Strategic Choices 7 Strategic Decisions and CorporateLevel Strategy

Strategic Choices 7: Strategic Decisions and Corporate-Level Strategy

Learning Outcomes (1) £ Identify alternative directions for strategy, including market penetration or consolidation, product development, market development, and diversification £ Recognise when diversification is an effective strategy for growth £ Distinguish between different diversification strategies (related and unrelated) and identify conditions under which they work best Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -2

Learning Outcomes (2) £ 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 Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -3

What is a Corporate Parent? The corporate parent refers to the levels of management above that of the business units, and therefore without direct interaction with buyers and competitors. Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -4

Exhibit 7. 1 Strategic Directions and Corporate-Level Strategy Value creation Corporate parenting Portfolio management Diversification Penetration Consolidation Development Scope decisions Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -5

Exhibit 7. 2 Strategic Directions (Ansoff Matrix) Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -6

Strategic Directions for Axel Springer £ Which strategic directions should Axel Springer pursue? £ Considering the Ansoff matrix, what other options are possible? Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -7

What is Market Penetration? Market penetration refers to a strategy by which an organisation takes increased share of its existing markets with its existing product range. Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -8

Constraints of Market Penetration Retaliation from competitors Exploring Corporate Strategy 8 e, © Pearson Education 2008 Legal constraints 7 -9

What is Consolidation? Consolidation refers to a strategy by which an organisation focuses defensively on their current markets with current products. Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -10

Forms of Consolidation Defending market share Exploring Corporate Strategy 8 e, © Pearson Education 2008 Downsizing or divestment 7 -11

What is Product Development? Product development refers to a strategy by which an organisation delivers modified or new products to existing markets. Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -12

Risks of Product Development New strategic capabilities Exploring Corporate Strategy 8 e, © Pearson Education 2008 Project management risk 7 -13

What is Market Development? Market development refers to a strategy by which an organisation offers existing products to new markets. Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -14

Forms of Market Development New segments New users Exploring Corporate Strategy 8 e, © Pearson Education 2008 New geographies 7 -15

What is Diversification? Diversification refers to a strategy by which an organisation pursues new product offerings and new markets. Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -16

Reasons for Pursuing Diversification (1) Efficiency gains Stretching corporate parenting capabilities Increasing market power Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -17

Reasons for Pursuing Diversification (2) Responding to market decline Spreading risk Expectations of powerful stakeholders Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -18

Zodiac and Diversification £ What were the bases of the synergies underlying Zodiac’s diversifications? £ What are the advantages and potential dangers associated with this basis? Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -19

Exhibit 7. 3 Related Diversification Options Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -20

Exhibit 7. 4 Diversification and Performance Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -21

Value-Adding Activities Envisioning Coaching and facilitating Providing central services and resources Intervening Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -22

Value-Destroying Activities Adding management costs Adding bureaucratic complexity Obscuring financial performance Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -23

Exhibit 7. 5 Portfolio and Synergy Managers and Parental Developers Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -24

Problems Achieving Synergy Excessive costs Overcoming self-interest Illusory synergies Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -25

Challenges for Parental Developers £Identifying parent capabilities £Parental focus £The ‘crown jewel’ problem £Sufficient ‘feel’ Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -26

Portfolio Matrices Growth/Share (BCG) Matrix Directional Policy (GE-Mc. Kinsey) Matrix Parenting Matrix Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -27

Exhibit 7. 7 The Growth Share (BCG) Matrix Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -28

Exhibit 7. 8 The Directional Policy (GE-Mc. Kinsey) Matrix Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -29

Exhibit 7. 9 Strategy Guidelines Based on Directional Policy Matrix Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -30

Exhibit 7. 10 The Parenting Matrix Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -31

Chapter Summary (1) £ Many companies are made up of multiple business units £ Corporate strategy focuses on decisions of the corporate parent £ Product diversity may be considered in terms of related and unrelated diversification Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -32

Chapter Summary (2) £ Performance tends to suffer when organisations become very diverse £ Corporate parents may seek to add value by adopting different parenting roles: portfolio manager, synergy manager, or parental developer £ Several portfolio models are available to aid corporate parents: the BCG matrix, the directional matrix, and the parenting matrix Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -33

Key Debate: Why have corporatelevel strategies anyway? (1) £Corporate strategy assumes that corporations should own and control businesses in a range of markets or products £But the transaction cost view suggests that corporate parents are unnecessary Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -34

Key Debate: Unilever is Parent to Many Brands and SBUs Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -35

Key Debate: Why have corporatelevel strategies anyway? (3) £Consider a corporation like Cadbury Schwppes or Unilever: what kinds of hard-to-trade knowledge might it be able to transfer between product and country subsidiaries? £Is such knowledge likely to be of increasing or decreasing importance? Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -36

Case Example: The Virgin Group (1) Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -37

Case Example: The Virgin Group (2) £ The Virgin Group is one of the UK’s largest companies £ It includes 63 businesses; expansion has often come through joint ventures £ It has been described as a ‘keiretsu’ organisation – loosely linked, autonomous units run by selfmanaged teams £ Some say the “Virgin” name is just an endorsement £ The group is controlled primarily by Branson, but there are rumors that he may be withdrawing Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -38

Case Example: The Virgin Group (3) £ What is the corporate rationale of Virgin as a group of companies? £ Are there any relationships of a strategic nature between businesses within the Virgin portfolio? £ How does the Virgin Groups, as a corporate parent, add value to its businesses? £ What were the main issues facing the Virgin Group at the end of the case? Exploring Corporate Strategy 8 e, © Pearson Education 2008 7 -39