SM Lecture Six : Corporate Strategy and Diversification

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SM Lecture Six : Corporate Strategy and Diversification

  1. 1. Strategic Management BUSM 3200 These Lecture Slides summarize the key points covered in the respective chapters in your recommended text; these slides do NOT substitute, at all, the required reading of the assigned chapter from the text. These slides also may contain additional supplementary material extracted from other texts and sources outside your text book. 6-1BUSM 3200- Strategic Management (Jan 2013) GDS
  2. 2. Strategic choices Chapter Seven Figure II.i Strategic choices 6-2BUSM 3200- Strategic Management (Jan 2013) GDS
  3. 3. Learning outcomes for Chapter 7 Identify alternative strategy options, including market penetration, product development, market development and diversification. Distinguish between different diversification strategies (related and conglomerate diversification) and evaluate diversification drivers.BUSM 3200- Strategic Management (Jan 2013) GDS 6-3
  4. 4. Learning outcomes for Chapter 7 Assess the relative benefits of vertical integration and outsourcing. Analyse the ways in which a corporate parent can add or destroy value for its portfolio of business units. Analyse portfolios of business units and judge which to invest in and which to divest.BUSM 3200- Strategic Management (Jan 2013) GDS 6-4
  5. 5. STRENGTHENING A COMPANY’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS Defining the Scope of the Firm’s Operations Extent of its Size of its Range of its geographic Breadth of its competitive activities market product and footprint on performed presence and service offerings its market internally mix of or industry businesses 6-5Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–5
  6. 6. Levels of strategy Wesfarmers Limited Corporate StrategyChemicals Industrial & Energy Hardware& Fertilisers Safety Supermarkets Business Strategy Insurance Forest ProductsSales & Marketing Operations Finance Functional Strategy Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-6 Beamish/Strategic Management/4th edition
  7. 7. What is corporate strategy? Corporate strategy deals with issues related to the portfolio mix of businesses held by a multi-business organisation/corporation. Issues such as:  What the portfolio of businesses is or should be within the corporation  the rationale behind the design of the portfolio  allocation of resources to the various businesses  performance and returns required of the businesses Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-7 Beamish/Strategic Management/4th edition
  8. 8. Strategic directions and corporate-level strategy Figure 7.1 Strategic directions and corporate-level strategyBUSM 3200- Strategic Management (Jan 2013) GDS 6-8
  9. 9. Some additional notes on the concept of diversification Before we move into the Ansoff model discussion, it is important that you understand the concept of diversification Diversification is an important topic and almost always appears in the exam paper You need to know about the types of diversification, the motives for diversification and the advantages and disadvantages of diversification strategyBUSM 3200- Strategic Management (Jan 2013) GDS 6-9
  10. 10. What is diversification? Multi-business corporations have diversified beyond a single business. Diversification is defined as:  ‘the entry of a firm or business unit into new lines of activity, either by processes of internal business development or acquisition, which entail changes in its administrative structure, systems and other management processes.’ Two types of diversification:  into ‘related’ businesses and industries  Into ‘unrelated’ businesses and industries Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-10 Beamish/Strategic Management/4th edition
  11. 11. Reasons for diversification General environment becomes unattractive Industry’s competitive environment becomes unattractive Strategic intent of the organisation covers more than one business Surplus capabilities or capability gaps Diversification achieves managerial goals  Aggressive managerial goals  Defensive managerial goals Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-11 Beamish/Strategic Management/4th edition
  12. 12. WHEN TO DIVERSIFY ♦ A firm should consider diversifying when: ● It can expand into businesses whose technologies and products complement its present business. ● Its resources and capabilities can be used as valuable competitive assets in other businesses. ● Costs can be reduced by cross-business sharing or transfer of resources and capabilities. ● Transferring a strong brand name to the products of other businesses helps drive up sales and profits of those businesses. 6-12Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–12
  13. 13. BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING Testing Whether a Diversification Move Will Add Long-Term Value for Shareholders The industry The cost-of-entry The better-off attractiveness test test test 6-13Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–13
  14. 14. Advantages and disadvantages ofdiversificationAdvantages DisadvantagesEfficient capital allocation Shareholders have no say in capital allocationTrains general managers processSpreads risk May not align withMore strategic options shareholder risk profileGood control systems Easier to hide poorly performing businesses Performance measures usually concentrate on financial returns Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-14 Beamish/Strategic Management/4th edition
  15. 15. Testing Whether Diversification Will Add Value for Shareholders ♦ The Attractiveness Test: ● Are the industry’s returns on investment as good or better than present business(es)? ♦ The Cost of Entry Test: ● Is the cost of overcoming entry barriers so great that profitability is too long delayed? ♦ The Better-Off Test: ● How much synergy will be gained by diversifying into the industry? 6-15Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–15
  16. 16. Development of corporate strategy Synergy and the resource-based view (RBV)  Corporations have capabilities that can be transferred from one business to another  These core capabilities were the basis of competitive advantage  Similar businesses could develop synergies by sharing core capabilities  This view leads to related diversification not unrelated conglomerates Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-16 Beamish/Strategic Management/4th edition
  17. 17. Better Performance through Synergy Firm A purchases Firm B in another industry. A and B’s No profits are no greater than Synergy what each firm could have (1+1=2) Evaluating the earned on its own. Potential for Synergy through Firm A purchases Firm C in Diversification another industry. A and C’s Synergy profits are greater than what each firm could have earned (1+1=3) on its own. 6-17Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–17
  18. 18. STRATEGIES FOR ENTERING NEW BUSINESSES Diversifying into New Businesses Internal new Acquisition Joint venture venture (start-up) These topics will be covered in Chapter 10 : Mergers, Acquisitions and Alliances 6-18Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–18
  19. 19. Development of corporate strategy Internationalisation  Continued internationalisation of business has encouraged businesses to ‘stick to their knitting’ by accessing foreign markets instead of unrelated domestic growth strategies  International expansion often financed by divestment of unrelated businesses Covered in next lecture on International Strategy Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-19 Beamish/Strategic Management/4th edition
  20. 20. Corporate strategy directions Ansoff Matrix Figure 7.2 Corporate strategy directions Source: Adapted from H.I. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6. Ansoff originally had a matrix with four separate boxes, but in practice strategic directions involve more continuous axes. The Ansoff matrix itself was later developed – see Reference 1BUSM 3200- Strategic Management (Jan 2013) GDS 6-20
  21. 21. Market penetration Market penetration refers to a strategy of increasing share of current markets with the current product range. This strategy:  strategic capabilities; builds on established  scope is unchanged; means the organisation’s  increased power; leads to greater market share and with buyers and suppliers;  economies of scale; and provides greater and experience curve benefits.BUSM 3200- Strategic Management (Jan 2013) GDS 6-21
  22. 22. Constraints of market penetration Retaliation Legal from constraints competitors Economic Constraints (recession or funding crisis) 6-22BUSM 3200- Strategic Management (Jan2013) GDS
  23. 23. Consolidation & retrenchment Consolidation refers to a strategy by which an organisation focuses defensively on their current markets with current products. Retrenchment refers to a strategy of withdrawal from marginal activities in order to concentrate on the most valuable segments and products within their existing business.BUSM 3200- Strategic Management (Jan 2013) GDS 6-23
  24. 24. Product development Product development refers to a strategy by which an organisation delivers modified or new products to existing markets. This strategy :  involves varying degrees of related diversification (in terms of products);  can be an expensive and high risk  may require new strategic capabilities  typically involves project management risks.BUSM 3200- Strategic Management (Jan 2013) GDS 6-24
  25. 25. Market development (1) Market development refers to a strategy by which an organisation offers existing products to new marketsBUSM 3200- Strategic Management (Jan 2013) GDS 6-25
  26. 26. Market development (2) This strategy involves varying degrees of related diversification (in terms of markets) it;  may also entail some product development (e.g. new styling or packaging);  can take the form of attracting new users (e.g. extending the use of aluminium to the automobile industry);  can take the form of new geographies (e.g. extending the market covered to new areas – international markets being the most important);  must meet the critical success factors of the new market if it is to succeed;  may require new strategic capabilities especially in marketing.BUSM 3200- Strategic Management (Jan 2013) GDS 6-26
  27. 27. Diversification Diversification involves increasing the range of products or markets served by an organisation. Related diversification involves diversifying into products or services with relationships to the existing business. Conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to the existing businesses. See later discussion on this topicBUSM 3200- Strategic Management (Jan 2013) GDS 6-27
  28. 28. Conglomerate diversification Conglomerate (or unrelated) diversification takes the organisation beyond both its existing markets and its existing products and radically increases the organisation’s scope.BUSM 3200- Strategic Management (Jan 2013) GDS 6-28
  29. 29. Drivers for diversification Exploiting economies of scope – efficiency gains through applying the organisation’s existing resources or competences to new markets or services. Stretching corporate management competences. Exploiting superior internal processes. Increasing market power.BUSM 3200- Strategic Management (Jan 2013) GDS 6-29
  30. 30. Synergy Synergy refers to the benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts. N.B. Synergy is often referred to as the ‘2 + 2 = 5’ effect.BUSM 3200- Strategic Management (Jan 2013) GDS 6-30
  31. 31. Value-destroying diversification drivers Some drivers for diversification which may involve value destruction (negative synergies):  Responding to market decline,  Spreading risk and N.B. Despite these being common justifications for diversifying, finance theory suggests these are misguided.  Managerial ambition.BUSM 3200- Strategic Management (Jan 2013) GDS 6-31
  32. 32. So which is better? Related Diversification Unrelated Diversification The following set of slides explain the differences in detailBUSM 3200- Strategic Management (Jan 2013) GDS 6-32
  33. 33. CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES ♦ Related Businesses ● Have competitively valuable cross-business value chain and resource matchups. ♦ Unrelated Businesses ● Have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level. 6-33Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–33
  34. 34. Related diversification Businesses need to be ‘related’ in some way for synergy to occur. If no synergy, no value in having the combination within the corporation. Related diversification strategies:  Capability-based diversification  Product-market diversification  Vertical integration Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-34 Beamish/Strategic Management/4th edition
  35. 35. CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES Which Diversification Path to Pursue? Both Related Related Unrelated and Unrelated Businesses Businesses Businesses 6-35Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–35
  36. 36. What is ‘relatedness’? ‘Relatedness’ concerns degree of similarity or fit between the businesses held within the corporation What appears to be related to one observer, may seem to be quite unrelated to another There is no hard and fast definition of relatedness Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & 6-36 Beamish/Strategic Management/4th edition
  37. 37. STRATEGIC FIT AND DIVERSIFICATION INTO RELATED BUSINESSES ♦ Strategic Fit Benefits ● Occur when the value chains of the different businesses present opportunities for:  Transfer of resources among businesses.  Lowering of costs in combining related value chain activities or resource sharing.  Use of a potent brand name across businesses.  Cross-business collaboration to build stronger competitive capabilities. 6-37Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–37
  38. 38. Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic FitCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–386-38
  39. 39. Identifying Cross-Business Strategic Fit along the Value Chain Supply Chain Activities R&D and Manufacturing- Technology Related Activities Activities Potential Cross-Business Fits Sales and Marketing Distribution- Activities Related Activities Customer Service Activities 6-39Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–39
  40. 40. Strategic Fit, Economies of Scope, and Competitive Advantage Using Economies of Scope to Convert Strategic Fit into Competitive Advantage Transferring Combining Leveraging Using cross- specialized and related value brand names business generalized chain activities and other collaboration skills andor to achieve differentiation and knowledge knowledge lower costs resources sharing 6-40Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–40
  41. 41. Economies of Scope Differ from Economies of Scale ♦ Economies of Scope ● Are cost reductions that flow from cross- business resource sharing in the activities of the multiple businesses of a firm. ♦ Economies of Scale ● Accrue when unit costs are reduced due to the increased output of larger-size operations of a firm. 6-41Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–41
  42. 42. From Competitive Advantage to Added Profitability and Gains in Shareholder Value Capturing the Cross-Business Benefits of Related Diversification Builds more Yields value in Requires that Is only possible shareholder the application management via a strategy value than of specialized take internal of related owning a stock resources and actions to diversification portfolio capabilities realize them 6-42Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–42
  43. 43. DIVERSIFICATION INTO UNRELATED BUSINESSES Can it meet corporate targets for profitability and return on investment? Evaluating the acquisition of a Is it is in an industry with new business or attractive profit and growth the divestiture of potentials? an existing business Is it is big enough to contribute significantly to the parent firm’s bottom line? 6-43Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–43
  44. 44. Building Shareholder Value via Unrelated Diversification Using an Unrelated Diversification Strategy to Pursue Value Cross-Business Acquiring and Astute Corporate Allocation of Restructuring Parenting by Financial Undervalued Management Resources Companies 6-44Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–44
  45. 45. Building Shareholder Value via Unrelated Diversification Astute Corporate • Provide leadership, oversight, expertise, and guidance. Parenting by • Provide generalized or parenting resources that lower Management operating costs and increase SBU efficiencies. Cross-Business • Serve as an internal capital market. Allocation of • Allocate surplus cash flows from businesses to fund Financial the capital requirements of other businesses. Resources Acquiring and • Acquire weakly performing firms at bargain prices. Restructuring • Use turnaround capabilities to restructure them to Undervalued increase their performance and profitability. Companies 6-45Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–45
  46. 46. The Path to Greater Shareholder Value through Unrelated Diversification Do a superior job of diversifying into businesses that produce good earnings and returns on investment. Actions taken by upper management Do an excellent job of negotiating to create value and favorable acquisition prices. gain a parenting advantage Provide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses. 6-46Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–46
  47. 47. The Drawbacks of Unrelated Diversification Pursuing an Limited Demanding Unrelated Competitive Managerial Diversification Advantage Requirements Strategy Potential Monitoring and Potential lack of maintaining cross-business the parenting strategic-fit advantage benefits 6-47Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–47
  48. 48. Inadequate Reasons for Pursuing Unrelated Diversification Poor Rationales for Unrelated Diversification Seeking Seeking Pursuing rapid Pursuing stabilization to reduction of or continuous personal avoid cyclical business growth for its managerial swings in investment risk own sake motives businesses 6-48Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–48
  49. 49. A Company’s Four MainStrategic AlternativesAfter It Diversifies Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 8–496-49
  50. 50. Diversification and performance Figure 7.3 Diversity and performanceBUSM 3200- Strategic Management (Jan 2013) GDS 6-50
  51. 51. Vertical integration 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.BUSM 3200- Strategic Management (Jan 2013) GDS 6-51
  52. 52. VERTICAL INTEGRATION STRATEGIES ♦ Vertically Integrated Firm ● Is one that participates in multiple segments or stages of an industry’s overall value chain. ♦ Vertical Integration Strategy ● Can expand the firm’s range of activities backward into its sources of supply and/or forward toward end users of its products.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–52
  53. 53. Types of Vertical Integration Strategies Vertical Integration Choices Full Partial Tapered Integration Integration IntegrationCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–53
  54. 54. Types of Vertical Integration Strategies ♦ Full Integration ● A firm participates in all stages of the vertical activity chain. ♦ Partial Integration ● A firm builds positions only in selected stages of the vertical chain. ♦ Tapered Integration ● Involves a mix of in-house and outsourced activity in any stage of the vertical chain.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–54
  55. 55. Backwards Integration Towards Suppliers ♦ Integrating Backwards By: ● Achieving the same scale economies as outside suppliers—low-cost based competitive advantage. ● Matching or beating suppliers’ production efficiency with no drop-off in quality—differentiation-based competitive advantage. ♦ Reasons for Integrating Backwards: ● Reduction of supplier power ● Reduction in costs of major inputs ● Assurance of the supply and flow of critical inputs ● Protection of proprietary know-howCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–55
  56. 56. Diversification and integration options Figure 7.4 Diversification and integration options: car manufacturer exampleBUSM 3200- Strategic Management (Jan 2013) GDS 6-56
  57. 57. Integrating Forward to Enhance Competitiveness ♦ Reasons for Integrating Forward: ● To lower overall costs by increasing channel activity efficiencies relative to competitors. ● To increase bargaining power through control of channel activities. ● To gain better access to end users. ● To strengthen and reinforce brand awareness. ● To increase product differentiation.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–57
  58. 58. Disadvantages of a Vertical Integration Strategy ♦ Increased business risk due to large capital investment. ♦ Acceptance of technological advances or more efficient production methods. ♦ Loss of operating flexibility through dependence on internally self-produced parts and components. ♦ Less flexibility in meeting buyer preferences if they require non-internally produced parts and components. ♦ Internal production levels and capacity matching problems may not allow for economies of scale. ♦ Requirements for new skills and business capabilities.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–58
  59. 59. Weighing the Pros and Cons of Vertical Integration ♦ Can vertical integration enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation? ♦ What is the impact of vertical integration on investment costs, flexibility and response times, and the administrative costs of coordinating operations across more vertical chain activities? ♦ How difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–59
  60. 60. Benefits of Increasing Horizontal Scope ♦ Increasing a firm’s horizontal scope strengthens its business and increases its profitability by: ● Improving the efficiency of its operations ● Heightening its product differentiation ● Reducing market rivalry ● Increasing the firm’s bargaining power over suppliers and buyers ● Enhancing its flexibility and dynamic capabilitiesCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–60
  61. 61. Outsourcing Outsourcing is the process by which activities previously carried out internally are subcontracted to external suppliers.BUSM 3200- Strategic Management (Jan 2013) GDS 6-61
  62. 62. OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS ♦ Outsourcing ● Involves farming out value chain activities to outside vendors. ♦ Outsource an Activity When It: ● Can be performed better or more cheaply by outside specialists. ● Is not crucial to achieving sustainable competitive advantage and does not hollow out the firm’s core competencies. ● Improves organizational flexibility and speed time to market. ● Reduces risks due to new technology and/or buyer preferences. ● Assembles diverse kinds of expertise speedily and efficiently. ● Allows a firm to concentrate on its core business, leverage key resources, and do even better what it does best.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–62
  63. 63. To outsource or not? The decision to integrate or subcontract rests on the balance between two distinct factors:  Relative strategic capabilities: Does the subcontractor have the potential to do the work significantly better?  Risk of opportunism: Is the subcontractor likely to take advantage of the relationship over time?BUSM 3200- Strategic Management (Jan 2013) GDS 6-63
  64. 64. The Risks of Outsourcing Value Chain Activities ♦ Hollowing out the resources and capabilities that the firm needs to be a master of its own destiny. ♦ Loss of control when monitoring, controlling, and coordinating activities of outside parties by means of contracts and arm’s-length transactions. ♦ Lack of incentives for outside parties to make investments specific to the needs of the outsourcing firm’s value chain.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–64
  65. 65. Value-adding activities Coaching and Envisioning facilitating Providing central services and Intervening resourcesBUSM 3200- Strategic Management (Jan2013) GDS 6-65
  66. 66. Value-destroying activities Adding management costs Adding bureaucratic complexity Obscuring financial performanceBUSM 3200- Strategic Management (Jan2013) GDS 6-66
  67. 67. Corporate rationales (1) Figure 7.5 Portfolio managers, synergy managers and parental developers Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley, 1994BUSM 3200- Strategic Management (Jan 2013) GDS 6-67
  68. 68. Corporate rationales (2) The portfolio manager operates as an active investor in a way that shareholders in the stock market are either too dispersed or too inexpert to be able to do. The synergy manager is a corporate parent seeking to enhance value for business units by managing synergies across business units. The parental developer seeks to employ its own central capabilities to add value to its businesses.BUSM 3200- Strategic Management (Jan 2013) GDS 6-68
  69. 69. Portfolio matrices Growth/Share (BCG) Matrix Directional Policy (GE-McKinsey) Matrix Parenting MatrixBUSM 3200- Strategic 69 6-69
  70. 70. The growth share (or BCG) matrix (1) Figure 7.6 The growth share (or BCG) matrixBUSM 3200- Strategic Management (Jan 2013) GDS 6-70
  71. 71. The growth share (or BCG) matrix (2) A star is a business unit which has a high market share in a growing market. A question mark (or problem child) is a business unit in a growing market, but it does not have a high market share. A cash cow is a business unit that has a high market share in a mature market. A dog is a business unit that has a low market share in a static or declining market.BUSM 3200- Strategic Management (Jan 2013) GDS 6-71
  72. 72. The growth share (or BCG) matrix (3) Problems with the BCG matrix: definitional vagueness, capital market assumptions, motivation problems, self-fulfilling prophecies and possible links to other business units.BUSM 3200- Strategic Management (Jan 2013) GDS 6-72
  73. 73. The directional policy (GE–McKinsey) matrix (1) Figure 7.7 Directional policy (GE–McKinsey) matrixBUSM 3200- Strategic Management (Jan 2013) GDS 6-73
  74. 74. The directional policy (GE–McKinsey) matrix (2) Figure 7.8 Strategy guidelines based on the directional policy matrixBUSM 3200- Strategic Management (Jan 2013) GDS 6-74
  75. 75. The parenting matrix (1) Figure 7.9 The parenting matrix: the Ashridge Portfolio Display Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley, 1994BUSM 3200- Strategic Management (Jan 2013) GDS 6-75
  76. 76. The parenting matrix (2) 1. Heartland business units - the parent understands these well and can add value. The core of future strategy. 2. Ballast business units - the parent understands these well but can do little for them. They could be just as successful as independent companies. If not divested, they should be spared corporate bureaucracy. 3. Value-trap business units are dangerous. There are attractive opportunities to add value but the parent’s lack of feel will result in more harm than good The parent needs new capabilities to move value-trap businesses into the heartland. It is easier to divest to another corporate parent which could add value. 4. Alien business units are misfits. They offer little opportunity to add value and the parent does not understand them. Exit is the best strategy.BUSM 3200- Strategic Management (Jan 2013) GDS 6-76
  77. 77. Summary (1) Many corporations comprise several, sometimes many business units. Decisions and activities above the level of business units are the concern of what in this chapter is called the corporate parent. Organisational scope is considered in terms of related and unrelated diversification. Corporate parents may seek to add value by adopting different parenting roles: the portfolio manager, the synergy manager or the parental developer.BUSM 3200- Strategic Management (Jan 2013) GDS 6-77
  78. 78. Summary (2) There are several portfolio models to help corporate parents manage their businesses, of which the most common are: the BCG matrix, the directional policy matrix and the parenting matrix. Divestment and outsourcing should be considered as well as diversification, particularly in the light of relative strategic capabilities and the transaction costs of opportunism.BUSM 3200- Strategic Management (Jan 2013) GDS 6-78
  79. 79. PRACTICE ESSAY QUESTIONS IMPORTANT NOTE: →  These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.  DO NOT use these questions to “spot”  The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise  The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive  To score a high grade it is important to LINK the theory to applications and examples. Where from?  You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.  You have selected a case company for your project; you may use examples from there.  You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.BUSM 3200- Strategic Management (Jan 2013) GDS 6-79
  80. 80. Sample essay question Discuss the benefits and risks associated with related and unrelated diversification strategy. Use specific examples from one of the cases studied in this course to illustrate how potential risks might be managed effectively for a firm to achieve sustainable competitive advantage.BUSM 3200- Strategic Management (Jan 2013) GDS 6-80
  81. 81. Sample essay question Discuss the advantages and disadvantages associated with related and unrelated diversification strategy for international expansion. Illustrate your answer with examples from one case studied in this course. Hint: Question is tricky: need to LINK two chapter content, one on diversification (Chapter 7) and one on international strategy (Chapter 8)BUSM 3200- Strategic Management (Jan 2013) GDS 6-81
  82. 82. Sample essay questions Explain using examples, how a company can implement a diversification strategy for long term advantage.  Consider an alternative approach that might have been more successful and discuss why such a company might not have adopted this approach.BUSM 3200- Strategic Management (Jan 2013) GDS 6-82
  83. 83. Sample essay questions Explain the three corporate rationales of diversification and discuss their logic, strategic requirements and organizational requirements. Can more than one rationale co-exist in a particular organization?BUSM 3200- Strategic Management (Jan 2013) GDS 6-83
  84. 84. Sample essay question Synergy is often said to be important in the selection of a corporate level strategy. Is synergy necessary to ensure corporate success? Your answer must address the three corporate parenting roles associated with corporate strategy and give examples whenever necessary to illustrate the points.BUSM 3200- Strategic Management (Jan 2013) GDS 6-84
  85. 85. Sample essay question There are broad three ways or rationales for corporate headquarters to add value. Explain these three corporate rationales and discuss their logic, strategic requirements and organisational requirements. Can more than one rationale co-exist in a particular corporation? Use Wesfarmers case as an example to support your argument.BUSM 3200- Strategic Management (Jan 2013) GDS 6-85

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