Strategy Formulation

Strategies for Growth and

Diversification
Identifying Growth Strategies
Define the industry
Analyze options for growth

What Is Our Industry?
Defining the industry in new ways can
present new opportunities.
Examples:
Disney
IBM
Business-Level Strategies For
Growth
Market
Penetration
Strategy
Product
Development
Strategy
Market
Development
Strategy
Diversification
Strategy
Existing
New
Domain
(i.e., Industry
Market
Product/Service
Existing New
Product/Market Expansion:
Scale Strategies
Market Penetration
Goal: increase market share
Low risk/marginal returns
Every business does this

Market Development
Goal: find new markets
Marketing expertise
Mature products/services
Product/Market Expansion: Scope
Strategies
Product Development
Goal: develop & introduce new products/services
Technical expertise
Growth of products/services
(Could Entail Related Diversification)

Diversification
Goal: develop & introduce products/services to new or emerging
markets
(Most likely Unrelated Diversification)
When Does Diversification
Make Sense?
Single business strategies have a number of advantages
but also a number of risks -- all ones eggs in one basket
The logic: to spread corporate risk across multiple industries
to enhance shareholder value: SYNERGY (i.e., 2 + 2 = 5)
Diversification -- Motives
The risks of single business strategies are
more severe for management than for
shareholders of publicly traded firms.
Diversification may be motivated by
managements desire to reduce risk.
Diversification only makes sense when it
enhances shareholder value!

Tests For Judging
Diversification
Attractiveness
Better-off
Cost of entry
Attractiveness Test
Is the target industry attractive? (Use 5-
forces model to assess industry
attractiveness)
Does the diversification move fit with the
grand strategy of the firm?
Better-off test
Does the diversification move produce
opportunities for synergies? Will the
company be better off after the
diversification than it was before? How and
why?
Cost of Entry Test
Is the cost of the diversification worth it?
Will the diversified firm create enough
additional value to justify the cost?
Methods for Diversification
Acquisition of an existing business
Creation of a new business from within, e.g.
a start-up
Joint venture with another firm or firms
Acquisition
Most popular approach to diversification
Quick market entry
Avoids entry barriers:
Technology
Access to suppliers
Efficiency / economies of scale
Promotion
Distribution channels
Major Acquisition Issue
Acquire a successful company at a high price
or
Acquire a struggling company at a bargain price
Start-Up
Appropriate when:
You have time to launch
Market moves slowly
Internal entry costs lower than acquisition costs
You already possess necessary skills
Target industry is fragmented
Joint Ventures
Pooling resources to spread risk
Achieving synergy from respective capabilities
Leveraging one anothers experience
Complicated; potential for conflicts if responsibilities,
liabilities, & rewards not clearly delineated
Related Diversification
Businesses are distinct
but their value chains possess strategic fit in operations,
marketing, management, R&D. distribution, labor, etc.
Therefore, they tend to exploit economies of scope
Tend to (historically) outperform unrelated diversifications
Unrelated Diversification
No common linkage or element of strategic fit among SBUs -- i.e.,
no meaningful value chain interrelationships
Strategic approach: venture opportunistically into attractive
industries that have solid potential for financial returns
Conglomerates
Dominant logic: spreads businesses risk over multiple industries,
stabilizing corporate profitability (in theory)
Attractive Acquisition Targets
for Unrelated Diversification
Companies whose assets are undervalued (buyem & sellem
to realize capital gains)
Companies that are financially distressed (purchase at bargain
price & turnem around through injections of financial
resources & managerial expertise)
Companies with bright prospects, but limited capital
Dominant logic: any company that can be acquired on good
financial terms & offers good prospects for profitability is a
good business for diversification
Drawbacks of Unrelated
Diversification
Places enormous demands on corporate management --
shifting resources & making moves into unknown areas, etc.
Cannot capture synergies -- no strategic fit between SBUs
Few businesses have offsetting up-down cycles, so sales-
profit stability is more mythical than real (& when
EVERYTHING IS in a downturn, assets spread thin
are sometimes consumed )
Strategic Analysis of Diversified
Companies
The essence of strategic management is to allocate
resources to those areas that possess the greatest
potential for future success
Corporate Strategy for Diversified Firms --
Key Strategic Issues
(1) How attractive are our current businesses?
(2) With these businesses, what is our performance outlook
for X years in the future?
(3) If answers to (1) & (2) above arent satisfactory, what
should we do to get out of some businesses, strengthen those
remaining, & get into new businesses to boost our prospects
for better performance?
BCG Growth-Share Matrix
Dimensions:
Industry growth rate
Relative market share position of the
businesses

SBUs plotted as circles with area proportional to their
contribution to overall corporate sales
BCG Business Portfolio Matrix
High Low
High
Low
Stars
Cash Cows
Question Marks
Dogs
Industry
Growth
Rate
Relative Market Share Position
BCG Matrix -- Strengths
Encourages strategists to view a diversified firm as a collection of
cash flows & cash requirements (** its major strategic implication
**)

Explains why priorities for corporate resource allocation differ from
SBU to SBU

Demonstrates the progression of an SBU --
from Q-mark ===>Star ===>Cash Cow
BCG Matrix -- Weaknesses
Over-simplifies market growth & market share issues
4 simple categories are neat, but trends are more valuable
Doesnt directly identify which SBUs offer the best investment
opportunities
Considers only 2 variables
G.E. 9-Cell Matrix
Dimensions:
Long-term industry attractiveness
Business strength/Competitive position

SBUs plotted as circles with area proportional to the size of
the industry, & a sector within each circle representing the
SBUs market share in its industry
Strong Average Weak
H
M
L
GE 9-Cell Matrix
Business Strength/Competitive Position
Long-Term
I ndustry
Attractiveness
Strategic Implications of the
G.E. 9-Cell Matrix
SBUs in 3 upper left cells get top investment priority
SBUs in 3 middle diagonal cells merit steady investment to
maintain & protect their industry positions
SBUs in 3 lower right cells are candidates for harvesting or
divestiture
Advantages of G.E. 9-Cell
Matrix
Allows for intermediate rankings between high & low and
between strong & weak
Incorporates a wider variety of strategically relevant
variables than the BCG matrix
Stresses the channeling of corporate resources to SBUs with
the greatest potential for competitive advantage & superior
performance
Weaknesses of G.E. 9-Cell
Matrix
Provides no guidance on specifics of SBU strategy
Only suggests general strategic posture -- aggressive
expansion, fortify-&-defend, or harvest/divest
Doesnt address the issue of strategic coordination across
related SBUs
Tends to obscure SBUs about to take off or crash & burn --
static, not dynamic
Life-Cycle Portfolio Matrix
Dimensions:
Industry stage in the life cycle
SBUs competitive position

Area of each SBU circle is proportional to size of the
industry; sectors denote SBUs market share in
its industry

This matrix displays the distribution of the firms businesses
across the various stages of industry evolution
Strong Average Weak
SBUs Competitive Position
Life-Cycle Portfolio Matrix
Introduction
Growth
Early Maturity
Late Maturity
Decline
Life-
Cycle
Stages
Common Problems Associated With
Diversified Firms:
Overemphasis on ROI
Under-emphasis on future earnings streams
Short-term focus
Growth more valued than quality & value
Over-decentralized; top managers become
isolated & out-of-touch
Avoidance of manageable (strategic) risk
for the sake of short-run profit
Performance: Effectiveness &
Efficiency
Effectiveness: external criteria
Efficiency: internal criteria
Not mutually exclusive
Both important
Effectiveness
Doing the right thing; goal attainment
Determine by the market
Establishes what price you can command
Measures: sales, market share, etc.
Efficiency
Doing the thing right
Ratio of output to input
Determines price you must charge
Measures: operating profit, unit cost
structure, etc.
Market Criteria
Future projection
Reflects anticipated results
Indicates investor confidence
Measures: trend in stock price or cash value
Operational Criteria
Past & present
Reflects actual results
Indicates managerial competence
Measures: ROE, ROI, ROA, market share,
revenue, operating margin (profit), time-to-
market, inventory turns, quality, etc.
Performance:
The Bottom Line
No simple bottom line
No single criterion of performance is inherently
most important
Multidimensional
Situational -- different measures are more
appropriate at different times
Difficult to be successful on all measures at the
same time