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04/11/2019

Hull University Business School

Connected Thinking!

Business Strategies 2019

Dr. Giles A. Hindle

600552

Corporate Strategy – Week 7 Session A

Dr. Giles A. Hindle E: [email protected] T: +44 1482 463 457

04/11/2019

Corporate Strategy,

Diversification &

Integration

Lecture 7A

4 Corporate Strategy Directions

Source: Adapted from H.I. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6 . Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson

Education Ltd. 2014

Images: By Mieremet, Rob / Anefo [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via W ikimedia Commons and https://www.amazon.com/Corporate-Strategy-H-Igor-Ansoff/dp/0070021112

Igor Ansoff

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A. Market Penetration

This strategy:

• builds on established strategic capabilities

• means the organisation’s scope is unchanged

• leads to greater market share and increased power vis-à-vis

buyers and suppliers

• provides greater economies of scale and experience curve

benefits.

But there may be constraints, such as:

• retaliation from competitors e.g. price wars

• legal barriers e.g. restrictions imposed by regulators

When there is a downturn in demand:

• Consolidation - organisation focuses defensively on their current

markets with current products

• Retrenchment - withdrawal from marginal activities in order to

concentrate on the most valuable segments and products within

the existing business

Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson Education Ltd. 2014

B. Product Development

Product development is where an organisation

delivers modified or new products (or services) to

existing markets.

This strategy: • involves varying degrees of related diversification (in

terms of products)

• can be expensive and high risk

• may require new strategic capabilities

• typically involves project management risks.

Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson Education Ltd. 2014

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C. Market development

Market development involves offering existing products to new markets.

This strategy involves: • product development (e.g. packaging or service)

• new users (e.g. extending the use of aluminium to the automobile

industry)

• new geographies (e.g. extending the market to new areas –

international markets being the most important)

• meeting the critical success factors of the market

• new strategic capabilities (e.g. in marketing).

Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson Education Ltd. 2014

D. Diversification

This involves increasing the range of products or markets served by an organisation.

• Related diversification involves diversifying into products or services with relationships to the existing business.

Conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to the existing businesses (both in terms of markets and products) and radically increases the organisation’s scope.

Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson Education Ltd. 2014

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Drivers for Diversification

• Exploiting economies of scope – efficiency gains through

applying the organisation’s existing resources or

competences to new markets or services.

• Stretching corporate management competences –

‘dominant logics’ i.e. applying these competences across a

portfolio of businesses.

• Exploiting superior internal processes.

• Increasing market power via mutual forbearance or cross

subsidisation.

• Creates synergy, the benefits gained where activities or

assets complement each other so that their combined effect

is greater than the sum of the parts.

Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson Education Ltd. 2014

Economies of scope in diversification derive from two types of relatedness:

• Operational Relatedness—synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D) but the benefits from economies of scope may be dwarfed by the administrative costs involved in their exploitation.

• Strategic Relatedness—synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses.

Types of Relatedness

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

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1949 1964 1974 1950 1970 1993

Single business

Dominant business

Related business

Unrelated business

United States United Kingdom

Diversification Strategies of Corporations

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

Findings of Empirical Research

Do diversified firms outperform specialized firms?

• No consistent relationship

• Evidence of a ∩-shaped relationship: diversification first increases profitability, then further diversification reduces profitability (increased complexity?)

• McKinsey & Co. identify benefits from moderate diversification —especially for firms that have run out of growth opportunities

• Question of direction of causation: does diversification drive profitability, or vice-versa?

What type of diversification is most profitable? Related vs. unrelated

• Most studies show related diversification outperforms unrelated diversification

• Related diversification offers greater synergies—but also imposes higher management costs

• But what is “related diversification ”? Businesses can be related in many different ways (e.g. LMVH, GE, Virgin group)

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

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Diversification • What diversification options are open to an organisation?

• What might the risks and rewards be?

Vertical Integration

• Vertical integration means entering activities where the organisation is its own supplier or customer.

• Backward integration refers to development into activities concerned with the inputs into the company’s current business.

• Forward integration refers to development into activities concerned with the outputs of a company’s current business.

Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson Education Ltd. 2014

04/11/2019

• Technical economies from integrating processes, e.g. iron and steel production, but doesn’t necessarily require common ownership

• Avoids transactions costs of market contracts in situations where there are:

-small numbers of firms

-taxes and regulations on market transactions

• Superior coordination

The Benefits of Vertical Integration

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

• Inhibits development of distinctive capabilities • Difficulties of managing strategically different

businesses • Incentive problems: lack of “high-powered”

incentives • Limits flexibility

-in responding to demand fluctuation -in responding to changes in technology, customer

preferences, etc.

• Compounding of risk

The Costs of Vertical Integration

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How many firms in the adjacent stage?

Do transaction-specific investments

necessary? The greater the need for transaction-specific

investments, the greater the advantages of VI

Is information evenly distributed

across the stages? The greater are information asymmetries, the greater

the advantages of VI

Is there uncertainty over the period of

the relationship? The greater the uncertainty, the more incomplete is

the contract and the greater the advantages of VI

How similar is optimal scale between

the two stages? The greater the dissimilarity, the less advantageous

is VIHow strategically similar are the two

stages?

Do capabilities in the adjacent stage

need to be continually upgraded?

The fewer the number, the less advantageous is VI

Are profit incentives critical to

performance?

The greater the need for high-powered incentives

the greater the disadvantages of VI

Unpredictable demand reduces advantages of VI Is market demand uncertain?

The greater the need for capability development the

greater the disadvantages of VI

Is the adjacent stage highly risky? VI tends to compound risk

Characteristics of the vertical relationship Implications for VI

Vertical Integration v. Outsourcing

Do transaction-specific investments

necessary?

• From competitive contracting to supplier partnerships, e.g. in autos

• From vertical integration to outsourcing (not just components, also IT, distribution, and administrative services).

• Diffusion of franchising

• Technology partnerships (e.g. IBM- Apple; Canon- HP)

• Inter-firm networks

General conclusion:- boundaries between firms and markets are becoming increasingly blurred

Recent Trends in Vertical Relationships

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To Outsource or Not?

The decision to integrate or subcontract rests on the balance between two distinct factors:

• Relative strategic capabilities:

Does the subcontractor have the potential to do the work significantly better?

• Risk of opportunism:

Is the subcontractor likely to take advantage of the relationship over time?

Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson Education Ltd. 2014

Diversification and Integration Options

Johnson, W hittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the W eb, 10th ed., ©Pearson Education Ltd. 2014

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Integration • What integration options are open to an organisation?

• What might the costs (including transaction and administrative) and benefits be?

Horizontal

Backwards

Forwards

Horizontal