Week 5 Corporate strategy Flashcards
Corporate strategy decides what business should we be competing in.
As companies adapt and diversify 3 issues are raised around scope or ‘how far’ in terms of products and markets.
• The role of ‘corporate-level’ executives (parents) to the individual business units
• Which business units should be included
* How should they be managed financially
Define diversification, related diversification and conglomeration
Diversification - increasing the range of products or markets served by an organisation.
Related diversification - diversifying into products or services with relationships to the existing business.
Conglomerate (unrelated) diversification - diversifying into products or services with no relationships to the existing businesses.
The Ansoff product/market growth matrix details 4 expansion directions.
Market penetration - increase share, current producs
Product development - current market, new products
Market development - new markets, current products
Conglomerate (Unrelated diversification) - new markets, new products
Discuss pros & cons
Penetration
Pros - Est advantage, buyer/seller pwer, scale, experience
Cons - retaliation, regulation, cooperations
Product dev
Pros - same markets, diff tech/channels
Cons - exy, new capabilties, project mment risk
Market dev
Pros - same product, growth through numbers
Cons - must meet market, new capabilities
Conglomerate
Pros - scope
Cons - conglomerate discount (org worth less than it’s parts).
Define the value creating drivers and value destroying drivers of diversification
SIDE MoSQ
Creating
• Superior internal processes
• Increased market power dissuading competition
• Dominant logic - corporate mmentl competences applied across businesses.
• Economies of scope - existing capabilities against new markets or services
Destroying
• Managerial ambition – need for gains encourages poor long term decisions
• Spreading risk – unrealistic as there are limited opportunities. False thinking
• Queting for growth takes us into unrelated markets with no supporting capabilities
Define synergy and the relationship between diversity & performance.
Activities or assets complement each other so that their combined effect is greater than the sum of parts.
Diversity curve is inverted, undersified & unrelated diversification the lower extremes with related diversification in the middle. “Some diversification is good but not too much”
Define horizontal and vertical integration
- Horizontal - company acquires units that are complimentary or competitive to it’s own
• Vertical integration – entering into activities where the organisation is it’s own supplier and customer.
• Note – diversification is sometimes called horizontal integration.
What is forward or backward integration
- Backward integration – activities concerned with inputs into companies business eg: car parts
- Forward integration – activities concerned wit the outputs of a company’s current business. Eg: car dealer
- Vertical integration favoured for capturing more profits in the value chain, often requires investment and new capabilities.
Outsourcing assumes specialists do things better / cheaper. Define outsourcing and factors to take into account re outsourcing or integrating.
Def - Process by which activities previously carried out internally are subcontracted to external suppliers.
Does subby have relative strategic capability advantage?
Risk of opportunism?
Corporate parents need to add more than they cost or else they are ‘destroying value’. What activities create and destroy value?
CICE MOB
Create value • Central services and resources • Intervening – monitor and improve performance • Coaching • Envisioning
Destroy value
• Management costs
• Obscuring financial performance
• Bureaucratic complexity
Describe the 3 types of corporate parenting roles
PPS
- Portfolio manager - agent on behalf of customers and shareholders for more value
- Parental developer - parental capabilities down to business units – eg brand, r and d.
- Synergy manager - corporate parent enhancing value for business units
BCG matrix models balance and attractiveness of business. Discuss.
BCG matrix uses market share (x) and market growth criteria (y) for determining the attractiveness and balance of a business portfolio.
- A star - high share, high growth
- A question mark (or problem child) – low share, high growth
- A cash cow - high share, low growth
- Dogs - low share, low growth
GE Mckinsey - directional policy matrix models strength of SBU’s. Discuss.
Attractiveness (pestel) vs competitiveness (5 forces)
Directional policy matrix categorises business units into those with good prospects and those with less good prospects
Parenting matrix models fit SBU’s & corporate parents. Discuss.
Parental fit as an important criterion for including businesses in the portfolio.
Do they add value, if not be cautious about acquiring or retaining.
