diversify for mobile age

Question 3

Sustainable growth could be broken down into a triangle of three parts, which ones?

Answer 3

1) Scope: How diversified should your portfolio be? (Scope is concerned with how far an organisation should be diversified in terms of two different dimensions: products and markets.)
2) Portfolio balance/matrix: Which SBUs to invest in?
3) Corporate parenting: How can the ‘parent’ add value?

Question 4

In terms of the Scope of the Portfolio, three alternatives are mentioned for the porfolio, which ones and what do they mean?

Answer 4

1) Diversification
– Broaden product/service or market scope (geographies or customer segments)

2) Related diversification (B, C)
– Develop new products/services or markets related to existing products/services or markets

3) Unrelated diversification (D)
– Develop new products/services unrelated to existing prod/serv & markets

Question 5

What is Specialisation?

Answer 5

Specialisation refers to a strategy by which an organisation takes increased share of its existing markets (geographies or customer segments) with its existing product/service range.

Question 6

What is Product Development and what are 2 potential risks?

Answer 6

Product development refers to a strategy by which an organisation delivers modified or new products to existing markets

1. Resource & Capabilities - do the company have enough of this?
2. Project Management risk - delays in projects due to complexity.

Question 7

What is Market Development and what are a risk with this?

Answer 7

Market development refers to a strategy by which an organisation offers existing products to new markets (geographies or customer segments)

risk: Strategies based on simply off-loading traditional products or services in new markets are likely to fail. has to meet the CRITICAL success factors of the new market.

Question 8

What is more meant by Unrelated diversification?

Answer 8

Unrelated diversification radically increases the organisation’s scope, taking the organisation beyond both its existing markets and its existing products

Question 9

what is the relationship between Diversification and Performance?

Answer 9

There is a maxium point where diversification is utilizied to the fullest and more or less diversification won’t enhance the performance.

Undiversified/specialized = Low performance (to little of everything)

Related limited diversification = High performance (Best)

unrelated extensively diversified = low performance (too much of everything)

Question 10

What is meant by a Balanced Portfolio?

Answer 10

This is about the mix of activities in a company’s portfolio which generates different amount of revenues and cash. A balanced portfolio has more activities in the left part of the BCG-matrix.

Question 11

what is meant by the BCG-matrix?

Answer 11

the matrix has market growth rate on the y-axis (low to high) and then relative market share on the x-axis (high to low). In this matrix there are 4 kinds of alternatives:

1. Bottom left - Cash cows:
   - Revenues are high and stable,
   - have cash surplus,
   - but market growth is low.
2. top left - Stars:
   - revenues are high stable and growing,
   - cash flows are neutral
   - market growth and market share is growing.
3. Bottom right - Dogs:
   - Revenues are low and unstable,
   - Cash flow are a drain on resorces –> Divest
   - market growth and market shares are low.
4. Top right - Question marks:
   - Revenues are low and unstable but growing,
   - negative cash flows
   - Low market share but high market growth

(see pdf.page 20)

Question 12

What is Corporate Parenting about?

Answer 12

How the company should act to add value.

Question 13

Within Corporate Parenting there are 3 kinds of “parents”, which ones?

Answer 13

1. Portfolio Manager
2. Synergy Manger
3. Parental Developer

Question 14

What is meant by a Portfolio Manager and how does it add value?

Answer 14

• active investor in a way that shareholders in the stock market are either too dispersed or too inexpert to be able to do
• Mostly Private Equity companies use this style
• but also some conglomerates

Question 15

What is meant by a Synergy Manager and how does it add value?

Answer 15

Is a corporate parent that adds related business units to create synergies:
(such as iMac, iPod, iPhone, iPad… )
• Synergies result from cooperative added value on iOS platform

Question 16

What is meant by a Parental Manager and how does it add value?

Answer 16

– Seeks to employ its own central capabilities to add value to its businesses
– Can be related/unrelated businesses

Question 17

What is meant when a parent makes a combination?

Answer 17

Then the parent could combine the value creation that comes from 2 or 3 types of parenting style to better enhance the works of creating value within the consolidation or conglomerate.

Question 18

What are Four potentially value-creating drivers for diversification?

Answer 18

1. EXPLOITING economies of scope: economies of scope refer to efficiency gains made through applying the organisation’s existing resources or competences to new markets or services.
2. STRETCHING corporate management competences (‘dominant logics’). The dominant logic is the set of corporate-level managerial competences applied across the portfolio of businesses.
3. EXPLOITING superior internal processes.
4. INCREASE market power

Question 19

What is meant by Synergies?

Answer 19

Synergies are 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)

Question 20

What is meant by Vertical Integration?

Answer 20

Vertical integration describes entering activities where the organisation is its own supplier or customer.

Question 21

With Corporate Parenting, there are 5 types of value adding activities, which ones?

Answer 21

1. ENVISIONING - The corporate parent can provide a clear overall vision or strategic intent for its business units.
2. FACILITATING SYNERGIES - The corporate parent can facilitate cooperation and sharing across business units, so improving synergies from being within the same corporate organisation.
3. COACHING - The corporate parent can help business unit managers develop strategic capabilities, by coaching them to improve their skills and confidence.
4. PROVIDING central services and resources.
5. INTERVENING - Finally, the corporate parent can also intervene within its business units to ensure appropriate performance.

Question 22

With Corporate Parenting, there are 3 types of value destroying activities, which ones?

Answer 22

1. Adding MANAGEMENT COSTS
2. Adding BUREUCRATIC COMPLEXITY. As well as these direct financial costs, there is the ‘bureaucratic fog’ created by an additional layer of management and the need to coordinate with sister businesses.
3. OBSCURING FINANCIAL PERFORMANCE. One danger in a large diversified company is that the under-performance of weak businesses can be obscured.

Question 23

What are the 2 challenges with Parental management?

Answer 23

1. PARENTAL FOCUS - Corporate parents need to be rigorous and focused in identifying their unique value-adding capabilities.
2. The ‘CROWN JEWEL’ problem - Some diversified companies have business units in their portfolios which are performing well but to which the parent adds little value.