BS 6100 - Strategic management

Corporate strategy

Ivan Zupic
 Roadmap
1. Introduction
2. Strategic purpose, corp. governance & business ethics
3. External analysis
4. Internal analysis
5. Business strategy
6. Corporate strategy
7. Platforms and ecosystems
8. International strategy
9. Strategy execution
10.Designing organizations
11.Business models
 Corporate strategy
Scope is concerned with how far an organisation
should be diversified in terms of products and
markets.

Questions:
• How broad to make the portfolio? (Scope)
• How should the ‘parent’ add value? (Corporate
parenting)
• Which SBUs to invest in? (Portfolio matrices)
 Strategy directions
Basic choice: penetrating further into the existing
market or increasing diversity in markets and/or
products?
Diversification – increasing the range of products or
markets served by an organisation.
Related diversification – expanding into products or
services with relationships to the existing business.
Conglomerate (unrelated) diversification –
diversifying into products or services with no
relationships to the existing business.
Strategy directions
 Market penetration
Market penetration – increasing share of
current markets with the current product
range.

• Builds on established strategic capabilities

• Greater market share => increased power
towards suppliers and buyers
 Market penetration
Three constraints to market penetration:
• Retaliation from competitors (Increased
market rivalry => price wars or expensive
marketing battles)
• Legal constraints (regulators restrict excessive
market power)
• Economic constraints (market downturn or
crisis; consider retrenchment strategy)
 Product development
Product development – organisations deliver
modified or new products (or services) to
existing markets.

Example: iPod -> iPhone -> iPad

 Product development
Product development can be expensive and
risky activity:
• New strategic capabilities (need for new
processes, technologies… heavy investment
needed)
• Project management risk (delays, increased
cost, …)
 Market development
Market development – offering existing products to
new markets.

Two basic forms:

• New users
• New geographies (internationalisation; expansion to
new regions/cities

Market development strategies need to be based on

the critical success factors of the new market.
 Conglomerate diversification
• Going beyond existing markets and existing
products
• Some benefits to being in a larger group:
– Greater confidence of users
– Lower cost of finance
• Drawbacks:
– Sometimes no obvious way the various businesses can
work together
– Additional bureaucratic cost => ‘conglomerate discount’
 Video: Samsung group

https
://www.youtube.com/watch?v=ykfIAnNsyLw
 Diversification drivers
• Economies of scope – efficiency gains through
applying organisation’s existing capabilities to
new markets or services
• Stretching corporate management
competences (‘dominant logics’)
• Exploiting superior internal processes
• Increasing market power
 Diversification drivers
Synergy – benefits gained where activities or
assets complement each other so that their
combined effect is greater than the sum of
parts (the 2+2=5 equation).
Value-destroying diversification drivers

• Responding to market decline

• Spreading risk
• Managerial ambition (empire building)
 Vertical integration
Vertical integration describes entering activities
where the organisation is its own supplier or
customer.

Vertical integration vs. vertical dis-integration

(outsourcing)
Forward and backward integration
Vertical integration can go in two directions:
• Backward integration – development into activities
concerned with the inputs into company’s current
business
– e.g. car manufacturer acquires component supplier(
• Forward integration - development into activities
concerned with the outputs into company’s current
business
– e.g. car manufacturer acquires a network of
dealers/service shops
Diversification/integration options
 To integrate or to outsource?
• Outsourcing – the process by which activities
previously carried out internally are
subcontracted to external suppliers.
• Specialists in a particular activity likely have
superior capabilities compared to a company
this activity is not central
• Subcontractors liable to take advantage of
their position
 Markets or hierarchies?
• Subcontractor opportunism
– There are few alternatives to the subcontractor
– Product/service is complex and changing…
impossible to specify fully in a legally binding
contract
– Investments have been made in specific assets
that will have little value if contractor withhold
their product/service
 To integrate or to outsource?
Decision to integrate or outsource based on:
• Relative strategic capabilities (Does the
subcontractor have the potential to do the
work better?)
• Risk of opportunism (Is the subcontractor
likely to take advantage of the relationship
over time?)
Value creation and the corporate parent

• Corporate parents must show they have

parenting advantage just as business units
must demonstrate competitive advantage.
• Activities of parents can be value-creating as
well as value-destroying.
Value-adding activities of corporate parent

• Envisioning (strategic intent for its business units)

• Facilitating synergies (cooperating and sharing
among business units)
• Coaching (helping BU managers develop strategic
capabilities)
• Providing central services and resources (capital
for investment, tax advice, lobbying, knowledge
management, …)
• Intervening (monitoring business units to ensure
appropriate performance)
 Value-destroying activities of corporate
parent
• Adding management costs (if the cost of
corporate overhead is greater than the value
created…)
• Adding bureaucratic complexity (additional
layers of management and needs for
coordination)
• Obscuring financial performance (under-
performance of weak businesses can be
obscured)
 The portfolio manager
The portfolio manager operates as an active investor in a
way that shareholders in the stock market are either too
dispersed or too inexpert to do.
• Portfolio manager role: identify & acquire under-valued
businesses and improve them
• Does not get closely involved in routine management of
the business, but acts short-term to improve performance
• Main value-creating activities: intervening and provision
of investment
• Low costs of the centre HQ, small corporate staff, high
autonomy for business unit CEOs
 The synergy manager
The synergy manager is a corporate parent seeking to
enhance value for business units by managing synergies
across business units.
Three challenges:
• Excessive costs (benefits of sharing & cooperation
have to outweigh costs)
• Overcoming self-interest (will managers of business
units cooperate?)
• Illusory synergies (synergies can prove illusory when
put into practice)
 The parental developer
The parental developer seeks to employ its own
central capabilities to add value to its businesses.
• Transfer of parents’ capabilities downwards to
business units (e.g. brand, financial management
skills, product development skills, …)
• Key parent value-adding activities: provision of
central services and resources
• More common in related than unrelated
diversification
 Models to determine financial
investment/divestment
Things to consider:
• The balance of the portfolio
• The attractiveness of the business units
• The ‘fit’ that business units have with each
other (exploiting potential synergies, can
corporate parent add value?)
The BCG matrix
 Problems with BCG matrix
• Definitional vagueness
• Capital-market assumptions
• Unkind to animals
• Ignores commercial linkages
 Summary
• Corporate strategy involves the decisions and
activities above the level of business units. It is
concerned with the scope of the organisation.
• Organisational scope is often considered in terms
of related and unrelated diversification.
• Corporate parents add value by adopting
different parenting roles: the portfolio manager,
the synergy manager or the parental developer.
• The BCG matrix helps corporate parents manage
their portfolio of businesses.