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Corporate Strategy

and Diversification
DR M MANJUNATH SHETTIGAR
MA (ECON), MBA, MPHIL, PHD
Learning outcomes (1)

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.
Learning outcomes (2)

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.
Strategic directions and
corporate-level strategy

Figure 7.1 Strategic directions and corporate-level strategy


Corporate strategy directions

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
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.
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 organisations
increased power; leads to greater market
share and with buyers and suppliers;
economies of scale; and provides greater and
experience curve benefits.
Constraints of
market penetration

Retaliation
Legal
from
constraints
competitors

Economic
Constraints
(recession or
funding
crisis)
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.
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.
Market development (1)

Market development refers to a strategy by


which an organisation offers existing products
to new markets
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.
Conglomerate diversification

Conglomerate (or unrelated)


diversification takes the organisation
beyond both its existing markets and its
existing products and radically increases the
organisations scope.
Risk Element
Drivers for diversification

Exploiting economies of scope efficiency


gains through applying the organisations
existing resources or competences to new
markets or services.
Stretching corporate management
competences.
Exploiting superior internal processes.
Increasing market power.
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.
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.
Diversification and performance

Figure 7.3 Diversity and performance


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 companys current business.
Forward integration refers to development
into activities concerned with the outputs of a
companys current business.
Diversification and integration options

Figure 7.4 Diversification and integration options: car manufacturer example


Diversification and integration options

Benefits:
Capturing more profits
Dangers:
Heavy investment
Drift into unrelated areas
Outsourcing

Outsourcing is the process by which


activities previously carried out internally are
subcontracted to external suppliers.
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?
When there is no alternative source of supply
Heavy investment is already undertaken by the procuring enterprise
Value Creation and the Corporate
Parent
Corporate parent is the holding company
which manages, supports, guides and
coordinates a number of business entities
(SBUs) coming under its umbrella.
These SBUs may be fully or partially owned
by the holding company, and dependent on
the parent for business support.
Eg., TATA Sons, Mahindra Group, etc
Value Creation and the Corporate
Parent
Corporate parent should be adding value to
the group business units/companies.

But in reality, parent may also have a


negative effect on them.
Value-adding activities

Envisioning Coaching

Providing central
services and Intervening
resources

Facilitating synergies
Ways of adding value
There are a number of ways in which the corporate parent can add
value.
By providing resources which the business units would not otherwise
have access to, such as investment and expertise in different markets.
By providing access to central services such as information technology
and human resources that can be made available more cheaply on an
organisation-wide basis due to economies of scale.
By providing access to markets, suppliers and sources of finance that
would not be available to individual units.
By improving performance through monitoring performance against
targets and taking corrective action.
Sharing expertise, knowledge and training across business units.
Facilitating co-operation and collaboration between business units.
Providing strategic direction to the business and clarity of purpose to
business units and external stakeholders such as shareholders.
By helping business units to develop either through assisting with
specific strategic developments or by enhancing the management
expertise.
Value-destroying activities

Adding management costs

Adding bureaucratic complexity

Obscuring financial performance


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
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.
Portfolio managers:
are corporate parents effectively acting as agents for
financial markets and shareholders to enhance the value
from individual businesses more effectively than the
financial markets could
identify and acquire under-valued businesses and
improve them, perhaps by divesting low-performance
businesses or improving the performance of others
keep the costs of the centre low by minimising the
provision of central services and allowing business units
autonomy whilst using targets and incentives to
encourage high performance
may manage a large number of businesses, which may
be unrelated.
Synergy managers:
enhance value by sharing resources and activity,
such as distribution systems offices or brand
names
may however bring substantial costs as
managing integration across businesses can be
expensive
may have difficulty in bringing synergy as
cultures and systems in different business units
may not be compatible
may need to be very hands-on and intervene at
the business unit level to ensure that synergy is
actually achieved.
Parental developers:
use their own central competences to add value
to the businesses by applying specific skills
required by business units for a particular
purpose, such as financial management or
research and development
need to have a clear understanding of the value-
adding capabilities of the parent and the needs
of the business units in order to identify how
these can be used to add value to business units
need to ensure that they are able to add value to
all businesses or be prepared to divest those to
which they can offer no advantages.
Portfolio matrices

Growth/Share (BCG) Matrix

Directional Policy (GE-McKinsey) Matrix

Parenting Matrix
BCG Matrix
BCG-matrix (aka growthshare matrix, Boston Box,
Boston matrix, Boston Consulting Group analysis,
portfolio diagram) is a chart that was created by Bruce D.
Henderson for the Boston Consulting Group in 1970 to help
corporations to analyze their business units regarding
profitability and future growth opportunities.

This helps the company allocate resources and is used as


an analytical tool in brand marketing, product management,
strategic management, and portfolio analysis. Some
analysis of market performance by firms using its principles
has called its usefulness into question.
The growth share (or BCG) matrix (1)

Figure 7.6 The growth share (or BCG) matrix


BCG Matrix
BCG Matrix Recommended
Strategy
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.
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.
The directional policy
(GEMcKinsey) matrix (1)

Figure 7.7 Directional policy (GEMcKinsey) matrix


The directional policy
(GEMcKinsey) matrix (2)

Figure 7.8 Strategy guidelines based on the directional policy matrix


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
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 parents 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.
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.
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.