Socrates vasiliades tax - business strategic planning
SM Lecture Six : Corporate Strategy and Diversification
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.
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BUSM 3200- Strategic Management (Jan 2013) GDS
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.
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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.
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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 strategy
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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 1
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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.
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22. Constraints of
market penetration
Retaliation
Legal
from
constraints
competitors
Economic
Constraints
(recession or
funding
crisis)
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2013) GDS
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.
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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.
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25. Market development (1)
Market development refers to a strategy by
which an organisation offers existing products
to new markets
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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.
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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 topic
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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.
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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.
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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.
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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.
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32. So which is better?
Related Diversification
Unrelated Diversification
The following set of slides explain the
differences in detail
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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.
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61. Outsourcing
Outsourcing is the process by which activities
previously carried out internally are
subcontracted to external suppliers.
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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?
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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, 1994
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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.
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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.
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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.
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74. The directional policy
(GE–McKinsey) matrix (2)
Figure 7.8 Strategy guidelines based on the directional policy matrix
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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, 1994
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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.
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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.
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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.
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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.
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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.
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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)
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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.
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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?
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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.
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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.
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