Business Strategy PDF

BUSINESS STRATEGY Sandra RAMOS 2024/2025 STRATEGIC CHOICES CORPORATE STRATEGY AND DIVERSIFICATION INTRODUCTION Organisations may choose to enter many new products and market areas. As organisations add new units and capabilities -> their strategies may n...

BUSINESS STRATEGY Sandra RAMOS 2024/2025 STRATEGIC CHOICES CORPORATE STRATEGY AND DIVERSIFICATION INTRODUCTION Organisations may choose to enter many new products and market areas. As organisations add new units and capabilities -> their strategies may no longer be solely concerned with competitive strategies in one market space at the business level. Corporate strategy is about what business areas to be active in, and this will determine which business unit(s) to buy, the direction(s) an organisation might pursue and how resources may be allocated efficiently across multiple business activities. 3 INTRODUCTION Tata Group began as a trading organisation and soon moved into hotels and textiles. Since that time, it has diversified further into steel, motors, consultancy, technologies, tea, chemicals, power, communications. Corporate strategy questions: Whether it should add any more businesses; Whether it should exit some; How far it should integrate the businesses it retains. 4 Strategic directions and corporate-level strategy INTRODUCTION 5 STRATEGY DIRECTIONS STRATEGY DIRECTIONS A central corporate strategy choice is about in which areas a company should grow. Ansoff’s product/market growth matrix is a classical corporate strategy framework for generating four basic directions for organisational growth. 7 Corporate strategy directions – Ansoff product/market matrix STRATEGY DIRECTIONS 8 STRATEGY DIRECTIONS Typically an organisation starts in zone A. It may choose between penetrating still further within zone A (= ‘consolidation’), or increasing its diversity along the two axes of increasing novelty of markets or increasing novelty of products (= ‘diversification’). Diversification involves increasing the range of products or markets served by an organisation. Related diversification involves expanding into products or services with relationships to the existing business. 9 STRATEGY DIRECTIONS On Ansoff’s axes the organisation has two related diversification strategies available: 1. moving to zone B, developing new products for its existing markets; 2. moving to zone C by bringing its existing products into new markets. The further along the two axes, the more diversified the strategy. 10 STRATEGY DIRECTIONS Alternatively, the organisation can move in both directions at once, following a conglomerate diversification strategy with altogether new markets and new products (Zone D). Unrelated diversification involves diversifying into products or services with no relationships to existing businesses. 11 MARKET PENETRATION For a simple, undiversified business, the best strategic option is often increased penetration of its existing market, with its existing products. Market penetration implies increasing share of current markets with the current product range. 12 MARKET PENETRATION Organisations seeking greater market penetration may face two constraints: 1. Retaliation from competitors (increased rivalry – price wars or expensive marketing battles). 2. Legal constraints (regulators with powers to restrain powerful companies and M&As). 13 PRODUCT DEVELOPMENT Product development is where organisations deliver modified or new products (or services) to existing markets. It can be expensive and high-risk due to: 1. New resources and capabilities. Mastering new processes or technologies that are unfamiliar to the organisation. 2. Project management risk. Even within fairly familiar domains, product development projects are typically subject to the risk of delays and increased costs due to project complexity and changing project specifications over time. 14 MARKET DEVELOPMENT Market development involves offering existing products to new markets. It can be more attractive by being potentially cheaper and quicker to execute (than product development). It entails some product development (e.g. in terms of packaging or service. It takes two forms: New users (e.g. aluminium). New geographies (new towns, internationalization). 15 MARKET DEVELOPMENT It essential that market development strategies be based on products or services that meet the critical success factors of the new market. Strategies based on simply off-loading traditional products or services in new markets are likely to fail. Strategic capabilities: Market developers often lack the right marketing skills and brands to make progress in a market with unfamiliar customers. Managers face challenges is coordinating between different users and geographies, which might all have different needs. 16 CONGLOMERATE DIVERSIFICATION Conglomerate (or unrelated) diversification takes the organisation beyond both its existing markets and its existing products. It radically increases the organisation’s scope. Conglomerate diversification strategies can create value as businesses may benefit from being part of a larger group. E.g. Tata group Products: Automotive, chemicals, defence, electronics, Jewellery, etc… Services: Airlines, Finance, Hospitality, Retail, E-commerce… 17 VERTICAL INTEGRATION INTRODUCTION Vertical integration describes entering activities where the organisation is its own supplier or customer. It involves operating at another stage of the value network (value chain). FORWARD AND BACKWARD INTEGRATION Backward integration is movement into Forward integration is movement into input activities concerned with the output activities concerned with the company’s current business (i.e. further company’s current business (i.e. further back in the value network). forward in the value network). E.g. Acquiring a component supplier E.g. For a car manufacturer, forward would be backward integration for a car integration would be into car retail, manufacturer. repairs and servicing. 21 FORWARD AND BACKWARD INTEGRATION Vertical integration is like diversification in increasing corporate scope. The difference is that it brings together activities up and down the same value network, while diversification typically involves more or less different value networks. Realising synergies involves bringing together different value networks, diversification (especially related diversification) is sometimes also described as horizontal integration. E.g. A car manufacturer also providing buses and trucks. 22 Diversification and integration options: car manufacturer example FORWARD AND BACKWARD INTEGRATION 23 FORWARD AND BACKWARD INTEGRATION Vertical integration often appears attractive as it seems to ‘capture’ some of the profits gained by retailers or suppliers in a value network – the retailers’ or suppliers’ profits. However, there are two dangers: 1. It involves investment. 2. Even if there is a degree of relatedness through the value network, vertical integration is likely to involve quite different strategic capabilities. 24 TO INTEGRATE OR TO OUTSOURCE? Where a part of vertically integrated operations is not adding value to the overall business, it may be replaced through outsourcing or subcontracting. Outsourcing is the process by which activities previously carried out internally are subcontracted to external suppliers. E.g. Subcontracting of components in manufacturing, IT, customers call centres, HR management. 25 TO INTEGRATE OR TO OUTSOURCE? The argument for outsourcing to specialist suppliers is often based on strategic capabilities. Specialists in a particular activity are likely to have superior capabilities than an organisation for which that particular activity is not a central part of its business. E.g. A specialist IT contractor is usually better at IT than the IT department of a steel company. However, Williamson says that companies should also assess the transaction costs (relative costs and benefits of transacting activities internally or externally) and the risk of opportunism. 26 TO INTEGRATE OR TO OUTSOURCE? Therefore, the decision to integrate or subcontract rests on the balance between: 1. Relative strategic capabilities. Does the subcontractor have the potential to do the work significantly better? 2. Risk of opportunism. Is the subcontractor likely to take advantage of the relationship over time? 27 HANDBOOK Johnson, G., Whittington, R., Scholes, K., Angwin, D., & Regner, P. (2017). Exploring Strategy - Text and Cases (11th ed.). Pearson Education. 28