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 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 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. 7-4

Exhibit 7.1 Strategic Directions and Corporate-Level Strategy Value creation Corporate parenting Portfolio management Diversification Penetration Consolidation Development Scope decisions 7-5

Exhibit 7.2 Strategic Directions (Ansoff Matrix) 7-6

Strategic Directions for Axel Springer Which strategic directions should Axel Springer pursue? Considering the Ansoff matrix, what other options are possible? 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. 7-8

Constraints of Market Penetration Retaliation from competitors 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. 7-10

Forms of Consolidation Defending market share 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. Use easyJet, start with 1:39 to 2:14 (on getting into car rentals) 7-12

Risks of Product Development New strategic capabilities 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. 7-14

Forms of Market Development New segments New users New geographies 7-15

What is Diversification? Diversification refers to a strategy by which an organisation pursues new product offerings and new markets. 7-16

Reasons for Pursuing Diversification (1) Efficiency gains Stretching corporate parenting capabilities Increasing market power 7-17

Reasons for Pursuing Diversification (2) Responding to market decline Spreading risk Expectations of powerful stakeholders 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? 7-19

Exhibit 7.3 Related Diversification Options Use easyJet, 11:46 -12:10 on how the Internet ties its businesses together. 7-20

Exhibit 7.4 Diversification and Performance 7-21

Value-Adding Activities Envisioning Coaching and facilitating Providing central services and resources Intervening 7-22

Value-Destroying Activities Adding management costs Adding bureaucratic complexity Obscuring financial performance 7-23

Exhibit 7.5 Portfolio and Synergy Managers and Parental Developers 7-24

Problems Achieving Synergy Excessive costs Overcoming self-interest Illusory synergies 7-25

Challenges for Parental Developers Identifying parent capabilities Parental focus The ‘crown jewel’ problem Sufficient ‘feel’ 7-26

Portfolio Matrices Growth/Share (BCG) Matrix Directional Policy (GE-McKinsey) Matrix Parenting Matrix 7-27

Exhibit 7.7 The Growth Share (BCG) Matrix 7-28

Exhibit 7.8 The Directional Policy (GE-McKinsey) Matrix 7-29

Exhibit 7.9 Strategy Guidelines Based on Directional Policy Matrix 7-30

Exhibit 7.10 The Parenting Matrix 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 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 7-33

Key Debate: Why have corporate-level 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 7-34

Key Debate: Unilever is Parent to Many Brands and SBUs 7-35

Key Debate: Why have corporate-level 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? 7-36

Case Example: The Virgin Group (1) 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 self-managed 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 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? 7-39