bs l11 corporate-level strategies

8/9/2019 BS L11 Corporate-level Strategies

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PRODUCT & SERVICE DEVELOPMENT (I)

Product & Service development means to deliver new or

improved products & services on the existing market.

For instance, Sony developed the Walkman products

into tape-based and CDs, and recently to MP 3s players.

Sony diversified the range of products but for approx.

the same customers. Similar examples could be the switch from written

newspapers to online newspapers. New technologies

and products, but almost same customers.

This strategy is also called related diversification. Risk: the need for new strategic capabilities (e.g.

internet and software capabilities).

Example: Online banking needs new types of security

systems.


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PRODUCT & SERVICE DEVELOPMENT (II)

In 1981 CEO of Coca-Cola Company became Roberto

Goizueta. In the struggle to keep the #1 position on themarket against pepsi-cola, Goizueta decided in 1985 to put

on the market a new product - the New Coke, and to stop

production on the old coke.

Sales of New Coke were low and public outrage was high atthe fact that the original was no longer available.

This joint decisiona new product and stopping production

on the old producthas since referred as the biggest

marketing blunder of all time. It soon became clear that Coca-Cola Company had little

choice but to bring back its original brand.


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MARKET DEVELOPMENT (I)

Market development means to offer existing products to

new markets. It involves some adjustments to theirproducts, usually in terms of packaging and service.

It is a form of related diversification. It may take two

forms:

New users. Example: Aluminium from industry (oldmarket) to packaging products (new market).

New geographies. Example: Strategies for

internationalization and globalization.

It is essential first to study the characteristics of the newmarkets and then to send the products to these markets.

It is essential to make some adjustments if necessary

(e.g. coca-cola may change the taste to adjust the local

tradition).


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MARKET DEVELOPMENT (II)

Market development must take into consideration

cultural traditions and the living cost in the newcountries and geographical regions.

Kelloggs in India a big failure.

Kellogg in the 80s dominated the market of breakfast

cereals. In 90s Kellogg lost important market share dueto competitors and decided to extend beyond Europe.

India was very attractive due to the huge number of its

population, approx. 950 millions inhabitants.

However, in India the tradition was that for breakfast tohave hot vegetables. Also, the price of the Kelloggs

cereals was too high for Indians.

The market development in India was a big failure.


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MARKET DEVELOPMENT (III)

In order to keep a singular identity throughout the

world, many companies stick with the same marketingcampaign and brand message in every country. Also,

this policy keeps down the advertising campaign.

This policy creates some difficulties due to culture

differencesand due to the lack of nationalcharacteristics.

For instance, in Taiwan Pepsis advertising slogan

Come alive with the Pepsi generation was translated:

Pepsi will bring your ancestors back from the dead !

General Motors had a big failure in selling Chevy Nova

in Latin America, since in Spanish Novameans It

doesnt go!


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CONGLOMERATE DIVERSIFICATION (I)

Conglomerate diversification means unrelated diversification that

takes the organization beyond both its existing markets and itsexisting products.

It is also calledeconomy of scope since it increases the

organization scope. Examples: General Electric, Virgin, Sony,

Samsung.

Economy of scope refers to efficiency gains through applying theorganizations existing resources or competences to new markets

or services.

Many organizations have resources (i.e. tangible and intangible

resources) under-utilized, and they can extend their utilization with

new and different businesses. Example: Universities may use theirclassrooms and halls of residence for summer conferences and

students tourism.

However, there is no method to anticipate a business success

through conglomerate diversification. Many such businesses

failed.


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CONGLOMERATE DIVERSIFICATION (II)

Stretching corporate management competences(i.e.

using dominant logic)a diversification driver.

The dominant logicis the set of corporate-level

managerial competences applied across the portfolio of

businesses. Example: Sony had for many years as

dominant logicminiaturization.

Increasing market powerthrough cross-subsidizing one

business from the profits of another business. That

increases the reaction power of the company to any

potential threat from competitors in a price war.

Spreading the riskacross a range of markets is another

common justification for diversification.


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Low

High

Performance

Specialized

Related limited

diversification

Unrelated diversification

Diversification vs. Performance


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INTEGRATION / DIVERSIFICATION

Integration is a form of diversification.

Horizontal integrationpurchasing or developing relatedbusiness.

Vertical integrationpurchasing or developing businesses which

are unrelated but can be aligned to the dominant scope of the

company. Vertical integration can be:

Backward integration refers to development into activitiesconcerned with the inputs into the companys current business

(i.e. they are further back in the value network).

Forward integration refers to development into activities

concerned with the outputs of a companys current business (i.e.

they are further forward in the value network). Integrationis the opposite strategy of outsourcing. When to

integrate and when to outsource is a strategic question. There is

no general answer for success.


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Car retail

Carmanufacture

Components

manufacture

Busmanufacture

Truckmanufacture

Backward

integration

Forward

integration

Horizontal

integration

Horizontal and vertical integration strategies


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Value-adding activities

Any corporate parent must demonstrate that it creates

more business value than costs. Envisioning. The corporate parent can provide a clear

overall vision or strategic intent for its business units.

Coaching and facilitating. The corporate parent can

help business unit managers develop strategiccapabilities, by coaching them to improve their skills

and confidence.

Providing central services and resources. Capital and

knowledge can be such resources. Thus, capitalinvestment and sharing knowledge expertise add value.

Intervening. The corporate parent can intervene within

its business units in order to ensure appropriate

performance.


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Value-destroying activities

Adding managing costs. Generally, the staff and

facilities of the corporate centre are expensive. Thecorporate centre has the best-paid managers and the

most luxurious offices. However, it is the actual

business that have to generate the revenue to pay them.

Adding bureaucratic complexity. Any new manageriallayer increases the bureaucracy of the company and the

time for decision making and solving problems.

Obscuring financial performance. One danger in a large

diversified company is that the underperformance ofweak businesses can be obscured. Weak business

might be cross-subsidized by other strong businesses.

That could lead to lack of incentive and innovation from

the weak business.


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Parent

SBU 1 SBU 2 SBU 3

The portfolio manager


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The synergy manager

The synergy manageris the corporate parent seeking

to enhance value for business units by managing

across business units.

Synergies can be significant in the case of related

diversification.

For instance, at Apple, Steve Jobs had the vision of

integrating computer, internet and communication

experience in its products iMac, iPod, iPad, and iPhone

by creating connections between them and

connections between the SBU representing them. The synergy manager must go beyond the self-interest

of only some SBU in disadvantage of the others.


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Parent

SBU 1 SBU 2 SBU 3

The synergy manager


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Parent

SBU 1 SBU 2 SBU 3

The parental developer


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The BCG matrix

The Boston Consulting Group (BCG) matrix uses market shareand

market growthcriteria for determining the attractiveness and

balance of business portfolio.

A star is a business unit within a portfolio which has a high market

share in a growing market. The SBU may be spending heavily to

keep up with growth, but high market share should yield sufficient

profit to balance the effort.

A question mark (or problem) is a SBU within a portfolio that is in a

growing market, but does not yet have high market share.

Developing question marks into stars , with high market share,

takes heavy investment.

A cash cow is a SBU within a portfolio that has a high market sharein a mature market. Investment needs are low, and market share is

high. Thus, a cash cow is a good cash provider.

Dogsare SBU within a portfolio that have low share in static or

declining markets, which means the worst of combinations. It is

recommended divestment or closing down the business.


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StarsQuestion

marks

Cash cows Dogs

High Low

Market share

The BCG Matrix

High

Low

Market

growth


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Mergers & Acquisitions (M&A)

M&A are strategies involving huge sums of money and large public

support for shareholders. M&A can generate successes and alsofailures.

An example of a catastrophic failure is that of the Royal Bank of

Scotland, whose 2007 takeover of the Dutch ABN AMRO ended in a

commercial disaster and the banks nationalization by the British

government. A mergeris the combination of two previously separate

organizations, typically as more or less equal partners.

An acquisitioninvolves one firm taking over the ownership (equity)

of another, hence the alternative term takeover. Most of the

acquisitions are friendly, which means agreement on mostimportant issues. Sometimes acquisitions are hostile:

here the would-be acquirer offers a price for the target

firms share without the agreement of the targets

management, and the decision belongs to shareholders.


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Motives for M&A

Extension. M&A can help in getting fast extensions in terms of

products, services, markets and geographies. In 2010 the ChineseGeely car company purchased the Swedish Volvo car company in

order to make it a global company.

Consolidation. M&A can contribute to consolidation os some

competitors. For instance, bringing together two competitors there

are several good effects: increased market power, reducedcompetition, increased internal efficiency by optimizing resource

allocation.

Capabilities. M&A can contribute to increasing capabilities of the

new company. For instance, Microsoft regards purchasing new

entrepreneurial firms as a part of their R&D effort. Financial efficiency. It is often a good strategy to put together a

company with a good balance sheet (i.e. cash flow) with a

company with a weak balance sheet (i.e. high debt). The first is

good for providing financial resources, the other for providing

other tangible and intangible resources.


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Strategic alliances

In M&Athe fundamental problem is a change in ownership. In a

strategic alliancethere is only a partial change or no change inownership.

Joint venture. Two organizations that remain independent but they

set up jointly a new organization . For example, General Motors

and Toyota have operated together the NUMMI joint venture since

1984, producing cars from both companies in the same plant inCalifornia.

Consortium. It involves several companies setting up a common

venture together. For example, IBM, Hewlett-Packard, Toshiba and

Samsung are partners in the Sematech research consortium,

working together on the latest semiconductor technologies. Franchising. One organization (the franchisor) gives another

organization (the franchisee) the right to sell the franchisors

products or services in a particular location in return for a fee or

royalty. Examples: McDonalds, KFC, Starbucks.

bs l11 corporate-level strategies

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