Strategic Management

CORPORATE LEVEL STRATEGY

Patrick P. Khambadza
 What is corporate strategy?
As organisations develop and grow, they may
decide to operate in more than one market with
more than one product
Where this occurs, strategic concern is not just
about competitive advantage in one market
space at business level
Choices need to be made concerning different
business or markets and how resources are to be
allocated amongst the different options
This is Corporate Strategy – defining the scope
of the business
 What is corporate strategy?
Existing Products New

A B
Product
Existing Market Penetration
Development
Consolidation
Markets
C D
New Diversification
Market Development

Ansoff Product/Market Growth Matrix – Strategic Directions

Source: Johnson, G., Scholes, K., Whittington, R., (2008), Exploring Corporate Strategy, 8 th Ed., Financial
Times/ Prentice Hall, London
What is corporate strategy?
Ansoff’s product/market growth matrix
provides a simple way of demonstrating the four
basic strategic development options available to
organisations that organisational executives
consider
An organisation typically begins in Box A with
existing products and markets (business level
strategy;
In seeking growth and develop, the organisation
has a four choices of evolving its scope:
What is corporate strategy?
1. Penetrating still further within its existing
market/product (staying in Box A);
2. Developing new products for its existing
markets (Box B);
3. Penetrating new markets with its existing
products (Box C); or
4. Taking a more radical step of full
diversification which entails entering new
markets with new products (Box D).
 What is corporate strategy?
1. Penetrating still further within its existing
market/product (staying in Box A);
 Strategy is basically about market share
growth
 Involves establishing product and
increasing demand
 What is corporate strategy?
2. Developing new products for its existing
markets (Box B);
 Developing new products for existing
market
 Intention is to retain existing customers
while attracting new ones so as to increase
market share
 Providing new products uses existing
competences and developing new ones
 Advantage: experience and knowledge of
customer needs
 What is corporate strategy?
3. Penetrating new markets with its existing
products (Box C); or
 Entry into new markets or segments or
existing markets with existing products
 May acquire/develop new competences to
service new markets/segments
 Internationalisation/globalisation
 Major risk: limited business experience
 What is corporate strategy?
4. Taking a more radical step of full
diversification which entails entering new
markets with new products (Box D)
 This is the focus of corporate strategy
diversification
What is corporate strategy?
Scope is concerned with how far an organisation
should diversify its products and markets
Strategically, Corporate Strategy involves
assessing multiple-industry environments and
developing a set of strategies for each industry
and market the company is in
Furthermore, Corporate strategy must go one
step further – Device a strategy for improving
attractiveness and performance of the company’
overall business line-up/portfolio
What is corporate strategy?
Hotels

Chemicals Textiles

Tea Steel

Communication
TATA Cars

Power Technologies

Consultancy
What is corporate strategy?
Strategic decisions for each SBU delegated to
SBU heads
Overall organisation strategy falls on top-level
executives and involves:
1. Picking new industries to enter into and how
• New industries offering best growth prospects
• Start new, acquire, joint venture/alliance
2. Pursuing opportunities to leverage cross-
business value-chain relationships into
competitive advantage
• Value chain strategic fit gives better chance of gaining 1+1=3
effect
What is corporate strategy?
3. Steering corporate resources into the most
attractive business units
4. Initiating action to boost combined
performance of corporation's portfolio of
businesses; options:
• Keep to existing businesses & exploit opportunities
• Broaden scope of diversification to new industries
• Retrench diversification to narrow scope and divest from poorly performing businesses
• Broadly restructure business portfolio with multiple divestures and/or acquisitions
 diversification
Corporate strategy is therefore primarily a
diversification strategy
•Diversification is a corporate-level strategy that
specifies actions a firm takes to gain a competitive
advantage by selecting and managing a group of
different businesses competing in different product
markets,’ thus making a diversified organisation a
collection of individual businesses
(Ireland et’al, 2011: 142; Thompson et’al, 2010).
 Diversification - levels

Diversification is termed broadly as

Related Diversification or
Unrelated Diversification
 Diversification - levels
•Related Diversification:
Also termed as concentric diversification
Firms utilising related diversification have
investment options that are very similar to those
in their current business;
It involves diversifying the organisation around
businesses that have value chains that present
opportunities for forming competitively valuable
cross-business strategic fits because the value
chains of the related businesses are similar
 Diversification - levels
•Related Diversification:
Firm following this strategy builds on the
resources and capabilities it posses in order to
create value and develop and exploit economies
of scope between its businesses
Related diversification is horizontal or vertical
 Vertical diversification involves either backward integration (development into
activities concerned with company inputs/inbound logistics) or forward integration
(development into activities concerned with company outputs/outbound logistics)
 Horizontal integration involves the acquisition of similar firms operating in the
same market as the acquiring firm
BACKWARD
INTERGRATION

Raw Materials Components Machinery

Manufacture Manufacture Manufacture

Raw Materials Components Machinery

Supply Supply Supply

Transport

Related Diversification Options for a Construction Company

Adapted from: Johnson, G., Scholes, K., Whittington, R., (2008: 266), Exploring Corporate Strategy, 8 th Ed.,
Financial Times/ Prentice Hall, London
 HORIZONTAL
INTERGRATION

Competitive Complementary
Products Capabilities

CONTRACTOR

Complementary
By-Products
Products

FORWARD
INTERGRATION

Distribution Marketing Repairs &

Transport
Outlets Information Servicing
 Diversification - levels
•Unrelated Diversification:
also termed as Conglomerate Diversification
complete move away from any business the
company is involved in
Firms utilising unrelated diversification have a
variety of investment options that are not limited
to their current business
The principle concern of such diversification is
the profit pattern of such diversification, rather
than creating product-market synergy with
existing businesses
 Diversification - levels
•Unrelated Diversification:
unrelated diversifying firms create value
through financial economies which are cost
savings realised through improved allocations of
financial resources based on investments inside
or outside the firm
Higher risk approach due to unfamiliarity of
different markets requiring different approaches
 Diversification – strategic relatedness
Recent research into diversification has disputed
the clear-cut-line between related and unrelated
diversification
Concept of strategic relatedness in
diversification has blurred the line of division
Traditionally, the definition of the relatedness of
diversification was hinged on similarities
between the technologies, markets or customers
used in different businesses (bases on Standard
Industry codes [SIC])
 Diversification – strategic relatedness
Strategic relatedness emphasises the need to
understand the importance of resources and
competences to competitive advantage and how
these resources/competences can be used across
different businesses
By this understanding, the line between related
and unrelated diversification becomes blurred
Where businesses may seem unrelated on the
surface, when examined closely, these businesses
may be more related than first thought because
they are strategically related
 Diversification – strategic relatedness
•Strategic relatedness exists on 5 fronts:
1. Customer Assets (such as brand recognition and
customer loyalty which an organisation can transfer to a
second market;
2. Channel Assets such as established access to distribution
channels which sister businesses can use;
3. Input Assets which is knowledge of where to source
required resources and supplier loyalty;
4. Process Assets such as proprietary technology, product or
market-specific experiences that can be used across businesses;
and
5. Market Knowledge Assets such as behaviour of
competitors or customers
 Approaches to diversification
The means of entering a new industry and
business line can take any of three forms:
Acquisition
Internal start-up or
Joint Ventures with other companies
 Approaches to diversification
•Diversification by Acquisition :
This is the most popular route but can be pricy
It is quicker than trying to launch a brand new
business
Helps acquirer overcome barrier of entry into the
new market such as the need to acquire
technological know-how; establish supply chain
relationships and distribution channels; achieve
economies of scale; building new brands etc.
An acquisition enables the acquirer to quickly
move into the actual business of developing a
strong market position in the target market
 Approaches to diversification
•Diversification through internal start-up
This involves developing and building a new
business subsidiary from scratch. This approach
is appealing when:
 parent company already possesses in-house skills/competences
and resources required to compete effectively;
 there is ample time to develop and launch the new start-up
 internal entry has low cost compared to an acquisition
 the target industry is fragmented as consists of relatively small
firms such that the new start-up will not need to compete against
existing large powerful rivals
 adding a new production capacity will not adversely impact the
supply-demand balance of the industry
 retaliation from incumbents is likely to be slow, weak, or
ineffective toward a new start-up
 Approaches to diversification
•Joint-venture Diversification:
This is a viable vehicle where:
 the diversification opportunity is too
complex, uneconomic or risky for one
company to pursue alone
 the opportunity requires a broad range of
competences and know-how that the one
company possesses
Risk lies in conflicting objectives between
partners
 Which market?
•To diversify, the new opportunity must pass
three tests:
1. The Industry Attractiveness Test: must be
attractive enough to yield consistently good
returns on investment;
2. The cost-of-entry test: entry cost must not be so
high as to erode potential for good
profitability. Entry into attractive markets
usually comes with costly/high entry barriers
but these should be balanced against expected
profitability in the industry attractiveness test
above;
 Which market?
•To diversify, the new opportunity must pass
three tests:
3. The better-off test: will the businesses perform
better together or apart? It is the parent
organisation’s responsibility to assess this and
where there is no benefit, to either not invest
where investment has not been made or divest
where already invested.
•Diversification moves that satisfy all three tests have
great potential to grow shareholder value over the long
term; those that pass only one or two are suspect
 WHY DIVERSIFY? benefits
Seek growth and capture value added from other
related/unrelated markets/products unavailable
in current markets;
Spread risk by diversifying into a ‘less risky’
market to support the risky business;
Prevent a competitor gaining ground by getting
first mover advantage
Achieve synergy by sharing value chain
activities across businesses and therefore
benefiting from economies of scale and scope;
Control the supply/distribution chain by
forward or backward diversification
 Diversification challenges

•‘Fit between a parent and its businesses is a two-edged

sword: a good fit can create value; a bad one can destroy
it’. This is by far the largest risk associated with
diversification
•(Thompson et’al, 2010:239)
 Diversification challenges
Capability of management to diversified
organisations;
The link between diversification and
performance is one where the jury is still out as
there are conflicting findings on the link between
the two
Unknown market factor risks in new markets
Losing touch with the market/response to
market factors compared to narrowed rivals