Corporate Strategy

Corporate level strategy
business.ulster.ac.uk
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Copyright © Pearson Education, Inc. All rights reserved
Learning objectives
• Identify alternative strategy options, including market penetration,
product development, market development and unrelated diversification.
• Distinguish between different diversification strategies (related and
conglomerate diversification) and evaluate diversification drivers.
• 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.
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Strategic choices – approach
• Strategic Choices is concerned with the
‘options’ available to an organisation for
responding to the ‘positioning’ issues
discussed in the earlier lectures
• There are 3 choices to be made:
• Business strategy - how an
organisation at a business level
positions itself in relation to
competitors
• Strategic directions - which products,
industries and markets to pursue
• Strategy methods - methods by which
to pursue strategies
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Introduction
• Corporate strategy is about the overall
scope of the organisation and how value
is added to the constituent businesses of
the organisation as a whole
• Choices about the business areas,
industries and geographies to be active in
will determine the direction an
organisation might pursue for growth,
which business units to buy and dispose
of, and how resources may be allocated
efficiently across multiple business
activities
• The choices central to corporate strategy
are shown here
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Introduction
Scope is how far an
organisation should be
diversified in terms of
products and markets
(e.g. different
diversification
strategies, vertical
integration,
outsourcing).
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Introduction
Portfolio matrices
refers to the corporate
head office selecting an
appropriate portfolio of
individual business
units and managing
them by establishing
their boundaries so that
they add value to the
group
7
Introduction
Corporate parenting
refers to the value
adding effect of the
head office to individual
SBUs that make up the
organisation’s portfolio.
This is often referred to
as a parenting
advantage.
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Corporate strategy directions
A central corporate strategy choice is the direction
in which a company should grow
• Ansoff’s classic corporate strategy matrix
suggests 4 basic directions for organisational
growth (see figure) - the four strategies are:
1. Market Penetration: This focuses on increasing
sales of existing products to an existing market. https://www.mindtools.com/
2. Product/Service Development: Focuses on a2gy5ya/the-ansoff-matrix
introducing new products/services to an existing
market.
3. Market Development: This strategy focuses on
Source: Adapted from H.I. Ansoff, (1988). Corporate Strategy,
entering a new market using existing Penguin.
products/services
4. Diversification: Focuses on entering a new market
with the introduction of new products/services
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Corporate strategy directions - market penetration
• Market penetration implies increasing share of current markets with the current
product or service range
• Benefits:
• builds on established strategic capabilities
• means the organisation’s scope is unchanged
• leads to greater market share and increased power
• provides greater economies of scale and experience curve benefits
• Constraints:
Economic
Legal
Retaliation constraints
constraints
from e.g. market
e.g. restrictions
competitors downturn,
imposed by
e.g. price wars public sector
regulators
funding crisis
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Corporate strategy directions - product development
• Product development is where an organisation delivers modified or new products (or
services) to existing markets.
• Involves varying degrees of related diversification (in terms of products).
• Can be expensive and high risk:
• may require new resources and strategic capabilities.
• typically involves project management risks.
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Corporate strategy directions - market development
• Market development involves offering existing products to new markets.
This strategy involves:
• new users.
• new geographies.
• Key requirements:
• meeting the critical success factors of the market.
• new strategic capabilities (e.g. in marketing).
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Corporate strategy directions - unrelated diversification
• Unrelated diversification: an organisation expands into markets, products
and services completely different from its own.
• Potential benefits to an acquired business are that it gains from the
reputation of the group, increased consumer confidence, and potentially
lower financing costs.
• An extreme form of unrelated diversification is conglomerate
diversification i.e. no operational or strategic linkages between multiple
businesses.
• Potential costs arise because there are no obvious ways to generate
additional value – shares suffer from ‘conglomerate discount’.
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EXAMPLE
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Diversification drivers
• Value creating drivers for diversification:
• Exploiting economies of scope – efficiency gains through applying the
organisation’s existing resources or competences to new markets or
services.
• Stretching corporate management competences (‘dominant logics’) i.e.
applying these competences across a portfolio of businesses.
• Exploiting superior internal processes.
• Increasing market power – via mutual forbearance or cross
subsidisation.
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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 company’s current business.
• Forward integration refers to development into activities concerned
with the outputs of a company’s current business.
• Benefits: Captures some of the profits gained by retailers or suppliers.

• Risks: Involves expensive investment and quite different resources and
capabilities.
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Vertical integration and horizontal integration
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Introduction
• Many businesses end up with a
corporate structure that comprises a
head office and various strategic
business units (SBUs), although the
legal nature of these can vary - some
may be set up as divisions while others
may be subsidiaries within a group
structure.
• Corporate parenting looks at the

relationship between head office and
these SBUs and in particular at how to
add value to the individual business
units. These questions are particularly
relevant if the firm has grown through
acquisition rather than organic growth.
19
Introduction
Portfolio matrices -
models which can
determine financial
investment and
divestment within
portfolios of business.
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EXAMPLE OF SBU
Disney.
The entertainment company has five SBUs:
studio entertainment,
the media network,
consumer products,
parks and resorts,
and the interactive media business.
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Portfolio matrices
• Each model uses three
criteria: BCG (or growth/share) matrix – uses market share and
• the ‘balance’ of the market growth criteria for determining the
attractiveness and balance of a business portfolio.
portfolio
• the ‘attractiveness’ of the
The GE–McKinsey directional policy matrix –
business units
categorises business units into those with good
• the ‘fit’ between business prospects and those with less good prospects.
units
Parenting matrix – introduces parental fit as an important
criterion for including a business in a portfolio.
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BCG or growth/share matrix
• 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 yet 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. 23
The GE-McKinsey directional policy matrix
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The GE-McKinsey directional policy matrix
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Summary
• Corporate strategy involves the decisions and activities above the level of
business units. It is concerned with choices concerning the scope of the
organisation.
• Organisational scope is often considered in terms of related and
unrelated diversification.
• Corporate parents may seek to add value by adopting different parenting
roles: portfolio manager, synergy manager or parental developer.
• 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. 26

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Corporate level strategy

• Benefits: Captures some of the profits gained by retailers or suppliers.

• Corporate parenting looks at the

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