Corporate Level Strategy

Growth Avenues for Businesses

Ansoff’s Growth Vector Matrix

 Ansoff’s Growth Vector Matrix
• Market penetration / Consolidation:
– Organisation takes increased share of its existing markets
with its existing product range
– Greater market share - increased power vis-à-vis buyers
and suppliers, greater economies of scale and experience
curve benefits
– L N Mittal moved rapidly to become the largest steel
producer in the world by acquiring struggling steel
companies around the world
– Gaz de France and Suez, two utility companies with
dominant positions in France and Belgium, decided to
merge
 Ansoff’s Growth Vector Matrix
• Product development:
– Organisations deliver modified or new products
(or services) to existing markets
– It implies greater degrees of innovation
– Sony’s move from Walkman portable music
system from audio tapes, through CDs to MP3-
based systems
– Banking and Insurance companies developing
products to cater to the existing customer
 Ansoff’s Growth Vector Matrix
• Market development:
– Involves offering existing products to new markets
– New Segment: Traditional colleges might offer its
educational services to working professionals / skill
development of entrepreneurs
– New users: Aluminum whose original users in
packaging and cutlery manufacture are now
supplemented by users in aerospace and
automobiles
– New geographies: Financial Inclusion scheme
through Pradhan Mantri Jan Dhan Yojana
 Ansoff’s Growth Vector Matrix
• Diversification:
– Strategy that takes an organisation away from
both its existing markets and its existing products
– The primary approach to corporate level strategy
– Diversified firms vary according to
• Level of diversification
• Degree of relatedness
Corporate-level strategy: Specifies actions
a firm takes to gain a competitive
advantage by selecting and managing a
group of different businesses competing in
different product markets
Corporate-Level Strategy: Key Questions
• Corporate-level Strategy’s Value
– The degree to which the businesses in the
portfolio are worth more under the
management of the company than they would
be under other ownership
– What businesses should the firm be in?
– How should the corporate office manage the
group of businesses?
 Four Main Tasks in
Crafting Corporate Strategy
• Pick new industries to enter and decide on means of entry
(Acquisition, Internal Development, Joint Venture, etc.)
• Initiate actions to boost combined performance of
businesses
• Pursue opportunities to leverage cross-business value
chain relationships and strategic fits into competitive
advantage
• Establish investment priorities, steering resources into
most attractive business units (financial economies)
– Efficient internal capital allocation (reduce risk)
– Restructuring of acquired assets (sell restructured company at a
profit)
 Why do Firms Diversify?
• When they have excess resources, capabilities, and core
competencies that have multiple uses
• Diminishing growth prospects in present industry
– Microsoft’s diversification into electronic games such as the Xbox
• Cost saving opportunities
– Through economies of scope and synergies
• Increasing market power
– General Electric’s (jet engines) bid for electronic controls company Honeywell
(aviation electronics)
– JSW Steel’s acquisition of Ispat Industries to overtake SAIL
• Stretching corporate parenting capabilities
– LVMH (French conglomerate) creates value for the subsidiaries by adding
parenting skills –the nurturing of highly creative people
• BUILDING SHAREHOLDER VALUE
 Levels of Diversification
1. Low Levels
– Single Business Strategy
• Corporate-level strategy in which the firm generates
95% or more of its sales revenue from its core business
area
• Examples: Tata Motors (car/bus/truck chassis), Bajaj
Auto (two-wheelers), Ballarpur Industries (Paper
products)
– Dominant Business Diversification Strategy
• Corporate-level strategy whereby firm generates 70-95%
of total sales revenue within a single business area
• Examples: ITC (more than 70% from tobacco)
 Levels of Diversification (Cont’d)

2. Moderate to High Levels

– Related Constrained Diversification Strategy
• Less than 70% of revenue comes from the dominant business
• Direct links (i.e., share products, technology and distribution
linkages) between the firm's businesses
• Examples: Nestle, P&G, HUL, L&T, etc.
– Related Linked Diversification Strategy (Mixed related and
unrelated)
• Less than 70% of revenue comes from the dominant business
• Mixed: Linked firms sharing fewer resources and assets among
their businesses (compared with related constrained, above),
concentrating on the transfer of knowledge and competencies
among the businesses
• Examples: GE (transfer more of knowledge and competencies)
 Levels of Diversification (Cont’d)

3. Very High Levels: Unrelated

• Less than 70% of revenue comes from dominant
business
• No relationships between businesses
• Examples: Godrej (locks, furniture, cosmetics, etc.),
and other conglomerates.
Levels and Types of Diversification
 What is Related Diversification?
• Involves diversifying into businesses whose
value chains possess competitively valuable
“strategic fits” with the value chain(s) of the
present business(es)
• Capturing the “strategic fits” makes related
diversification a 1 + 1 = 3 phenomenon
(Synergy exists)
 Examples of Related Diversification
Proctor and Gamble
• Provides branded consumer goods products worldwide
• 3 GBUs (Global Business Units)
– Beauty GBU
• Beauty segment
• Grooming segment
– Health and Well-Being GBU
• Health Care segment
• Snacks, Coffee, and Pet Care segment
– Household Care GBU
• Fabric Care and Home Care segment
• Baby Care and Family Care segment
 Examples of Related Diversification
Johnson and Johnson
• Engages in the research and development, manufacture, and sale of
various products in the health care field worldwide
• 3 segments
– Consumer segment
• Products for baby care, skin care, oral care, wound care, and
women’s health care fields, as well as nutritional and over-the-
counter pharmaceutical products
– Pharmaceutical segment
• Products for anti-infective, antipsychotic, cardiovascular,
contraceptive, dermatology, gastrointestinal, hematology,
immunology, neurology, oncology, pain management, urology, and
virology
– Medical Devices and Diagnostics segment
• Products for circulatory disease management, orthopedic joint
reconstruction and spinal care, wound care and women’s health,
minimally invasive surgical, blood glucose monitoring and insulin
delivery, and diagnostic products, as well as disposable contact
lenses
 What is Unrelated Diversification?
• Involves diversifying into businesses with
– No strategic fit
– No meaningful value chain relationships
– No unifying strategic theme
• Approach is to venture into “any business
in which we think we can make a profit”
• Firms pursuing unrelated diversification are often
referred to as conglomerates
 Examples of Unrelated Diversification
ITC
• A diversified Indian conglomerate
• 6 segments
– FMCG
• Cigarettes, lifestyle retailing, food, personal care, education &
stationary, safety matches, agarbatties
– Hotels
• Different brands: ITC Hotels, WelcomHotels, Fortune Hotels,
WelcomHeritage
– Paper boards and specialty papers
– Packaging
• Carton Board Packaging, Flexible Packaging, Tobacco Packaging
– Agri Business
• Agri Commodities & Rural Services
• Agri Business-ILTD
• e-Choupal
– Information Technology
 Diversification and Shareholder Value
• Related Diversification

– A strategy-driven approach to creating

shareholder value

• Unrelated Diversification

– A finance-driven approach to creating

shareholder value
Value-Creating Diversification Strategies:
Operational and Corporate Relatedness
Operational Relatedness: Sharing Activities
• P&G

– Paper towel business and baby diaper business uses

paper products as primary input from same
manufacturing facility

• HUL

– Cosmetic, detergent, and food business share same

logistics, distribution facility, and relationship with
super markets.
 Corporate Relatedness: Transferring core
competencies / capabilities
• HP

– Transferred competence of ink printers to high end

copiers: Output is better quality product at lesser
price.

• HONDA

– Core competency of engine design and

manufacturing to motorcycle, cars and trucks.
 Simultaneous Operations Relatedness and
Corporate Relatedness
• Ability to create economies of scope by sharing
activities (Operational Relatedness)
• Ability create economies of scope through
transferring core competencies / capabilities
– Walt Disney Co.
• Studio entertainment business gain economies of scope by
sharing activities among various movie distribution companies
(Touchstone Pictures, Dimension Films, etc.)
• Broad and deep knowledge of customers is a corporate capability
used in advertising and marketing
• Character created in movies are marketed through Disney’s retail
stores (Consumer product business)
• Themes established in movies become sources of new rides
(Parks and Resorts business)