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Corporate strategy and Diversification
Transcript of Corporate strategy and Diversification
Corporate strategy and Diversification
Identify alternative strategy options, including market penetration, product development, market development and diversification.
Assess the relative benefits of vertical integration and outsourcing
Distinguish between different diversification strategies
The Ansoff product/market growth matrix
Four basic directions for generating growth
Diversification 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.
Two Key Concepts
Market penetration refers to a strategy of increasing share of current markets with the current product range.
builds on established capabilities (LESS RISK)
provides increased power (FIVE FORCES)
achieves economies of scale
Stay in zone A
Diversify to zones: B C & D
Constraints of market penetration
Product development refers to a strategy by which an organisation delivers modified or new products to existing markets.
can be an expensive and high risk
may require new strategic capabilities
typically involves project management risks.
Market development refers to a strategy by which an organisation offers existing products to new markets
may also entail some product development (e.g. new styling or packaging)
attracting new users
can take the form of new geographies (e.g. international market) IKEA in India and China
Less risky, cheaper and quicker to excecute than product development
Takes the organisation beyond both its existing markets and products and radically increaes its scope
Exploiting economies of scale/scope – e.g. efficiency gains
Stretching corporate management competences.
Exploiting superior internal processes.
Increasing market power.
Synergy refers to the benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts.
N.B. Synergy is often referred to as the
‘2 + 2 = 5’ effect.
Drivers of Diversification
Synergy is the goal
Diversification and performance
Can be just an 'ego trip' for senior managers
short term growth leading to problems down the line
Some diversification is good but perhaps not too much!
Diversification through Integration: Vertical, backward, forward etc.
Specialist Adventure Tourism
To integrate or to outsource?
Value Creation and the Corporate Parent
Providing central services
The Parenting matrix
Adding management costs
Adding bureaucratic complexity
Obscuring financial performance
4. Alien business units are misfits. They offer little opportunity to add value and the parent does not understand them. Exit is the best strategy.
1. Heartland business units - the parent understands these well and can add value. The core of future strategy.
2. Ballast business units - the parent understands these well but can do little for them. They could be just as successful as independent companies.
3. Value-trap business units are dangerous. There are attractive opportunities to add value but the parent’s lack of feel will result in more harm than good.
Diversification through Integration: Vertical, backward, forward etc. The organisation becomes its own suppier or customer
e.g. FOX/SKY MERGER
Related versus unrelated diversification
To Intergrate or Outsource
Where a part of vertically integrated operations is not adding value to the overall business it may be repaced through outsourcing or sub-contracting to external suppliers
Corporate parents need to demonstrate that they can creat more value than they cost
The Boston Consulting Group Matrix
One of the most common ways of conceiving the balance of a portfolio of businesses
Divest or closure
Use cash to fund investments
in question marks
Help to develop into a star
Don't take it for granted
Many corporations comprise several, sometimes many business units.
Decisions and activities above the level of business units are the concern of what is called the corporate parent.
Organisational scope is considered in terms of related and unrelated diversification (Ansoff).
There are several portfolio models to help corporate parents manage their businesses such as the BCG matrix and the parenting matrix.
Divestment and outsourcing should be considered as well as diversification.