Making Strategic Choices

II:
Resource Related Options
Lecture 6

RESOURCE Corporate
Diversification
RELATED OPTIONS Ansoff Matrix
 CORPORATE
DIVERSIFICATION
AND ANSOFF
MATRIX
DIVERSIFICATION:
MOTIVES
1. Corporate Vision
2. Corporate Growth
3. Corporate vanity
4. Risk spreading benefits
5. Creation of value for shareholders
 Attractiveness
 Cost of entry
 Competitive advantage?
PORTER’S THREE
“ESSENTIAL TESTS”
The attractiveness test The industries chosen for
diversification must be structurally attractive or
capable of being made attractive
The cost-of-entry test The cost of entry must not
capitalise all the future profits
The better-off test Either the new unit must gain
competitive advantage from its link with the
corporation, or vice versa.
DIVERSIFICATION STRATEGIES:
TYPES

Vertical

Horizontal

Conglomerate
 DIVERSIFICATION
QUESTIONS
Is the chosen diversification area attractive or can it
be made attractive?

Does the cost of entry into the new business area out
weigh the perceived future benefits?

Will the company gain competitive advantage?

Does the proposed diversification add value to the company (shareholders?)

DIVERSIFICATION:
PERCEIVED COMPETITIVE ADVANTAGE
Market power
Economies of scope
 Tangible Resources
 Intangible Resources
 Functional Capabilities
 General Management Capabilities

Economies from internalising transactions

Information advantages
Synergistic effects?????
RELATED DIVERSIFICATION:
POTENTIAL ADVANTAGES
Tighter control of the supply chain
More control over market (manufacturer, wholesaler &
retailer)
Better access to industry information
Development of skill base
Development of technological know-how
Optimisation of company resource capacity
UNRELATED
DIVERSIFICATION:
POTENTIAL ADVANTAGES
Enhancement of key personnel’s vanity
Start of evolutionary change of company purpose.
Repositioning/ new directions for organisation?
Hedge cylindrical effects of industry. Spreading
‘eggs’ in more baskets?
WHO DECIDES ON
DIVERSIFICATION?
Corporate decision - strategically based?
Management
Shareholders

Business unit
Own strategy?
Operational control?

Corporate Strategy vs. Business Strategy?

WHEN SHOULD ONE
DIVERSIFY?
When market opportunities occur?
Successful core business with excess capacity?
Declining core business market?
Other reasons?
DIVERSIFICATION STRATEGIES:
MEANS

Merger and acquisition

Strategic alliances
Internal development
WHAT DO ALL THESE
NEED?
Concept of Resources, Capabilities and
Distinctive Competencies.
Outcome from looking at the internal
environment of the firm (and industry
environment)
Understanding your resources Matching DC and
KSF
 Existing markets and products
(increase market penetration)

Company
seeking Related markets and products
to diversify (new customers or variants of the
products)

New markets and products

(virgin territory)
 Ansoff Matrix
PRODUCTS
present new

Protect/Build Product
consolidation Development
present market penetration new products for
current consumers
MARKET
Market
Development Diversification
new
new segments
new territories
new uses
 DIRECTIONS FOR STRATEGIC
DEVELOPMENT
Backward vertical integration
(takeover suppliers)

Same stage Conglomerate

Firm
company

Forward vertical integration

(takeover sales outlets)
Concentric
Lecture 6

MORE -Corporate Parenting

RESOURCE - Ashridge Matrix

RELATED OPTIONS
CORPORATE PARENTING
AND
ASHRIDGE PARENTING
MATRIX
CORPORATE PARENTING
How does a company manage its subsidiaries (SBU)
What is the relation of parent to the business units?
How do the businesses fit together?
 Synergy = 2 + 2 = 5 is ideal
CONCEPT OF CORPORATE
PARENTING
Strategic decision at the parent level
Relates to conglomerates and also smaller businesses with SBU
Question on how can corporate parent add value to SBU and
shareholders?
 CORPORATE ROLE I:
PORTFOLIO MANAGER
Acquire undervalued assets. Divest low
performing SBU’s (asset strippers)
Autonomous SBUs
Example: GEC where MD saw his role as setting growth target for his SBUs
CORPORATE ROLE II:
RESTRUCTURER
Transform by restructuring. Value creation/ intervention in SBU to
improve performance, to identify opportunities
Sale of SBU when price is good
 CORPORATE ROLE III:
SYNERGY MANAGER
Sharing resources to enhance competitive advantage and synergistic benefits.
Integration of two or more SBUs
Example: sharing skills, competencies , activities like distribution
network..etc
Difficult to claim that synergy is important/ useful or really add value to
customer (consumer surplus)
 CORPORATE ROLE IV:
PARENTAL DEVELOPER
HQ closely involved with SBUs – may eventually
amalgamate. Matching skills & complementary
resources. Very close control and linkages
Using central competency/ capability to add value to
SBU
Provide parenting opportunity (benefit)
Example: Going global for SBU/ domestic business,
brand management, R&D
DIVERSIFICATION RELATING TO
CORPORATE PARENTING
Portfolio Manager
or Diverse
Restructurer portfolio

Synergy Manager Related

or Portfolio
Parental Developer
ASHRIDGE PARENTING
MATRIX
Fit between SBU KSF & Parent skills/resources (feel)
 Example: British Tabacco and Eagle Star Insurance
(wrong fit between KSF and parent strategy.

Fit between Parenting Opportunity and Parent skills/

resources (benefits)
 Potential for added value in the SBU with the resources
and capabilities of parent
 Example: R&D, finance, culture, internationalisation
 PARENTING MATRIX
corporate parent resources (FEEL)

L H
Fit between SBU KSF’s and

Ballast Heartland
H businesses
Businesses

Alien Value trap

L businesses Businesses

Fit between corporate parenting opportunities

and corporate parent resources (BENEFIT)
Conclusion
• how to get more value from resources
where market opportunities are limited
– standardise products
– improve linkages on the value chain
– improve corporate parenting
– invest in new equipment/system
– product innovation to add value