STRATEGIC CHOICES The influence of corporate

strategy on an organisation

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 CORPORATE STRATEGY
Many large businesses consist of a corporate parent and a number of SBUs. The
defining characteristic of the corporate parent is that it has no direct contact with the
buyers or competitors, its role being to manage the overall scope of the organisation in
terms of diversity of products, markets and international operations.
Each SBU has its own products, with which it serves its own market sector, and its
managers are, to a greater or lesser extent, responsible for its overall success (or failure).
In very large organisations, SBUs may be grouped into divisions, with divisional
managers providing an intermediate level of management between the SBU and the
corporate parent.
The processes involved in making and implementing these decisions are complex and the
role of the corporate parent is of very great importance to the success or failure of the
organisation.
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PRODUCT/ MARKET DIVERSIFICATION

Diversity of products and markets may be advantageous for three reasons:

•Economies of scope may arise in several forms of synergy.
•Corporate management skills may be extendible.
•Cross-subsidy may enhance market power.
Related diversification, whether horizontal or vertical, usually works better than
conglomerate, or unrelated, diversification.

DR. SWATI JAIN

The corporate parent controls the extent of product and market diversification undertaken by the organisation as a
whole. JS&W suggest three reasons why diversification may be advantageous.
(a) Economies of scope (as opposed to economies of scale) may result from the greater use of under-utilised
resources. These benefits are often referred to as synergy and can take several forms:
(i) Marketing synergy is achieved by extending the use of marketing facilities such as distribution channels; sales
staff and administration; and warehousing. For example, the UK Automobile Association, which is primarily a
provider of breakdown services for motorists, now offers loans to customers as well as breakdown services.
(ii) Operating synergy arises from the better use of operational facilities and personnel, bulk purchasing, and a
greater spread of fixed costs whereby the firm's competence can be transferred to making new products. For
example, although there is very little in common between sausages and ice cream, both depend on a competence of
refrigeration.
(iii) Investment synergy comes from the wider use of a common investment in non-current assets, working capital
or research, such as the joint use of plant, common raw material inventory and transfer of research and
development from one product to another.
(iv) Management synergy is the advantage to be gained where management skills concerning current operations
are easily transferred to new operations because of the similarity of problems in the two industries.
(b) Corporate management skills may be extendible across a range of unrelated businesses. In a way this is also a
kind of synergy, in which the corporate parent represents the resource that can be more intensively utilised. This
kind of approach is commonly seen in consumer goods groups that deploy brand management skills across a
diverse range of products and markets.
(c) Diversification can increase market power via cross-subsidisation. A high margin business can subsidise a low
margin one, enabling it to create a price advantage over its rivals and building market share. Eventually, it may
achieve a dominant position that enables it to increase its prices and recoup earlier group losses.

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RELATED DIVERSIFICATION
Related diversification is development beyond current products and markets but
within the capabilities or value network of the organisation.
•Horizontal integration makes use of current capabilities by development into
activities that are competitive with, or directly complementary to, a company's present
activities. An example would be a TV company that moved into film production.
•Vertical integration occurs when a company expands backwards or forwards within
its existing value network and thus becomes its own supplier or distributor. For
example, backward integration would occur if a milk processing business acquired its
own dairy farms, rather than buying raw milk from independent farmers. If a cloth
manufacturer began to produce shirts instead of selling all of its cloth to other shirt
manufacturers, that would be forward integration.

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UNRELATED DIVERSIFICATION
Unrelated diversification is the development of products or services beyond the current
capabilities or value network.
Unrelated diversification produces the type of company known as a conglomerate.
Conglomerate diversification has been a key strategy for companies in Asia, particularly
South Korea, where the chaebol, as they are known, have provided better markets for
capital and managerial skills than were available in the economy generally. Conglomerate
diversification can also succeed when managed by particularly talented strategic leaders
who deploy an effective dominant logic; dominant logic is the term used by Prahalad
and Bettis to signify a cognitive orientation or world view based on sound judgement
and experience

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INTERNATIONAL DIVERSIFICATION

Despite wide-ranging measures to liberalize trade and the resulting major growth
in world trade, there has been little globalization of services
Language differences and restrictions on population movement hamper the
growth of international markets for labour, even when it is highly skilled.
Globalisation
 Import substitution
 Export-let growth
 Market convergence
 Increase in internet usage (e-commerce)

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Management orientation
 Ethnocentrism is a home country orientation
 Polycentrism adapts totally to local environments
 Geocentrism adapts only to add value. It ‘think globally, act locally’
 Regiocentrism recognizes regional differences

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MARKET SELECTION
In making a decision as to which market(s) to enter, the firm must start by establishing
its objectives.

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MODES OF ENTRY TO
FOREIGN MARKETS
Exporting

The entry mode depends on:

•Marketing objectives
•Mode availability Wholly
owned
•HR requirements Join ventures Modes overseas
production
•Risks
•Firm size
•Market research feedback Contract
manufacture
•Control needs
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DR. SWATI JAIN
CORPORATE PARENT AND VALUE
CREATION
There are three value-creating roles for the corporate parent:
Envisioning corporate intent, communicating the vision to stakeholders and SBU managers,
and acting in accordance with it
Intervention to improve performance
Provision of services, resources and expertise
Portfolio managers create value by applying financial discipline. They keep their own costs low.
Synergy managers pursue economies of scope through the shared use of competences and
resources.
Parental developers add value by deploying their own competences to improve their SBUs'
performance

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 THE CORPORATE PORTFOLIO
A parent may deploy four policies towards its SBUs:
❖Build
❖Hold
❖Harvest
❖Divest

The SBU portfolio must be managed against three criteria:

❖Balance
❖Attractiveness
❖Strategic fit

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Four major strategies can be pursued with respect to products, market segments and,
indeed, SBUs:
(a) Build. A build strategy forgoes short-term earnings and profits in order to increase
market share.
(b) Hold. A hold strategy seeks to maintain the current position.
(c) Harvest. A harvesting strategy seeks short-term earning and profits at the expense of
long-term development.
(d) Divest. Divestment reduces negative cash flow and releases resources for use
elsewhere.
A number of strategic tools have been developed to assist the decision process. These
tools help the corporate parent to manage its portfolio of SBUs against three criteria:
(a) Balance in relation to markets and corporate needs
(b) Attractiveness in terms of profitability and growth
(c) Strategic fit, in terms of potential synergy and parenting capability

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THE BOSTON CLASSIFICATION
The Boston classification classifies business units in terms of their capacity for growth
within the market and the market's capacity for growth as a whole. The Boston
Consulting Group (BCG) developed a matrix based on empirical research that assesses
businesses in terms of potential cash generation and cash expenditure requirements.
SBUs are categorised in terms of market growth rate and relative market share

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BOSTON CONSULTING GROUP
(BCG) MATRIX

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(a) Assessing rate of market growth as high or low depends on the conditions in the market. No single percentage
rate can be set, since new markets may grow explosively while mature ones grow hardly at all. High market growth
rate can indicate good opportunities for profitable operations. However, intense competition in a high growth
market can erode profit, while a slowly growing market with high barriers to entry can be very profitable.
(b) Relative market share is assessed as a ratio: it is market share compared with the market share of the largest
competitor. Thus, a relative market share greater than unity indicates that the SBU is the market leader. BGG settled
on market share as a way of estimating costs and thus profit potential, because both costs and market share are
connected with production experience: as experience in satisfying a particular market demand for value increases,
market share can be expected to increase also, and costs to fall. The connection between lower costs and higher
market share was independently confirmed by PIMS studies.
The portfolio should be balanced, with cash cows providing finance for stars and question marks; and a minimum
of dogs.
(a) In the short term, stars require capital expenditure in excess of the cash they generate, in order to maintain their
position in their competitive growth market, but promise high returns in the future. Strategy: build.
(b) In due course, stars will become cash cows. Cash cows need very little capital expenditure, since mature
markets are likely to be quite stable, and they generate high levels of cash income. Cash cows can be used to finance
the stars. Strategy: hold or harvest if weak.
(c) Question marks must be assessed as to whether they justify considerable capital expenditure in the hope of
increasing their market share, or should they be allowed to die quietly as they are squeezed out of the expanding
market by rival products? Strategy: build or harvest.
(d) Dogs may be ex-cash cows that have now fallen on hard times. Although they will show only a modest net cash
outflow, or even a modest net cash inflow, they are cash traps which tie up funds and provide a poor return on
investment. However, they may have a useful role, either to complete a product range or to keep competitors out.
There are also many smaller niche businesses in markets that are difficult to consolidate that would count as dogs
but which are quite successful. Strategy: divest or hold.

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BUSINESS UNIT STRATEGY
Generic strategies Business unit strategy involves a choice between being the lowest cost
producer (cost leadership), making the product different from competitors' products
in some way (differentiation) or specialising on a segment of the market (focus, by
addressing that segment via a strategy of cost leadership or differentiation). Porter
believes that a firm must choose one of these or be stuck-in-the-middle.

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