Week 8 - Corporate Level Strategy

Question 1

Corporate level strategy

Answer 1

• In corporate strategy we focus on scope and growth for organisations and strategic business units relevant to the corporate whole.
  
- Diversification and integration are important concepts (which we explore today). 

• Portfolios and products are considered relevant to SBUs.

Question 2

How is corporate strategy devised?

Answer 2

• Formal strategic planning cycle for the whole organisation?
  
- Decentralised SBU strategic planning under umbrella plan?
  
- No strategy?

Question 3

Growth strategies and Igor Ansoff

Answer 3

• Igor Ansoff is the ‘father of strategic management’. 

• He devised the growth matrix as a framework for generating four basic directions for firm growth.
  
- A strategy tool for planning future growth and directions. First theorised in a 1957 issue of Harvard Business Review.

Question 4

Market Penetration (Converse example)

Answer 4

• Market penetration implies increasing share of current markets with the current product (or service) range. 

• This strategy: 

  • Builds on established strategic capabilities. 

  • Means the organisation’s scope is unchanged. 

  • Leads to greater market share and increased power vis-à-vis buyers and suppliers. 

  • Provides greater economies of scale and experience curve benefits.

Question 5

Product development (Mercedes vs BMW)

Answer 5

• Product development is where an organisation delivers modified or new products (or services) to existing markets. 

• This strategy:
  
• Involves varying degrees of related diversification (in terms of products/services). 

  • Can be expensive and high risk. 

  • May require new resources and strategic capabilities. 

  • Typically involves project management risks.

Question 6

Market development (Nintendo)

Answer 6

• Market development involves offering existing products (services) to new markets. 

• This strategy:
  
• Involves new users (e.g. extending the use of aluminium to the automobile industry).
  
• Involves new geographies (e.g. extending the market to new areas – international markets being the most important). 

  • Helps meet the critical success factors of the market. 
• Requires new strategic capabilities (e.g. in marketing).

Question 7

Diversification (Samsung)

Answer 7

• Conglomerate (or unrelated) diversification takes the organisation beyond both its existing markets and its existing products (services) and radically increases the organisation’s scope. 

• This strategy:
  
• Has potential benefits to an acquired business in that it gains from the reputation of the group and potentially lowers financing costs.
  
• Has potential costs because there are no obvious ways to generate additional value.

Question 8

Diversification types

Answer 8

• Diversification involves increasing the range of products or markets served by an organisation: 

  • Related diversification involves expanding into products or services with relationships to the existing business.
  
• Conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to existing businesses.

Question 9

Integration types

Answer 9

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

  • Backward integration refers to development into activities concerned with the inputs into the company’s current business. 

  • Forward integration refers to development into activities concerned with the outputs of a company’s current business.

Question 10

Boston Consulting Group (BCG) Matrix

Answer 10

• Developed by Bruce Henderson in the early 1970’s as a consultancy tool to help organisations understand their SBUs(their portfolio and products).
  
- It follows two dimensions in guiding understanding of the attractiveness and balance of a portfolio: 

  • Market share of business units. To ensure a balance in an organisation.
  
• Market growth of business units. Some high/some low is healthy.

Question 11

BCG Matrix - Stars

Answer 11

• Stars are business units that have a high market share in a growing market. 

• Stars typically require heavy spending to keep up with growth/market competition. 

• High market share typically leads to healthy profits to balance and make this self-sufficient in terms of investment

Question 12

BCG Matrix - Cash cows

Answer 12

• Cash cows are business units with high market share in an established/mature market. 

• As growth is low, investment needs are less, while high market share means that the business will be making healthy profits.
  
- A cash cow can be thought of as a ‘cash generator’ for organisations. G

Question 13

BCG Matrix - Problem Child

Answer 13

• A problem child represents business units in a growing market, but without an established high market share.
  
- Key is to try to develop a problem child into a star. This takes heavy investment. Many problem child businesses fail to develop because of this.
  
- A problem child can therefore be thought of as a ‘cash user’ in organisations.

Question 14

BCG Matrix - Dogs

Answer 14

• Dogs are business units with low market share in static or declining markets.
  
- They are undesirable and use up resources (managerial time, marketing). 

• The matrix points organisations towards divestment or closure

Question 15

BCG Matrix advantages

Answer 15

1) Visualises different needs and potential of all the diverse businesses within the corporate portfolio (scans internal and external environment). 
2) Warns central strategy-makers/teams of the financial demands of what might otherwise look like a desirable portfolio of high-growth businesses.

3) Reminds organisations that business units and their positions change- stars are likely eventually to become cash cows, cash cows might decline into dogs.

4) Provides a guide for business unit managers and to consider the organisation as a whole, and that it is the organisation that allocates resources - avoids ‘silo thinking

Question 16

BCG Matrix disadvantages

Answer 16

1) It can be hard to decide what high and low growth or share mean in particular situations. Managers can easily define themselves as ‘high-share’ by defining their market in a particularly narrow way.

2) Both cash cows and dogs are targeted negatively- the first being simply ‘milked’, the second potentially cast out of the organisation. This can cause motivation problems as managers in these businesses are essentially working hard for the sake of other businesses or little gain. 

3) There is also the danger of the self-fulfilling prophecy. Cash cows will become dogs even more quickly than the model expects if they are simply milked and denied adequate investment. 

4) The matrix assumes no commercial ties exist between business units. For instance, a business unit may depend upon a ‘dog surviving’. The importance of these links depends on the organisations strategy-making (centralised vs decentralised).