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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

Strategic choices

Chapter Seven

Figure II.i

Strategic choices
6-2

BUSM 3200- Strategic Management (Jan 2013) GDS

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

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

STRENGTHENING A COMPANYS
MARKET POSITION VIA ITS SCOPE
OF OPERATIONS

Defining the Scope of


the Firms Operations

Range of its
activities
performed
internally

Breadth of its
product and
service offerings

Extent of its
geographic
market
presence and
mix of
businesses

Size of its
competitive
footprint on
its market
or industry

6-5
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

65

Levels of strategy
Wesfarmers Limited

Chemicals
& Fertilisers

Energy

Industrial &
Safety

Supermarkets

Insurance

Sales & Marketing

Corporate Strategy

Hardware

Business Strategy

Forest Products

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

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

Strategic directions and


corporate-level strategy

Figure 7.1

Strategic directions and corporate-level strategy

BUSM 3200- Strategic Management (Jan 2013) GDS

6-8

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

BUSM 3200- Strategic Management (Jan 2013) GDS

6-9

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

Reasons for diversification


General environment becomes unattractive

Industrys 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 &
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Beamish/Strategic Management/4th edition

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.
6-12

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

812

BUILDING SHAREHOLDER VALUE:


THE ULTIMATE JUSTIFICATION FOR
DIVERSIFYING

Testing Whether a Diversification


Move Will Add Long-Term
Value for Shareholders

The industry
attractiveness
test

The cost-of-entry
test

The better-off
test

6-13
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

813

Advantages and disadvantages of


diversification
Advantages

Disadvantages

Efficient capital allocation

Shareholders have no say


in capital allocation
process

Trains general managers


Spreads risk
More strategic options

May not align with


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

Testing Whether Diversification Will Add


Value for Shareholders

The Attractiveness Test:

Are the industrys 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?
6-15

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

815

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

Better Performance through Synergy

Evaluating the
Potential for
Synergy
through
Diversification

Firm A purchases Firm B in


another industry. A and Bs
profits are no greater than
what each firm could have
earned on its own.

No
Synergy
(1+1=2)

Firm A purchases Firm C in


another industry. A and Cs
profits are greater than what
each firm could have earned
on its own.

Synergy
(1+1=3)

6-17
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

817

STRATEGIES FOR ENTERING NEW


BUSINESSES

Diversifying into
New Businesses

Acquisition

Internal new
venture (start-up)

Joint venture

These topics will be covered in Chapter 10 :


Mergers, Acquisitions and Alliances
6-18
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

818

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

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

BUSM 3200- Strategic Management (Jan 2013) GDS

6-20

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.

BUSM 3200- Strategic Management (Jan 2013) GDS

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Constraints of
market penetration

Retaliation
from
competitors

Legal
constraints

Economic
Constraints
(recession or
funding
crisis)
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2013) GDS

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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

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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

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Market development (1)


Market development refers to a strategy by
which an organisation offers existing products
to new markets

BUSM 3200- Strategic Management (Jan 2013) GDS

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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

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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

BUSM 3200- Strategic Management (Jan 2013) GDS

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

BUSM 3200- Strategic Management (Jan 2013) GDS

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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.

BUSM 3200- Strategic Management (Jan 2013) GDS

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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

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

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So which is better?
Related Diversification
Unrelated Diversification

The following set of slides explain the


differences in detail

BUSM 3200- Strategic Management (Jan 2013) GDS

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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.
6-33

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

833

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

CHOOSING THE DIVERSIFICATION


PATH: RELATED VERSUS
UNRELATED BUSINESSES

Which Diversification
Path to Pursue?

Related
Businesses

Unrelated
Businesses

Both Related
and Unrelated
Businesses

6-35
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835

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

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.
6-37

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

837

Related Businesses Provide Opportunities to Benefit


from Competitively Valuable Strategic Fit

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

8386-38

Identifying Cross-Business Strategic Fit


along the Value Chain
Supply Chain
Activities
R&D and
Technology
Activities

ManufacturingRelated Activities

Potential
Cross-Business Fits
Sales and
Marketing
Activities

DistributionRelated Activities
Customer
Service Activities

6-39
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

839

Strategic Fit, Economies of Scope,


and Competitive Advantage
Using Economies of Scope to Convert
Strategic Fit into Competitive Advantage

Transferring
specialized and
generalized
skills and\or
knowledge

Combining
related value
chain activities
to achieve
lower costs

Leveraging
brand names
and other
differentiation
resources

Using crossbusiness
collaboration
and knowledge
sharing

6-40
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

840

Economies of Scope Differ from


Economies of Scale

Economies of Scope

Are cost reductions that flow from crossbusiness 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.

6-41
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

841

From Competitive Advantage to Added


Profitability and Gains in Shareholder Value
Capturing the Cross-Business Benefits
of Related Diversification

Builds more
shareholder
value than
owning a stock
portfolio

Is only possible
via a strategy
of related
diversification

Yields value in
the application
of specialized
resources and
capabilities

Requires that
management
take internal
actions to
realize them

6-42
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

842

DIVERSIFICATION INTO UNRELATED


BUSINESSES
Can it meet corporate targets
for profitability and return on
investment?
Evaluating the
acquisition of a
new business or
the divestiture of
an existing
business

Is it is in an industry with
attractive profit and growth
potentials?

Is it is big enough to contribute


significantly to the parent firms
bottom line?

6-43
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

843

Building Shareholder Value via


Unrelated Diversification

Using an Unrelated Diversification


Strategy to Pursue Value

Astute Corporate
Parenting by
Management

Cross-Business
Allocation of
Financial
Resources

Acquiring and
Restructuring
Undervalued
Companies

6-44
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

844

Building Shareholder Value via


Unrelated Diversification
Astute Corporate
Parenting by
Management
Cross-Business
Allocation of
Financial
Resources
Acquiring and
Restructuring
Undervalued
Companies

Provide leadership, oversight, expertise, and guidance.


Provide generalized or parenting resources that lower
operating costs and increase SBU efficiencies.

Serve as an internal capital market.


Allocate surplus cash flows from businesses to fund
the capital requirements of other businesses.

Acquire weakly performing firms at bargain prices.


Use turnaround capabilities to restructure them to
increase their performance and profitability.

6-45
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845

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
to create value and
gain a parenting
advantage

Do an excellent job of negotiating


favorable acquisition prices.
Provide managerial oversight and
resource sharing, financial resource
allocation and portfolio management,
and restructure underperforming
businesses.

6-46
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

846

The Drawbacks of Unrelated Diversification

Demanding
Managerial
Requirements

Pursuing an
Unrelated
Diversification
Strategy

Monitoring and
maintaining
the parenting
advantage

Limited
Competitive
Advantage
Potential

Potential lack of
cross-business
strategic-fit
benefits

6-47
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

847

Inadequate Reasons for Pursuing


Unrelated Diversification
Poor Rationales for
Unrelated Diversification

Seeking
reduction of
business
investment risk

Pursuing rapid
or continuous
growth for its
own sake

Seeking
stabilization to
avoid cyclical
swings in
businesses

Pursuing
personal
managerial
motives

6-48
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

848

A Companys Four Main


Strategic Alternatives
After It Diversifies

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

8496-49

Diversification and performance

Figure 7.3

Diversity and performance

BUSM 3200- Strategic Management (Jan 2013) GDS

6-50

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.

BUSM 3200- Strategic Management (Jan 2013) GDS

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VERTICAL INTEGRATION STRATEGIES


Vertically Integrated Firm

Is one that participates in multiple segments


or stages of an industrys overall value chain.

Vertical Integration Strategy

Can expand the firms 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.

652

Types of Vertical Integration Strategies

Vertical Integration
Choices

Full
Integration

Partial
Integration

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Tapered
Integration

653

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.

654

Backwards Integration Towards Suppliers


Integrating Backwards By:

Achieving the same scale economies as outside


supplierslow-cost based competitive advantage.

Matching or beating suppliers production efficiency


with no drop-off in qualitydifferentiation-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-how

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

655

Diversification and integration options

Figure 7.4

Diversification and integration options: car manufacturer example

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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.

657

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.

658

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.

659

Benefits of Increasing Horizontal Scope


Increasing a firms 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 firms bargaining power over


suppliers and buyers

Enhancing its flexibility and dynamic capabilities

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

660

Outsourcing
Outsourcing is the process by which activities
previously carried out internally are
subcontracted to external suppliers.

BUSM 3200- Strategic Management (Jan 2013) GDS

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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 firms 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.

662

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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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 arms-length transactions.
Lack of incentives for outside parties to make
investments specific to the needs of the
outsourcing firms value chain.

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

664

Value-adding activities

Envisioning

Coaching and
facilitating

Providing central
services and
resources

Intervening

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2013) GDS

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Value-destroying activities

Adding management costs


Adding bureaucratic complexity
Obscuring financial performance

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2013) GDS

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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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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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Portfolio matrices

Growth/Share (BCG) Matrix

Directional Policy (GE-McKinsey) Matrix

Parenting Matrix

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The growth share (or BCG) matrix (1)

Figure 7.6

The growth share (or BCG) matrix

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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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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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The directional policy


(GEMcKinsey) matrix (1)

Figure 7.7

Directional policy (GEMcKinsey) matrix

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The directional policy


(GEMcKinsey) matrix (2)

Figure 7.8

Strategy guidelines based on the directional policy matrix

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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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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.
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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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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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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

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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

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

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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

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

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

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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