Week 1 - Corporate Strategy - Managing multi-business firm Flashcards
Definition of Diversification + reference.
“Any entrance into a new product-market activity that requires or implies an appreciable increase in the available managerial competencies within the firm” (Rumelt 1974).
What are the 2 issues that arise in diversification decisions?
- How attractive is the industry to be entered?
- Can the firm achieve a competitive advantage?
What were the Diversification Strategies in the 1960s?
Management Goals:
- Growth.
Implications for Diversification Strategy:
- Diversification by established firms.
- Emergence of conglomerates.
- Boom in Marketing and Advertising.
Strategy Tools and Concepts:
- Financial Analysis.
- M-Form Structures.
- Corporate Planning.
What were the Diversification Strategies between early 1970s to late 1980s?
Management Goals:
- Making diversification profitable.
Implications for Diversification Strategy:
- Emphasis on related diversification.
- Quest for synergy.
Strategy Tools and Concepts:
- Economies of Scope.
- Portfolio Planning Models.
- Modern financial theory.
What were the Diversification Strategies between 1990 to 2000?
Management Goals:
- Creating shareholder values.
Implications for Diversification Strategy:
- Core business focus.
- Divestments and spin-offs.
- Leveraged buyouts.
What were the Diversification Strategies between 2000 - present?
Management Goals:
- Corporate advantage.
Implications for Diversification Strategy:
- Product bundling and customer solutions.
- Alliances.
- Creating growth options.
Strategy Tools and Concepts:
- Parenting advantage.
- Real options.
- Demand side economies of scope.
- Technology platforms.
What are the ‘Strategic’ Motivations for Diversification?
- Growth
- Risk Spreading
- Value
What competitive advantages can be gained from diversification?
- Economies of scope.
- Economies from internalising transactions.
- Parenting advantage.
- Diversified firm as an internal market.
What are the two types of relatedness that economies of scope derive from?
- Operational readiness (operational relatedness) - synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D, etc.).
- Strategic Readiness (Corporate relatedness) - Synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses.
What is the relationship between Relatedness and Performance?
High Relatedness = Undiversified = Low Performance.
Mid Relatedness = Related, limited diversification = High Performance.
Low relatedness = Unrelated, extensively diversified = Low Performance.
What are the 4 steps to Managing the Product Mix.
- Retain + Maintain existing products so they can continue to meet their objectives.
- Modify and adapt existing products to take advantage of new technology, emerging opportunities or changing market conditions.
- Delete old products that are close to then end of their working lives and no longer serve their purpose.
- Introduce a flow of new products to maintain or improve sales and profit levels.
What are the pros of Product Portfolio Management?
- Resource Optimisation (Efficient resource allocation based on performance + potential).
- Risk Management (Create a balance between high-risk, high-reward offerings with more stable offerings).
- Strategic Alignment (Ensure products align with overall business strategy + market trends).
- Improved decision making.
- Enhanced market understanding.
- Focus on innovation.
Cons of Product Portfolio Management.
- Complexity (Managing a diverse portfolio can require significant data analysis and market understanding).
- Resource constraints (Limited resources could lead to neglecting some product offering or market opportunities).
- Overemphasis on metrics (Too much focus on qualitative factors can overlook qualitative factors such as brand loyalty + customer satisfaction).
- Potential for bias.
- Short-term focus.
- Resistance to change.
Explain the GE/McKinsey Matrix
(Axis labels, Positions in the matrix and what they mean, what the company should do).
Axis Labels = Business Position (Strong, Medium, Weak on X-Axis) + Market Attractiveness (Low, Medium, High on Y-Axis).
If overall attractiveness is:
- High = Build and Grow.
- Medium = Be selective.
- Low = Harvest or divest.
Explain the Axis on Ashbridge’s Portfolio Display: The potential for parenting advantage.
X - Axis = Potential for parent to add value to the business.
Y - Axis = Potential for value destruction from misfit between needs of the business and patent’s corporate management style.
Explain the different areas on Ashbridge’s Portfolio Display: The potential for parenting advantage.
Low Value to ADD + DESTROY = Ballast (Typical core business position: Fit high, but limited potential to add more value).
Low Value to ADD + High value to DESTROY = Alien Territory (Exit: no potential for value creation).
High Value to ADD + Low value to DESTROY = Heartland (Business with high potential to add value).
Middle Value to ADD + Low-ish value to DESTROY = Edge of Heartland (Business for potential to add value is less than risk).
High Value to ADD + High value to DESTROY = Value Trap (Potential for adding value is seldom realised cause of problems of management fit).
