Corporate Strategy

The Multi-business Organisation

 Levels of management above that of business units (SBU) are referred to as
the corporate parent.
 Corporate parents do not have any direct interaction with buyers and
competitors.

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Strategy Development Directions –
Ansoff Matrix

INTENSIVE
STRATEGIES

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Ansoff Matrix: Market Penetration
(existing products, existing markets)
 Market penetration is where an organisation gains market share,
thro’ competences that sustain or improve quality or innovation, or
increasing marketing efforts (the 4 P’s).
 The ease with which an organisation can pursue market
penetration may be dependent on;
– Market growth rate: When the overall market is growing, it is easier for
organizations to gain share. In contrast, market penetration in static
markets can be achieved through the acquisition of failing companies.
– Complacency of market leaders: can allow lower share competitors to gain
market share because they are not regarded as serious competitors.
 E.g. A vegetarian restaurant in a small town estimates that there
are 12,000 vegetarians in the area. They have 1,200 unique
customers in a year. They estimate their market penetration is
(1,200 / 12,000) x 100 = 10%

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Ansoff Matrix: Product Development
(new products, existing markets)
 Product development is where organizations deliver modified or
new products to existing markets.
 Brand extension thro’ needs assessment & R&D are parts of a
successful product development strategy
 The advent of powerful data-mining applications, enables
organizations to gain real-time information about changing
customer needs.
 Kit Kat's product development has become a great success, with
flavours such as Wasabi, pumpkin, and toasted soy flour introduced
in the Japanese market.
 A well-known failure is that of the car manufacturer Volvo, whose
launch of its 850 GLT sports sedan. This seemed on the surface to
be a logical brand extension, but it did not work for Volvo because
the public could not be persuaded to buy a sports car from a
manufacturer whose principal brand value is safety.
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Ansoff Matrix: Market Development
(existing products, new markets)
 Market development is a business strategy whereby a
business attempts to find new groups of buyers as potential
customers for its existing products and services. In other
words, the goal of market development is to expand into
untapped markets.
 There are a variety of ways that this strategy can be
achieved.
– New geographical markets (E.g. KFC in India)
– New uses for existing products (E.g. Heinz vinegar to clean
windows, Tums for calcium, chewing gum for dental hygene)
– New product dimensions or packaging (E.g. Cadbury Bubble)
– New distribution channels (E.g. Brick & Mortar to internet)

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Ansoff Matrix: Diversification (new
products, new markets)

 Diversification is an ambitious, aggressive strategy that involves

working outside the organizations existing knowledge base.
 Value-creating reasons for diversification are as follows;
1. Economies of scope: using organization's existing under-utilized
resources or capabilities (technologies, distribution channels, brands etc.)
to new markets, products or services, i.e. economies gained by extending
the scope of the organization's activities. Scope benefits are also referred to
as the benefits of synergy. E.g. School renting out halls for weddings..
2. Cross-subsidize one product from the surpluses earned by another,
leading to competitive advantage.
3. In response to environmental change: where markets or technologies
are converging. E.g. Microsoft investing $500m in developing Xbox.
 Nokia were extremely successful when they diversified into cell
phone manufacturing from their original focus as a producer of
paper products.
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Example Ansoff Matrix - Coke

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Example Ansoff Matrix - Coke

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Corporate Level Diversification
Strategies
Single Industry Related Unrelated
Firm Diversified Firm Diversified Firm
• Competes in one • Shares and • Autonomous
Industry leverages core- businesses in
• Example: McDonalds, competencies different markets.
Wrigley, Ford Motors, resources & Only share financial
Coke operating synergies resources
across SBUs • Example: TATA Sons,
• Example: P & G,
Reliance, Godrej
Unilever, PepsiCo,
Texas Instruments,
Honda

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Related Diversification

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Related Diversification
 Related diversification can be defined as strategy development beyond current products
and markets, but within the capabilities or value network of the organisation.
 Vertical integration describes either backward or forward integration into adjacent
activities in the value network.
– Backward integration refers to development into activities concerned with the inputs (raw
materials, machinery and labor).
 Carnegie Steel owned the mines that extracted iron ore, the coal mines, the railroads that brought
the coal to the factories and the ships that brought the iron ore, and the mills that produced the
steel.
– Forward integration refers to development into activities which are concerned with a company’s
outputs (transport, distribution, repairs and servicing).
 DirectTV is a satellite TV company, whose 2003 `purchase enabled News Corporation to use it as a
medium to distribute more of its news, movies and television shows
 Horizontal integration is the process of acquiring or merging with competitors, or
companies which are into complementary products or capabilities or companies in the
same value chain.
 Horizontal integration often leads to industry consolidation.
 Disney merging with Pixar (movie production), Exxon with Mobile (oil production, refining and
distribution) or the infamous Daimler Benz and Chrysler merger (car developing, manufacturing and
retailing).
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Difference between Horizontal and
Vertical integration

A company is vertically integrating if it expands

from manufacturing industry to retailing industry,
while horizontal integration would mean buying
other firms in the same manufacturing industry.
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Related Diversification Issues
 Diversification sometimes serve managerial interests
(job security & risk hedging) more than shareholders.
 The ‘ownership’ of more value activities within the value
system through vertical or horizontal integration does not
guarantee improved performance.
 Considerable time and cost is involved in top
management to ensure that the benefits of relatedness
are transferred across business units.
 It may be difficulty for business-unit managers in sharing
resources, or adapting to corporate-wide policies,
when they are rewarded primarily on the basis of the
performance of their own business unit.
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Un-related Diversification
 Unrelated diversification (or conglomerate diversification) is the
development of products or services beyond the current capabilities
or value network.
 The major advantages of unrelated diversification is;
– Spreading the risk through different sectors of the economy or
different markets.
 Some disadvantages of unrelated diversification are;
– Achieving successful unrelated diversification requires allocation of
significant financial and human resources and there is always the risk
of harming the main company business.
– Unrelated diversified companies’ share prices may often suffer from
the ‘conglomerate discount’ (lower valuation than the standalone
business valuation). This is because the overall performance of the
unrelated business activities does not exceed that of the individual
ones.
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Diversification and performance
Related diversified firms
outperformed
undiversified firms &
unrelated diversified firms.

• Conglomerates in
developing economies
often perform well.
• Conglomerates perform
well for short periods,
but then tend to decline
and break up,
particularly when the
founding generation of
top managers retire.

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Defensive Strategies
 Retrenchment: Involves regrouping and cost reduction
thro’ employee head count reduction.
 Divestiture strategy: involves the sale of a part of a firm or
a major component of a firm;
– When retrenchment fails to accomplish the desired turnaround
– When a non-profitable, non-integrated business requires too much
capital, and is a mis-fit in the overall business activities.
 Liquidation strategy: the firm typically is sold in parts, or
as a whole, for its tangible asset value and not as a going
concern.
 Bankruptcy: agreeing to a complete distribution of firm
assets to creditors, most of whom receive a small fraction of
the amount they are owed.
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Types of Strategies – A Summary

Integration Diversification Intensive Defensive

Market
Horizontal Single Industry Retrenchment
Penetration

Market
Vertical Related Divestiture
Development

Product
Forward Unrelated Liquidation
Development

Backward Bankruptcy

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Portfolio, Synergy Managers and
Parental Developers

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The Portfolio Manager
 A portfolio manager is a corporate parent acting as an
agent on behalf of financial markets and shareholders,
with a view to enhancing the value attained from the
various businesses
 His role is identifying and acquiring under-valued
assets or businesses, divesting low-performing
businesses, and encouraging improved performance of
those with potential.
 Roles also include setting financial targets, making
central evaluations about the well-being and future
prospects of such businesses and investing or
divesting accordingly.
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The Synergy Manager
 The synergy manager is a corporate parent seeking to enhance value
across business units by managing synergies across business units.
 Value can be enhanced across business units in a number of ways;
– Resources or activities might be shared (common distribution systems,
overseas offices, common brand names)
– Skills or competences can be shared
 However, there may be problems in achieving such synergistic benefits;
– Excessive costs in sharing or transference of skills need to outweigh the costs
of undertaking the integration
– Overcoming self-interest of the managers in the business units as this detracts
from focusing on the primary concerns they have for their own businesses.
– Compatibility between acquired business-unit systems and culture
– The illusion of synergy
– Variations in local conditions in acquired business-unit.

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The Parental Developer
 The parental developer is a corporate parent seeking to employ its own
competences to add value to its business units.
 Here, the focus is not about creating synergies between business units, but
using their capabilities to enhance the potential of business units (E.g.
experience in globalizing domestically based businesses; value branding
that may enhance the image of a business; negotiating with governments;
specialist skills in financial management, brand marketing or research and
development).
 This may pose some challenges;
– Identifying capabilities of the parent
– Focusing on value-adding capabilities, and limiting interaction in other areas.
– The ‘crown jewel’ problem: Crown Jewels are business units within its portfolio
where parent can add little value, but are high-performing hence cannot be divested.
– Mixed parenting is when a parental develop acts as a synergy manager and a
parental developer.
– Executives of the corporate parent must also have ‘sufficient feel’ or understanding
of the businesses within the portfolio to know where they can add value
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Value-adding activities of corporate
parents
 Focus: The primary role of corporate parents is
establishing a clear level strategic intent. In the absence
of this clarity, the corporate parent will undertake
activities that have nothing to do with adding value to the
business units.
 Clarity to external stakeholders: This establishes how
a corporate parent might add value to the business units.
 Clarity to business units: This clarity will establish if a
business is seen as central to corporate aspirations, and
can provide a basis on which strategic choice is made at
the business level by setting of clear expectations and
standards
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Value-destroying activities of
corporate parents

 Corporate parents can add cost with systems

and hierarchies that delay decisions, create a
‘bureaucratic fog’ and hinder market
responsiveness.
 Corporate parents may buffer businesses from
the realities of financial markets by providing a
financial ‘safety net’.
 The diversity and size of some corporations
can make it very difficult for businesses to the
overall mission.
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The Strategy Lenses
Strategic choices are
adaptation of past
strategies influenced by Experience Lens
experience

Logical process wherein

strategic options weighed
carefully through analytic Design Lens
and evaluative techniques

Emphasizes subjectivity
& diversity, which can
generate genuinely new
Ideas Lens
ideas

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The BCG Matrix
The Boston Consulting Group (BCG) Matrix conceives to balance the
portfolio of businesses is in terms of the relationship between market
share and market growth.

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The BCG Matrix (2)
 A star is a business unit which has a high market share in a growing
market. The business unit may be spending heavily to gain that share,
but experience curve benefits may help in reducing costs faster than
competitors.
 A question mark is a business unit in a growing market, without a high
market share. It may be necessary to spend heavily to increase market
share, but it is unlikely that sufficient cost reduction is achieved to
offset such investments.
 A cash cow is a business unit with a high market share in a mature
market. Because growth is low, the need for heavy marketing
investment is less. The cash cow should be a cash provider to finance
stars or question marks.
 Dogs are business units with a low share in static or declining markets
They may be a cash drain and use up a disproportionate amount of
company time and resources.
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The BCG Matrix Issues
 There can be practical difficulties in deciding what exactly ‘high’ and
‘low’.
 The analysis should be applied to strategic business units, not to
products or to broad markets
 Question marks and stars are very demanding on innovative capacity
(time and creative energy) which are not factored in the matrix.
 Some ‘dogs’ may be necessary to complete the product range, to
provide a credible presence in the market, to keep competitors out or to
absorb fixed costs.
 Matrix does not address behavioral implications such as motivation of
Cash Cow managers or politics of divesting dogs.
 Different levels of economic and political risk are not addressed.
 For product-diversified firms the model does not take into account the
shared use of resources, for example sales and distribution facilities.

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Market Attractiveness / SBU
Strength Matrix (GE Matrix)

The Market attractiveness/SBU strength matrix

(directional policy matrix, attractiveness matrix
or GE Matrix) positions SBUs according to;
– How attractive the relevant market is in which they
are operating (thro‘ PESTEL or five forces analyses)
– the competitive strength of the SBU in that market
(thro’ competitor analysis).

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Market attractiveness/SBU strength
matrix (GE Matrix)

Relatively
low shares
Greatest in the
strength is in largest
a market with and most
only medium attractive
attractiveness market

Strength in
markets with
little long-
term
attractiveness

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Strategy guidelines based on the
directional policy matrix

Investment Selective Selectively

& Growth Growth Question

Selective Selectively Harvest /

Growth Question Divest

Selectively Harvest / Harvest /

Question Divest Divest

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GE Matrix for Apple Inc.

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GE Matrix for Maruti Indial Ltd.

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Indicators of SBU strength and
market attractiveness

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The End

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