Strategic ManagementStrategic ManagementBHRM 31124BHRM 31124

R.A.Ishanka ChathuraniLecturer (prob)Department of Human Resource ManagementFaculty of Commerce & Management StudiesUniversity of Kelaniya

Corporate Level and Corporate Level and International Strategy International Strategy Learning outcomesAfter completing of this topic students should be able to, • Understand why organizations might increase their product and geographic diversity•Understand what is meant by related and unrelated diversification•Explain how different extents of product and geographic diversity might affect performance

Introduction Introduction What is diversity ?Diversity is a strategy that takes the

organization into both new markets and products or services

If an organization has under-utilized resources or capabilities that it cannot effectively close to other potential users, it can make sense to use these resources or capabilities by diversification into a new activity

Potentially value creating Potentially value creating reasons for diversification reasons for diversification If an organization has under-utilized

resources or capabilities that it cannot effectively close to other potential users, it can make sense to use these resources or capabilities by diversification into a new activity

There may also be gains from applying corporate managerial capabilities to new markets and products and services. In a sense this extends the point above, but highlights skills that can easily be neglected

Cont… Cont… Potentially value creating Potentially value creating reasons for diversification reasons for diversification Having a diverse range of

products or services can increase market power with a diverse of products or services, an organization can afford to cross subsidies one product from the surpluses earned by another, in a way competitors may not be able to

Related diversification Related diversification Related diversification is strategy

development beyond current products and markets, but within the capabilities or value network of the organization

Vertical integration is backward or forward integration into adjacent activities in the value network

Backward integration is development into activities concerned with the inputs into the company’s current business

Cont… Cont… Related diversification Related diversification

Forward integration is development into activities which are concerned with a company’s outputs

Horizontal integration is development into activities which are complementary to present activities

Related diversification option Related diversification option for a manufacturer for a manufacturer

Manufacturer

Competitive product

Complementary product

By-product

Financing

Product/process research/design

Machinery manufacture

Machinery supplyComponents supply

Components manufacturer

Raw materials manufacture

Raw materials supply

Repair and servicingMarketing InformationTransportDistribution outlets

Transport Backward integration

Horizontal integration

Forward integration

Unrelated diversification Unrelated diversification Unrelated diversification is the

development of products or services beyond the current capabilities or value network

Diversification and Diversification and performance performance Many scholars and policy-makers have been

concerned to establish whether diversified companies really perform better than undiversified companies

Early research suggest that firms which developed through related diversification outperformed both those that remained specialized and also those which developed through unrelated diversification

In the research work on diversification and performance since then the most generalization finding is that the diversification- performance relationship follows in inverted U-shape.

Cont… Cont… Diversification and Diversification and performance performance In other words, related limitedly

diversified companies perform better on average than both undiversified companies and heavily diversified companies or conglomerates

Diversity and performance Diversity and performance

High

Low

Performance

Undiversified Related limited diversification

Unrelated extensive

diversified

Managing the Corporate Managing the Corporate PortfolioPortfolioOne of the most common and

long-standing ways of conceiving of the balance of a portfolio of business is in terms of the relationship between the market share and market growth identified by BCG.

Growth-Share Matrix Growth-Share Matrix Developed by the Boston Developed by the Boston Consulting GroupConsulting Group

BCG MatrixBCG Matrix

• A star is a business unit which has a high market share in a growing market. •A question mark or problem child is a business unit in a growing market, but without a high market share• A cash cow is a business unit with a high market share in a mature market• Dogs are business units with a low share in static or declining markets

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