management
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_growth_strategy.pptxGrowth Strategy
Agenda
Questions to consider
Vertical integration
When to Vertically Integrate
Limits of Vertical integration
Diversification
Types of diversification
Corporate Strategic Planning – Portfolio Management (BCG)
Vehicles for Diversification
Case:
Video: A new paradigm for sustainable growth
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Questions to Consider
Growth strategy makes the corporation as a whole become more than just the sum of its business unit parts
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What businesses should the corporation be in?
How should it enter and exit those businesses?
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Vertical Integration
In an industry value chain, each firm:
Makes its profits
Builds in inefficiencies in the transfer of goods and services from one firm to another
To try saving these transaction costs, firms may vertically integrate
Vertical integration may be
Backward integration: upstream operations closer to the raw materials
Forward integration: downstream operations closer to the customer
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When to Vertically Integrate
Are our existing suppliers (or customers) meeting the needs of the end-customers?
If the competencies needed are difficult to learn/replicate, find a specialist
If the competencies needed are mission critical knowledge-enhancing, then do internally e.g. dairy business
Is the competitive situation volatile?
If competition/technology is volatile, then seek flexibility by outsourcing
Is it possible to influence the behavior of our upstream/downstream businesses?
If a firm is able to mutually influence the activities of its suppliers and customers, then better to seek long-term relationships and invest in partner development
Will vertical integration enhance the structural position of the business?
Capture the high margins from the intermediaries, and capitalize on more diverse opportunities
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Advantages of Vertical Integration
Creates entry barriers for new entrants
Reduces transaction costs (buying, selling, inventory holding, ordering costs)
Offers tighter control and coordination of operations
Allows to spread fixed or overhead costs over a large number of product/ services
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Limits of Vertical Integration
=> Consider tapered/hybrid integration instead of vertical integration
Limits flexibility in times of demand/technology shifts; requires innovation and efficiency in each line of business
Requires robust system of organizing, culture building, and performance management, as KSF could vary in different lines of business
E.g., R&D, manufacturing, and marketing in pharmaceuticals have vastly different characteristics
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Diversification
Nature of competitive strategies may vary for each business unit
Must create significant value addition by:
Improving core processes (resource capability)
Enhancing structural position (positional capability)
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Types of Diversification
Related diversification
Complementary: Entry into new business activity based on shared commonalities in the components of the value chains of the firms
Vertical integration: Entry into the businesses of its suppliers or its customers, to gain control over the supply and delivery systems.
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Related (complementary) diversification adds value through economies of scope:
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Transferring operational skills or strategic capability from one business to another
Phillip Morris to Miller Brewing
Combining the value chain
P&G’s diaper and power towel businesses
Leveraging strong brand names
Virgin
Stretching core competencies for added value
Terry Berry from graduation rings to corporate incentive programs
Creating stronger capabilities by combining relative strengths of multiple businesses
Daimler and Chrysler
Gaining competitive leverage
For multi-market competition
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Types of Diversification
Unrelated diversification
Entry into a new business area that has no obvious relationship with their flagship business
A conglomerate has a large number of unrelated businesses, with no flagship business
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Unrelated diversification adds value through use of managerial capability when:
=> But, it reduces value when specialized managerial skills are needed
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Industry is attractive, based on external analysis
Cost of entering the business is lower than the potential benefits, as soft targets for acquisitions exist
Firms with investment constraints in a high growth industry
Firms that are undervalued and could be acquired at low acquisition premiums, and then restructured by breaking them apart and sell off
Firms that are sick/struggling and could be turned around by the acquirer with their managerial capabilities and financial resources
Investment allocation is prioritized based on performance, and performance is managed through incentive compensation to the business managers
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Growth Planning – Portfolio Management (BCG)
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Identify separate business units (SBUs)
Classify them on competitive position and market potential grid
Assign to each SBU a strategic mission
STARS
CASH COWS
QUESTION MARKS
DOGS
Allocate resources based on these strategic missions
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Vehicles for Diversification
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Mergers and Acquisitions (M&A)
Internal Development
Joint Ventures/Strategic Alliances
