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organization.
Related diversification involves expanding into products or services with
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Market Penetration
Organizations seeking greater market penetration may face two constraints:
exacerbate industry rivalry as other competitors in the market defend their share
→ leads to price wars
Organization which wants to penetrate the market must have strategic capabilities
competitors. For ex: Indian steel company LNM (Mittal) acquired struggling steel
companies and became largest global steel producer in the 2000s 5
Market Penetration
Legal constraints:
Most countries have regulators with the powers to restrain powerful companies or
prevent mergers and acquisitions that would create such excessive power
In the UK, the Competition Commission can investigate any merger or acquisition
that would account for more than 25 per cent of the national market, and either halt
the deal or propose measures that would reduce market power
The European Commission has an overview of the whole European market and
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Market Penetration
The optimal strategy option for market penetration during a market
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Product Development
Product development is where organizations deliver modified or new
iWatch involved little diversification for Apple → Apple was targeting the
same customers and using very similar production processes and distribution
channels
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Product Development
Product development can be an expensive and high-risk activity for at least two
reasons:
reasons:
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.
For ex: Boeing’s Dreamliner 787 aircraft made innovative use of carbon-fibre
composites but had a history of delays even before launch in 2010 and required
$2.5bn write-offs due to cancelled orders. Since then, batteries catching fire has
resulted in fleets being grounded
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Market Development
Market development can be more attractive by being potentially cheaper
similar products
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Market Development
Market development takes two basic forms:
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Market Development
It is essential that market development strategies be based on products or services
that meet the critical success factors of the new market (see Section 3.4.3).
Strategies based on simply off-loading traditional products or services in
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Conglomerate Diversification
Doubts related to conglomerate diversification:
There are no obvious ways in which the businesses can work together to generate
additional value
There is often an additional bureaucratic cost of the managers at headquarters who
control them → leads to ‘conglomerate discount’ - a lower valuation than the combined
individual constituent businesses would have on their own
Relationships that might have seemed valuable in related diversification may not turn out
to be as valuable as expected. For ex: large accounting firms have often struggled in
translating their skills and client contacts developed in auditing into effective consulting
practices (see Illustration 8.2 - From sat nav to driverless cars) 15
Baking change into the community. Page 246
What were the motivation(s) for Greyston Bakery’s
diversifications?
Referring to the Ansoff matrix, how would you classify these
diversifications?
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Sat nav manufacturer TomTom diversifies to survive.
Page 249
Explain the ways in which relatedness informed TomTom’s post-2008
strategy.
Were there alternative strategies open to TomTom post 2008?
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Sat nav manufacturer TomTom diversifies to survive.
Page 249
Sales of the company went down by 36% to €959 m and profits down by 71% to
navigation systems into their vehicles as the era of the ‘connected car and
replace roaming service with stand-alone sat nav
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Sat nav manufacturer TomTom diversifies to survive.
Page 249
Automakers are unwilling to share data with rivals and so rely on third
updates for driverless cars although they will face tough competition from
Google and Apple.
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Diversification Drivers
Exploiting economies of scope
Economies of Scope refer to efficiency gains made through applying the
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Diversification Drivers
Exploiting economies of scope
For ex: A University can use its under-utilized hall of residences (dormitories)
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Diversification Drivers
Stretching corporate management competences (‘dominant logics’)
This is a special case of economies of scope and refers to the potential for
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Diversification Drivers
Stretching corporate management competences (‘dominant logics’)
For ex: French luxury brand LVMH diversified its business into various fields
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Diversification Drivers
Exploiting superior internal processes
Internal processes within a diversified corporation can often be more efficient than
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Diversification Drivers
Increasing market power
First, having the same wide portfolio of products as a competitor increases the
potential for mutual forbearance (tolerance). Two similarly diversified competitors are
thus likely to forbear from competing aggressively with each other
having a diversified range of businesses increases the power to cross-subsidize one
of a particular market and, being aware of this, competitors without equivalent power
will be reluctant to attack that business 27
DIVERSIFICATION DRIVERS
Synergies are benefits gained where activities or assets complement each
other so that their combined effect is greater than the sum of the parts (the
famous 2 + 2 = 5 equation)
For ex: Film company and music publisher worth more together than
separately - if the music publisher had the sole rights to music used in the film
company productions for instance
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Better Performance through Synergy
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DIVERSIFICATION DRIVERS
Three potentially value-destroying diversification drivers are:
Responding to market decline - Rather than let the managers of a declining business
invest spare funds in a new business it is usually best to let shareholders find new
growth investment opportunities for themselves
For ex: Kodak spent billions of dollars on diversification acquisitions such as chemicals,
company’s current business (i.e. further back in the value network). For example,
acquiring a component supplier would be backward integration for a car
manufacturer.
Forward integration is movement into output activities concerned with the
company’s current business (i.e. further forward in the value network). For a car
manufacturer, forward integration would be into car retail, repairs and servicing.
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Vertical Integration
Two danger related to Vertical Integration:
the relative costs and benefits of managing (‘transacting’) activities internally or externally.
Williamson warns against underestimating the long-term costs of opportunism by external
subcontractors
Subcontractors are liable over time to take advantage of their position, either to reduce their
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To Integrate or Outsource
Market relationships tend to fail in controlling subcontractor opportunism where:
there are few alternatives to the subcontractor, and it is hard to shop around;
know will have little value if they withhold their product or service. See
Illustration 8.3.
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To Integrate or Outsource
This transaction cost framework suggests that the costs of opportunism can outweigh
housing services to its employees rather than outsourcing it since the isolation creates specific
assets (the housing is worth nothing if the mine closes down) and a lack of alternatives (the
nearest town might be 100 miles away)
Transaction cost economics therefore offers the following advice: if there are few
alternative suppliers, if activities are complex and likely to change, and if there are significant
investments in specific assets, then it is likely to be better to vertically integrate rather than
outsource 38
To Integrate or Outsource
In sum, the decision to integrate or subcontract rests on the balance between:
Relative strategic capabilities. Does the subcontractor have the potential to
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Illustration 8.3 ‘Out of sight – out of mind’?
Outsourcing at Royal Bank of Scotland. Page 255
In terms of transaction and capability costs, why might outsourcing be
attractive to companies?
What might be the risks of ‘insourcing’?
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The Portfolio Manager
Portfolio manager operates as an active investor in a way that shareholders in the
shareholders with a view to extracting more value from the various businesses
than they could achieve themselves → to identify and acquire under-valued
assets or businesses and improve them
For example, Portfolio Managers acquire another corporation, divest low-
In what ways does Berkshire Hathaway fit the archetypal portfolio manager
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The Synergy Manager
Synergy manager is a corporate parent seeking to enhance value for business units
by managing synergies across business units
Synergies are likely to be particularly rich when new activities are closely related to
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The Synergy Manager
For example, at Apple, Steve Jobs’ vision of his personal computers being
the digital hub of the new digital lifestyle guided managers across the iMac
computer, iPod, iPhone and iPad businesses and it enhanced value through
better customer experience
3 challenges of synergistic benefits:
Excessive costs - The benefits in sharing and cooperation need to outweigh
the costs of undertaking such integration, both direct financial costs and
opportunity costs
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The Synergy Manager
Overcoming self-interest – Well-rewarded managers are likely to be
unwilling to sacrifice their time and resources for the common good.
Illusory synergies - overestimating the value of skills or resources to other
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The Parental Developer
The parental developer seeks to employ its own central capabilities to add
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The Parental Developer
Parenting opportunities tend to be more common in the case of related
branding and distribution from the center; A technology company might run a
large central R&D laboratory.
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The Parental Developer
Two crucial challenges in managing a parental developer:
2) The ‘crown jewel’ problem - Some diversified companies have business units in their
portfolios which are performing well but to which the parent adds little value →
corporate parents get excessively attached to them. The logic of the parental development
approach is: if the center cannot add value, it is just a cost and therefore destroying
value. Parental developers should divest businesses they do not add value to, even
profitable ones and reinvest the money to businesses where they can add value
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Illustration 8.5 Chipotle: doing things differently. Page 262
Chipotle?
Despite its success, why was Chipotle spun-off?
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The BCG (or growth/share) matrix
A star is a business unit within a portfolio that has a high market share in a growing market.
A question mark (or problem child) is a business unit within a portfolio that is in a growing
market but does not yet have high market share → needs heavy investments. Many
question marks fail to develop, so the BCG advises corporate parents to nurture several
at a time
A cash cow is a business unit within a portfolio that has a high market share in a mature
market. The cash cow should then be a cash provider, helping to fund investments in
question marks.
Dogs are business units within a portfolio that have low share in static or declining markets.
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4 potential problems with The BCG matrix
Unkind to animals - Both cash cows and dogs receive ungenerous treatment,
the first being simply ‘milked’, the second terminated or cast out of the
corporate home. Can cause to motivation problems as managers in these
units see little point in working hard for the sake of other businesses. Also, can
cause to self-fulfilling prophecy. Moreover, cash cows can very quickly turn
into dogs as they are simply ‘milked’ and additional investment is denied
Ignores commercial linkages - The matrix assumes there are no commercial
ties to other business units in the portfolio. For instance, a business unit in the
portfolio may depend upon keeping a dog alive 54
The directional policy (GE–McKinsey) matrix
Categorizes business units into those with good prospects and those with
(i) how attractive the relevant market is in which they are operating
unit strength can be defined by competitor analysis (for instance, the strategy
canvas) (see Section 3.4.3)
Some analysts also choose to show graphically how large the market is for a
given business units activity, and even the market share of that business unit
For ex: A firm with the portfolio shown in Figure 8.7 will have relatively low shares
in the largest and most attractive market, whereas their greatest strength is in a
market with only medium attractiveness and smaller markets with little long-
term attractiveness 56
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The directional policy (GE–McKinsey) matrix
Two advantages of Directional Policy Matrix:
1) Unlike the simpler four-box BCG matrix, the nine cells of the directional policy
matrix acknowledge the possibility of a difficult middle ground
2) The two axes of the directional policy matrix are not based on single measures
(i.e. market share and market growth)
But the directional policy matrix shares some problems with the BCG matrix,
particularly about vague definitions, capital market assumptions, motivation and self-
fulfilling prophecy and ignoring commercial linkages
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The Parenting Matrix
The parenting matrix (or Ashridge Portfolio Display) developed by
matrices, but if the parent cannot add value, then the parent ought
to be cautious about acquiring or retaining them
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The Parenting Matrix
There are two key dimensions of fit in the parenting matrix (see Figure 8.8):
1) ‘Feel’ - This is a measure of the fit between each business unit’s critical success
factors (see Section 3.4.3) and the capabilities (in terms of competences and
resources) of the corporate parent.
2) ‘Benefit’ - This measures the fit between the parenting opportunities, or needs,
of business units and the capabilities of the parent. For the benefit to be
realized, of course, the parent must have the right capabilities to match the
parenting opportunities (for instance, by bringing marketing expertise)
Businesses for which a corporate parent has high feel but can add little benefit
and can continue to add value to. They should be at the core of
future strategy
Ballast business units are ones the parent understands well but can
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The Parenting Matrix
Value trap business units are dangerous. They appear attractive because there
are opportunities to add value (for instance, marketing could be improved). But
they are deceptively attractive, because the parent’s lack of feel will result in
more harm than good (i.e. the parent lacks the right marketing skills). The parent
will need to acquire new capabilities in order to move the business into the
heartland. Divesting to another corporate parent that could add value
Alien business units are clear misfits. They offer little opportunity to add value
and the parent does not understand them anyway. Exit is definitely the best
strategy.
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The Parenting Matrix
The parenting matrix can therefore assist hard decision where either high-feel
activities for which they have special managerial expertise. Other services
should be outsourced or set up as independent agencies
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Virgin – is the brand more than Richard Branson?
by Marianne Sweet. Pages: 271-274
What directions of strategic development have been followed by Virgin over the
what extent are these parenting skills relevant to the differing business units?
What should the future corporate strategy be? (And how essential is Richard