Objectives

By the end of this lecture, you will be able to know:

Corporate Level Strategy Growth Strategy Related Diversification Unrelated Diversification Implementing Growth Strategies Portfolio Analysis Corporate Parenting Strategic Evaluation

8.1 What is Corporate Strategy?

It is the scope of the different industries and markets the organization competes within in order to achieve its organizational purpose.

8.1 Corporate Level Strategy

Organizations exist for a purpose, Once purpose of the organization is determined, for instance to maximize shareholder value, then the role of corporate strategy is to help reaching that purpose. The role of the business unit is to devise a strategy that allows it to compete successfully in the marketplace and contribute to the corporate strategy. The managers of a business unit may have considerable autonomy to devise their business strategy level.

8.1 Corporate Level Strategy con

The corporate strategy sets the directions in which the organization will go.
When an organization is made up of many businesses operating in different markets, corporate level strategy is also concerned with how resources are to be allocated across the business units.

8.1 Corporate Level Strategy con

A question at the forefront of corporate strategy is how an organization adds value across the businesses that makeup the organization. This is the role of Corporate Parenting.
Corporate Parenting : Is concerned with how a parent company adds value across businesses that make up the organization.

8.1 Corporate Level Strategy con

A corporate parent exists when a business is made up of multiple business units. It refers to all those levels of management that are not part of customer-facing and profit-run businesses within multi business organizations. Corporate parents are often described as corporate headquarters and derided as simply cost centers.

Corporate parenting is of benefit if the corporate parent adds greater value by its management and coordination of these individual business units. When the corporate parent adds great value, then it creates something we call synergy.

8.1 Corporate Level Strategy con

Synergy : Occurs when the total output from combining businesses is greater than the output of businesses operating individually. It is often described mathematically as 2+2=5.

8.2 Growth Strategies

Figure 8.1 Ansoffs Growth Vector matrix

8.2 Growth Strategies con

In order to grow, organizations can pursue four different strategies : Market Penetration : increase market share in your existing markets using your existing products. It aims to attract new customers, and get existing customers to increase their usage of the product or service. This Strategy relies on the existing resources and capabilities of the organization therefore it is relatively low risk.

8.2 Growth Strategies con

Market development : entering new markets with your existing products.
This can be done by targeting new market segments, and new geographical areas or by devising new uses for its products.

8.2 Growth Strategies con

Product development : developing new products to sell in your existing markets.
The ability to innovate is crucial in developing products for rapidly changing customer markets (i.e. such as computer software markets and electronics), in those markets organizations are forced to continually develop new products to maintain and grow their market share.

8.2 Growth Strategies con

Diversification : markets. developing new products to serve new

Although this will involve the greatest level of risk, it maybe necessary where an organization's existing products and markets offer little opportunity for growth. However this risk can be reduced if the organization diversify into related businesses that have some links with its existing value chain.

8.3 What is related diversification?

A process that takes place when a business expands its activities into product lines that are similar to those it currently offers.

8.3 Related Diversification

For example, a manufacturer of computers might

begin making calculators as a form of related diversification of its existing business.

8.3 Aim of related diversification

To provide competitive advantage in the current industry and thereby generate synergy after choosing an industry in which it retains a close match with it resources & capabilities.
Choose an industry Competitive advantage
Synergy

8.3 Types of related diversification

Vertical integration

Horizontal integration

8.3.1 Vertical integration

This is where a firm integrates with different stages of production e.g. by buying its suppliers or controlling the main retail outlets. A good example, is the oil industry where many of the leading companies are explorers, producers and refiners of crude oil and have their own retail networks for the sale of petrol and diesel and other products.

8.3.1 Vertical integration con

Two types of vertical integration:

1) When a company acquires its input supplier it is called backward integration

2) When it acquires companies in its distribution chain it is called forward integration.

8.3.2 Horizontal integration

It takes place when an organization takes over a competitor or offers complementary products at the same stage within the value chain.
Benefits of horizontal integration:

Economies of scale
Economies of scope Strong presence in the reference market.

8.3.3 Transaction Cost Analysis

An Example:

The buyer of a new car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car's condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition.

T.C can be divided into three broad categories:

Search and information costs: are costs such as those incurred in determining that the required good is available on the market, which has the lowest price, etc. Bargaining costs: are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contact and so on.

8.3.3 Transaction Cost Analysis con

Policing and enforcement costs :

are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.

8.4 What is unrelated diversification?

Firms pursue this strategy for several reasons:

Continue to grow after a core business has matured or started to decline. To reduce cyclical fluctuations in sales revenues and cash flows.
Problems with conglomerate or unrelated diversification:

Managers often lack expertise or knowledge about their firms businesses.

8.4 Unrelated Diversification

The main reasons are:

Where an organizations existing markets are saturated or declining. Regulatory authorities view vertical and horizontal integration by the organization as uncompetitive. Management may believe that by not focusing on one market or product range they can diversify their risk.

8.5 Implementing Growth strategies

Mergers and Acquisitions Internal developments Joint ventures Strategic alliances

8.5.1 Mergers and Acquisitions

Merger : occurs when two organizations join together to share their combined resources.
A merger implies that both organizations accept the logic of combining into a single organization and willingly agree to do so. Shareholders from each organization become shareholders in the new combined organization.

8.5.1 Mergers and Acquisitions cont.

Acquisition : when one organization seeks to acquire another, often smaller, organization. The acquisition may be in the interest of both organizations particularly where the acquiring company has substantial financial resources and the firm to be acquired possesses proprietary technology but needs funds to develop it further. It can be in form of : Shares (of the new org.) Cash payment

8.5.1 Mergers and Acquisitions con

When the shareholders feel the price being paid for their shareholding represents fair value they will be more likely to concede ownership. However, where the acquisition is unwelcome it is referred to as takeover, specifically a hostile takeover.

8.5.1 Mergers and Acquisitions con

In a hostile takeover the board of directors of the takeover target is likely to say one of two things,
a) The offer being made undervalues organization and therefore should be rejected. the

b) The strategies being proposed by the takeover organization are incoherent.

Objective : Merger and Acquisition objective is to increase market share.

8.5.1 Mergers and Acquisitions con

Advantages : a. b. c. a. b. Speed Market entry Rapid access to capabilities Disadvantages : Increasing your financial risk Problem of combining different cultures may not have been properly considered

8.5.1 Increasing shareholder value in acquisitions

Attractiveness : An organization should be capable of achieving above-average returns in the target firms industry. Cost of entry : This include the capital sum paid for the acquisition. The cost of entry should not be so expensive that it effectively prohibits the organization recouping its initial investment. Competitive advantage or better-off : The acquisition must present an opportunity for competitive advantage for the parent organization.

8.5.2 Internal Development

This is sometimes referred to as organic growth. It involves the organization using its own resources and developing the capabilities it believes will be necessary to compete in future.
Many organizations start their growth trajectory using organic growth and consider mergers and acquisitions as their industry matures.

8.5.2 Internal Development con

Advantages :
a. Experience less financial risk b. Grows at a rate that is capable to control Disadvantage : a. The time it takes the organization to build up necessary strategic capabilities.

8.5.3 Joint ventures and strategic alliances

An organization may decide that it is in its interest to collaborate with one or more firms in order to achieve a specific objective.
The agreement between such organizations may only be temporary. Collaboration continues to grow over time as organizations recognize the benefits that cooperation may bring. A key reason for expansion in cooperative ventures is the growth in international markets.

8.5.3 Joint venture

It is exists when two organizations form a separate independent company in which they own shares equally. (e.g. Sony Ericsson.)
It is often formed when organizations feel it may be beneficial to combine their resources and capabilities to develop new technologies or gain access to new markets.

8.5.3 Joint venture con

For example : By entering into a collaborative alliance Britain, France, Germany, and Italy have formed the European Airbus consortia and successfully developed the A380, the worlds largest passenger plane, at a greatly reduced risk. Each nation has contributed its own distinctive capabilities to ensure that they develop a product which will successfully compete with their American competitor, Boeing.

8.5.3 Strategic Alliances

It takes place when two or more separate organizations share some of their resources and capabilities but stop short of forming a separate organization.

The idea is that each partner within the strategic alliance gains access to knowledge.
A useful alliance will involve complementary resources and capabilities which allow both organizations to grow and develop according to their strategic objectives. The ultimate aim of strategic alliances is to learn from your partners.

8.5.3 Strategic Alliances con

Both joint venture and strategic alliances work well when : each partners objectives are clear and agreed when the working relationship is based on trust Where managerial differences exist, these must be resolved prior to entering into a strategic alliances.

8.6 Portfolio Analysis

What is the portfolio? The different business unit &product that the organization possesses (make up the company) portfolio Analysis: is the process of evaluating the products and businesses units that make up the company how?

8.6 Portfolio Analysis con

By identifying the rate of return it is receiving from its various business units. Strategic business unit (SBU): is a unit of the company that has a separate mission and objectives that can be planned separately from other company businesses Company division Product line within a division Single product or brand.

8.6 The aim of the business units

Is to maximize the return on investment by allocating resources between SBUs to achieve a balanced portfolio

8.6 Methods used in portfolio analyses

Boston consulting Group (BCG) /Growth share Matrix
The General Electric Mckinsey Matrix

8.6 Growth share matrix

Is a portfolio planning method that evaluates a companys strategic business units in terms of their market growth rate and relative share Strategic business units are classified as:

Stars

Cash Cows
Question marks Dogs

8.6.1 Boston Consulting Group Matrix

Figure 8.3 The BCG Matrix

8.6.1 Boston Consulting

Group Matrix con
Stars: are high-growth, high-share businesses or products requiring heavy investment to finance rapid growth. They will eventually turn into cash cows.

Cash: cows are low-growth, high-share businesses or products that are established and successful SBUs requiring less investment to maintain market share

8.6.1 Boston Consulting

Group Matrix con
Question marks: are low-share business units in high-growth markets requiring a lot of cash to hold their share
Dogs: are low-growth, low-share businesses and products that may generate enough cash to maintain themselves but do not promise to be large sources of cash

8.6.1 Boston Consulting

Group Matrix con

The key element of the BCG is the market share why? High market share is a function of cost leadership achieved through economic of scale(the ability to reduce unit cost)

8.6.1 Difficulty in defining SBUs &

measuring MKT share & growth

Time consuming Expensive Focus on current businesses, not future planning

8.6.2 The General Electric Mckinsey

Matrix

8.6.2 The axes comprise

Industry attractiveness( examples: industry profitability/ market growth/number of competitors)
Business strength /competitive position - analysis of the organization internal strength & weaknesses (factors such as :product quality &technological capability )

8.7 Corporate Parenting

Campbell seek to understand how,and under what conditions, corporate parents suceed in creating value.
They argue that multi- business organizations create value by influencing or parenting the business thy own. Sound corporate strategies create vale through parenting advantage.

8.7 Corporate Parenting con

For example, in past Unilever has added value by sharing marketing and technological information across its business units in different countries. It added value through the provisions of funds to its businesses for R&D to enable new product development. left to its own devices the individual business unit would simply underinvest in this area.

8.7 Corporate Parenting con

The parent organization is seen as an intermediary between investors and businesses. In this respect, the parent competes against other parent companies and also against other intermediaries such as investment trusts.

Therefore the corporate level strategies make sense as long as the parent organization is able to create sufficient value to compete with other intermediaries.

8.7 Corporate Parenting con

The concept of corporate parenting is useful in heeling an organization to decide which new businesses it should acquire. Unless the corporate parent is creating greater value than its costs, the businesses would be better off as independent companies.

It helps the corporate parent focus in deciding how each business should be managed.

8.7 Corporate Parenting con

Successful parents create parenting advantage through their value Creation Insights.

Parenting advantage also involves creating a fit between the parents distinctive characteristics, and the opportunities that exist within the business units. In order to create value the parents characteristics must be compatible with the critical success factors needed for the business.

8.7 Corporate Parenting con

To understand fully the fit between a parent and its various businesses the organization needs to analyze its Parenting Opportunities and the critical success factors for each business.

8.7.1 Critical Success factors

Critical success factors: Each type of business will have different critical success factors which determine its success in the market place. There are four ways in which corporate parent can create value for their businesses

8.7.1 Critical Success factors con

1. Stand Alone Influence:This concerns the parent companys impact upon the strategies and performance of each business that parent owns. stand alone influence includes such things as the parent company setting performance targets and approving major capital expenditure for the business. There is an opportunity here for the parent to create substantial value.

8.7.1 Critical Success factors con

2. Linkage Influence :-

This occurs when parents seek to create value by enhancing the linkages that may be present between different businesses. For example this might include transferring knowledge and capabilities across business units. The aim is to increase value through synergy.
3. Functional and services influence :The parent can provide functional leadership and cost-effective services for the businesses. The parent company creates value to the extent that they provide services which are more cost effective then the businesses can undertake themselves or purchase from external suppliers.

8.7.1 Critical Success factors con

4.Corporate Development activities :This involves the parent creating value by changing the composition of its portfolio of businesses. The parent actively seeks to add value through its activities in acquisitions, divestments, and alliances.

8.7.2 Portfolio Decisions

A portfolio: is the different business units that an organization possesses
Which businesses should the corporate parent include in its portfolio?

8.7.2 Portfolio Decisions con

Heartland Edge of Heartland Ballast

Alien territory
Value trap

8.7.2 Portfolio Decisions con

Do the parenting opportunities in the business fit in the value creating insights of the parent, such that the parent can create a substantial amount of value ? Parenting opportunities will range from the high fit, with the value creation insights of the parent fit well with the opportunities In the business, to a low fit with the value creation insights of the parent company doesnt address the important opportunities that exist with the business.

8.7.2 Parenting fix matrix

8.7.2 Parenting fix matrix con

Do the critical success factors in the business have any obvious misfit with the prospective parenting characteristics such that the parent might influence the business in a way that destroys value? The critical success factor requires the cooperate patent to understand the critical success factors in the business and compare these with it own parenting characteristics. A misfit is likely to occur when the parent doesnt understand the critical success factor of the business

8.7.2 Types of business include in portfolio

Heartland businesses these are business with needs and opportunities that the parent organization can address. Heartland business should be the main focus of the companys parenting.

8.7.2 Types of business include in portfolio con

Edge-of-heartland businesses Parent company might acquire a new business that meets the value creation insights of the parent but not all the heartland criteria. The new business can be though of as extending the boundaries around the heartland.

8.7.2 Types of business include in portfolio con

Ballast businesses
These are those business in which there are few opportunities for the parent company to add values most portfolios will contain number balanced business

8.7.2 Types of business include in portfolio con

Value Trap Businesses
Those businesses which appear attractive to the cooperate parent to the surface but in reality their exist are of misfit with the parent. They should be avoided and kept out of cooperate portfolio unless the parent capable of learning to reduce or eliminate the misfit

8.7.2 Types of business include in portfolio con

Alien Territory
Businesses which lie within alien territory offer the parent little opportunity to create value they are referred to alien territory because their need is for a different corporate parent with a fundamentally different corporate strategy.

8.8 Strategic Evaluation

Strategy evaluation can help to surface the implication of pursuing different strategic options before they are implemented
Suitability: Defines how well the strategy matches the needs identify within its strategic analysis Feasibility: It may concerns weather a strategy will work in a practice.

8.8 Strategic Evaluation con

An organization must insure that it possesses the necessary resources and capabilities such as finance, technological expertise, marketing and other factors necessary to implement the strategy Acceptability: This Criterion of acceptability the response of stakeholders to the proposed strategy. Clearly , if a strategic change is to be implemented, it must have the support of those who will be most affected by it

8.8 Strategic Evaluation con

Rumelt (1995)proposes four tests to evaluate a strategy: Consistency Consonance Advantage

Feasibility

8.8 Strategic Evaluation con

Consistency: Any propose strategy must not present mutually inconsistent goals and policies. Consonance: The test that helps to determine whether or not sufficient value is being created to sustain the need for the strategy over the long term. Advantage: Addresses whether an organization is appropriate sufficient of the value that it creates. Feasibility: It is to ensure that any proposed strategy does not overtax an organizations available resources or create insoluble problems for it.

Thank You
Questions