P3 BUSINESS ANALYSIS

LECTURER: Stanford Allen

Class Notes 4
Objectives
To examine diversification strategies
To review portfolio analysis tools
To examine methods of sustaining competitive advantage

1 STRATEGIC OPTIONS
The defining feature of the corporate parent is that it has no direct contact with buyers and competitors. Its role is generally
to manage the scope of organization. There are two main, linked subjects for decisions about scope:
Diversity of products and markets
International and geographic diversity

1.1 Benefits of diversification

Benefit Comments
Economies of scope Marketing synergy. Distribution channels, sales staff,
administration and warehousing.
Operating synergy. Bulk purchasing and greater spread of fixed
costs.
Investment synergy. Wider use of common investments in fixed
assets, working capital and research
Management synergy. Ease of transfer of current operations
management skills to new operations
Corporate management skills May be extendible across a range of unrelated businesses. Virgin
Can increase market power via cross- A high margin business subsidizing a low margin business.
subsidization
Response to environmental change Though often quoted these are however questionable
Risk spreading
Expectations of powerful stakeholders
1.2 Related diversification

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P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
1.3 Unrelated diversification
Unrelated diversification is the development of products or services beyond the current capabilities of value
network. These companies are known as conglomerates, such as Samsung (electronics, ship building & construction)
Advantages of conglomerate diversification Disadvantages of conglomerate diversification
Risk spreading Dilution of shareholders earnings
Improved profit opportunities Lack of common identity and purpose
Escape from declining market Failure of one business could drag down the others
Use of image & reputation may be transferrable Lack of management experience

1.4 International diversification

1.4.1 Management Orientation
1.4.1.1 Ethnocentrism (home country orientation)
Ethnocentrism is a home country orientation. The company focuses on its domestic market and sees exports as
secondary to domestic marketing. Ethnocentric companies will tend to market the same products with the same
marketing programs in overseas countries as at home.
1.4.1.2 Polycentrism (host country orientation)
With polycentrism, objectives are formulated on the assumption that it is necessary to adapt almost totally the
product and marketing program to each local environment. The polycentric company believes that each country is
unique. It therefore establishes largely independent local subsidiaries and decentralizes it marketing management.
1.4.1.3 Geocentrism and Regiocentrism (world or region orientation)
Geocentrism and Regiocentrism are based on the assumption that there are both similarities and differences
between countries that can be incorporated into the regional or world objectives and strategies. Geocentrism treats
the issue of standardization and adaptation on their merits so as to formulate objectives and strategies that exploit
markets fully while minimizing company costs. The aim is to create a global strategy that is fully responsive to local
differences, hence the phrase think globally, act locally
1.4.2 Stages in the evolution of global business
According to Ohmae there are five stages to consider:
Exporting. The management orientation is ethnocentric.
Overseas branches. The management orientation is ethnocentric.
Overseas production. The management orientation is still largely ethnocentric
Insiderisation. The company clones itself overseas. Management style shifts to polycentric and thinks of itself
as a multinational company.
The Global Company. Geocentric management orientation.

1.4.3 Ohmaes five reasons why companies are moving towards globalization
Customer. Market convergence is driven by widespread customer demand for products with similar
characteristics.
Company. The search for economies of scale drives expansion towards the global scale.
Competition. The very existence of global competitors motivates companies to expand for reasons of
prestige and competitiveness. They may also be amenable to cost reducing strategic alliances.
Currency. Exchange rate risk can be managed most easily when a company has major cash flows in the
countries in which it operates.
Country. Multiple locations enable a company to exploit both absolute and comparative advantage. They
also enable it to promote itself as locally oriented in each country, thus enhancing its image with the local
government and markets.

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P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
1.4.4 Other factors encouraging globalization of world trade
Financial factors such as third world debt.
Country/continent connections e.g. UK and the commonwealth.
Legal and regulatory factors e.g industrial standards and protection of intellectual property
Markets trading in international commodities. Commodity can be purchased in one country for delivery in
another.
The Internet.
Government policy.

1.4.5 Designs for global businesses

Bartlett and Ghoshai discern four types of organizations, depending on the strengths and weakness of pressure to
globalize and the need for local adaptation.
Global environment. Geocentric, global product division.
International environment. Ethnocentric, international division.
Transnational environment. Polycentric; integrated systems and structures
Multinational environment. Polycentric; national or regional divisions
1.4.6 Market selection
Market attractiveness. This concerns such indicators as GNP/head and forecast demand, and market
accessibility.
Competitive advantage. Dependent on prior experience in similar markets, language and cultural
understanding.
Risk. Analysis of political analysis, possibility of government intervention and similar external influences.
o Political risk. Wars, nationalism, arguments between governments etc.
o Business risk. Possibility of flaw business idea.
o Currency risk. Volatility of foreign exchange rates.
o Profit repatriation risk.

1.4.7 Modes of entry

Modes of Entry Advantages Disadvantages
Exporting - Goods are Production can be concentrated in a Not enough knowledge of the local market
made at home but sold single location. Maybe be hindered by tariffs, quotas,
abroad. Economies of scale and consistency inspections etc
Direct Export Producer of product quality.
sells directly to final user Experience can be gained from
Indirect - The firms goods trying international marketing on a
are sold abroad by local small scale.
firms which have a greater Firms can test their international
local market knowledge marketing plans and strategies
Operating costs, administrative
overheads and personnel are
minimized.
Overseas production Better understanding of the
includes contract customers in the overseas market
manufacturer, wholly own Economies of scale in large markets.
subsidiaries and joint Production costs are lower than the
ventures home market in some countries.

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P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
Lower storage and transportation
costs.
Overcomes the effects of tariffs and
non-tariffs barriers.
May allow the company to win
contracts from the local
government.

Contract manufacturer. No investment needed in overseas Difficulty in finding suitable overseas

License is granted. Avoids plant. producers
costs and hassle of setting Lower risks from currency Training of the overseas producers
up abroad fluctuations personnel.
Control of marketing retained by The contractor may eventually become a
contractor. competitor.
Lower transportation costs and Quality control problems.
maybe lower production costs.

Wholly owned overseas Profits belong to the firm. Investment costs too prohibitive for some
production Decision-making not shared. companies.
No communication problems as Suitable managers may be difficult to find.
those in joint ventures. Some governments prohibit 100%
Systems can be integrated ownership by foreigners.
internationally. Ignores local partners knowledge of
Varied experience is gained by the market, distribution etc.
firm.

1.4.8 Factors considered in choosing a mode of entry

Firms marketing objectives
Firms size
Mode availability
Method quality.
Human resource requirements
Market information feedback
Learning curve requirements
Risks
Control needs.
1.5 The Corporate parent and value creation
1.5.1 Value Creation
Envisioning corporate intent, communicating the vision to stakeholders and SBU managers, and acting in
accordance with it.
Intervention to improve performance
Provision of services, resources and expertise.
1.5.2 Value Destruction
Value created may be less than costs
The corporate hierarchy provides an arena for managers political ambitions

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P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
Size and complexity of large organizations may hinder or obscure the development of a clear and useful
corporate vision
Corporate processes and hierarchy may slow decision-making, stunt enterprise and absorb the energies of
SBU managers
1.5.3 Strategic Rationale
JS&W identified three approaches to value creation:
Portfolio managers create value by applying financial discipline. They keep their own costs low.
Synergy managers peruse economies of scope through the shared use of competences and resources
Parental developers add value by deploying their own competences to improve the SBUs performance.

1.6 Corporate portfolio

A corporate parent of any type will have to make decisions about acquiring, nurturing and disposing of subsidiaries.
Four major strategies can be pursued with respect to products, market segments and SBUs.
Build. A build strategy forgoes short term earnings and profits in order to increase market share.
Hold. A hold strategy seeks to maintain the current position
Harvest. A harvesting strategy seeks short term earning and profits at the expense of long term
development.
Divest. Divestment reduces negative cash flow and releases resources for use elsewhere.
These are managed against the following criteria:
Balance in relation to market and corporate needs
Attractiveness in terms of profitability and growth
Strategic fit in terms of potential synergy and parenting capability.

1.6.1 BCG Matrix Stars. Stars have high market shares that operate in growing markets.
They require capital expenditure in excess of the cash they generate in order to
maintain their position. They promise high return in the future. Strategy: Build.
Cash cows. These are former starts at the mature stage of the lifecycle,
they generate high amounts of cash for the company, but growth rate is slowing.
There are chances that the product may slip into decline; appropriate marketing
mix strategies should be employed to try to prevent this from happening. Cash
generated can be used to sustain the stars. Strategy: Hold or harvest if weak.
Question marks/Problem child. These have low market share but
operate in market with high growth rates. An assessment must be done to
justify the continued capital expenditure in this area. If justified, these may
become stars. Strategy: Build or harvest.
Dogs. These generally ex-cash cows have low market shares and low
market growth rates. The options for many companies is to phase these products
out, however some organization do go for the strategy of re-inventing and
injecting new life into the product. Strategy: Divest or hold.

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P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
1.6.2 The public sector portfolio mix
A public sector star is something that the
system is doing well and should not be
changed. They are essential to the viability
of the system
Political hot boxes are services the public
want, or which are mandated, but for
which there are inadequate resources or
competences
Golden fleeces are services done well but
for which there is little demand. Potential
targets for cost cutting.
Back drawer issues are unappreciated and
have a low priority for funding. If managers
consider them important they should
attempt to increase support for them and
get them moved back to the political hot
box category.

1.6.3 The General Electric Business Screen

For market attractiveness the grid

examines:
Size of market.
Market rate of growth.
The nature of competition and its
diversity.
Profit margin.
Impact of technology, the law, and
energy efficiency.
Environmental impact.

Business positions include these factors:

Market share.
Management profile.
R & D.
Quality of products and services.
Branding and promotions success.
Place (or distribution).
Efficiency.
Cost reduction

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P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
1.6.4 The Shell Directional policy matrix

Leader - major resources are focused upon the

SBU.
Try harder - could be vulnerable over a longer
period of time, but fine for now.
Double or quit - gamble on potential major SBU's
for the future.
Growth - grow the market by focusing just
enough resources here.
Custodial - just like a cash cow, milk it and do not
commit any more resources.
Cash Generator - Even more like a cash cow, milk
here for expansion elsewhere.
Phased withdrawal - move cash to SBU's with
greater potential.
Divest/Disinvest - liquidate or move these assets
on a fast as you can.

1.6.5 The Ashridge portfolio display

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P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
The choice of each definite model depends on companys age, success, product and other specifications. Ashridge
Portfolio Display, which help identify fit between the business unit critical success factors and the parent's skills and
resources and fit between business unit parenting opportunities and the parent's skills and resources.
Heartland SBUs can benefit from the attention of the parent without risk of harm from unsuitable
developments. That is the parent can add value easily.
Ballast SBUs are well understood by the parent, but need little assistance. They would do as well
independent of a parent. They should bear as little central cost as possible.
Value trap SBUs are those which afford opportunities to add value but the strategic fit may not be perfect.
They should only be retained if they can be moved into the heartland, this will require the parent to acquire
new skills and resources.
Alien SBUs afford little opportunity to add value and should be divested as these SBUs require skills and
resources the parent do not posses.

1.6.6 Porters test for acquisitions

Better off tests. Will the company being acquired be better off after the acquisition? Will it gain competitive
advantage from being in the group? Will the group be better off after the acquisition?
Attractiveness tests. Is the target industry structurally attractive
Cost of entry tests. Will the future cash flows from the acquisition be greater than the amounts paid to
acquire it?

1.7 The Choice of Competitive strategy

1.7.1 Porters Generic Strategies
Cost Leadership: Striving to be the overall low-cost provider in industry.
Broad differentiation: Striving to build customer loyalty by differentiating ones product offerings from rivals
products.
Focus strategy based on low cost: Concentrating on a narrow buyer segment, out-competing rivals on basis
of lower cost.
Focus Strategy based on differentiation: Offering niche members a product or service customized to their
needs.
Option 1 low price/low added value.
1.7.2 Bowmans Strategy clock Option 2 Low price. Risk of price war & low margins/need
to be a cost leader
Option 3 Hybrid. Low cost base and reinvestment in low
price & differentiation
Option 4 Differentiation
o No Price premium: perceived buyer value, market
share advantage
o Price premium: perceived value added enough to
bear price premium
Option 5 Focused differentiation. Perceived value added
to a particular segment
Option 6 Increased price/standard value. Higher margins if
competitors do not follow. Risk of losing market share.
Option 7 Increased price/low values. Only feasible in a
monopoly
Option 8 Low value/standard price. Loss of market share.

Richmond Academy Page 8 of 13 December 2015

P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
1.8 Sustaining competitive advantage
1.8.1 Sustaining price based strategies
Low margins. Increase volumes or cross subsidization from another business unit
Constantly and aggressively driving down all costs
Extensive financial resources to win a price war
No frill strategy must be aimed at segment that particularly appreciates low price
1.8.2 Sustaining differentiation
Securing preferred access to customers of suppliers through bidding or licensing procedures to thwart
imitators
Cost advantage can be used to sustain differentiation by investing in innovation, brand management or
quality improvement.
Inherently immobile resources. These have intangibility such as brands, high customer switching costs as with
proprietary technology, co-specialization when organizations value chains are intimately linked.
1.8.3 Lock-In (Delta Model)
This is achieved in a market when a companys product becomes industry standard. Factors affecting lock-in are:
Perception of dominance
First mover advantage
Self-reinforcement. Once dominance is achieved, conforming with standard becomes necessary for survival
Fierce defence.
1.8.4 Strategy and hypercompetition
1.8.4.1 Repositioning on the strategy clock
A firm may be able to move from a no-frills strategy i.e. position 1 to higher quality with low price or position
2.
A differentiator may create a new market segment and move towards a more focused kind of differentiation
1.8.4.2 Counterattacking against market-based movers
First mover advantage. This can be overcome by leapfrogging into the lead with an improve product or a
flank attack on a new segment
Product/market moves can be imitated. This will prevent the competitor from gaining a competitive
advantage.
1.8.4.3 Attacking barriers to entry
Rapid technological advances
Dominance due to economies of scale can be overcome by utilizing similar economies of scale achieved from
dominance in another market. Cross subsidy can be used.
Dominance in distribution can be overcome by using other channels.
If a small player, try identify and supply niche markets

Richmond Academy Page 9 of 13 December 2015

P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
1.9 Product-market strategy
Market Penetration (Same Products, Same Markets):
This involves increasing sales of an existing product and
penetrating the market further by either promoting the
product heavily or reducing prices to increase sales.
Product Development (New Products, Same Markets):
The organization develops new products to aim within
their existing market, in the hope that they will gain
more custom and market share. For Example Sony
launching the Playstation 2 to replace their existing
model.
Market Development (Same Products, New Markets):
The organization here adopts a strategy of selling
existing products to new markets. This can be done
Consolidation: Where the either by a better understanding of segmentation, i.e
organization adopts a strategy who else can possibly purchase the product or selling
of withdrawing from particular the product to new markets overseas.
markets, scaling back on
operations and concentrating on
Diversification (New Products, New Markets): Moving away
its existing products in existing
from what you are selling (your core activities) to providing
markets.
something new eg Moving over from selling foods to selling cars.
Related (Concentric) Diversification
Unrelated (Conglomerate) Diversification
1.10 Methods of Growth
Method Advantages Disadvantages
Organic Also called Useful if ample time exists Time. Learning curve may cause
internal development. May be an option if the long time spans
Here growth is achieved incumbent firms are slow in There may be barriers to entry
through the development responding Resources will have to be acquired
of internal resources It involves lower costs than independently
acquiring existing firm May be too slow for the dynamics
Firm already has most of of the market
needed skills
An option if additional
capacity will not adversely
impact supply-demand
balance in industry
An option if the new start-
up does not have to go
head-to-head against
powerful rivals

Acquisitions and mergers Quicker entry into target market Costs

Hurdling certain entry barriers Customers may respond
Technological inexperience negatively to the takeover and

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P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
Gaining access to reliable take their business elsewhere
suppliers Incompatibility. From products,
Being of a size to match customers, suppliers and markets
rivals in terms of efficiency to information systems
& costs Driven by personal goals
Poor success records of
acquisitions
Non financial factors. HR issues
motivation, performance
assessment and culture
Joint Ventures Uneconomical or risky to go it alone Which partner will do what
Firm joint forces for Pooling competencies of two Who has effective control
manufacturing, financial partners provides more competitive Potential conflicts
and marketing purposes strength Sourcing of components
Foreign partners needed to Exporting
surmount : Whether operations should
Import quotas conform to foreign firms
Tariffs standards or to local preferences
Nationalistic political Control over cash flows & profits
interests
Cultural roadblocks
Franchising Franchiser Search for competent candidates is costly
Name and any goodwill associated and time-consuming
with it Control over franchisees
Systems and business methods
Support services, such as
advertising, training and help with
site decoration
Franchisee
Capital, personal involvement and
local marketing knowledge
Payment to the franchiser for rights
and for support services
Responsibility for the day-to-day
running, and ultimately profitability
of the franchise

1.10.1 Alliances
Share development costs
Bypass regulatory bans
Complementary markets or technology may exists
Facilitate learning
Development risk on new technology can be spread
Innovation can be generated

Richmond Academy Page 11 of 13 December 2015

P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
1.10.1.1 Limitations
Each organization must be able to focus on it core competence. Alliances do not enable them to create new
ones
Strategic priorities. If a key aspect of strategic delivery is handed over to a partner, the firm loses flexibility.

1.11 Strategy and market position

1.11.1 Strategies for market leaders
Expand the total market by finding
o new users of the product
o new uses of the product
o more usage on each use occasion
Protect your existing market share by:
o developing new product ideas
o improve customer service
o improve distribution effectiveness
o reduce costs
Expand your market share:
o by targeting one or more competitor
o without being noticed by government regulators

1.11.2 Strategies for market challengers

price discounts or price cutting
line extensions
introduce new products
reduce product quality
increase product quality
improve service
change distribution
cost reductions
intensify promotional activity

1.11.3 Strategies for market followers

Me too strategy
Control costs and exploit appropriate opportunities
Compete in the most appropriate segments
Maintain customer base and ensure profits grow in line with industry expectations
Follow closely and benefit form the waves and demand created by the leader. This is risky.
Follow at a distant. Less risky. However will not benefit from the buzz created by leader. Able to then offer
some differentiation.

1.11.4 Strategies for the market nicher

Chosen segment must have growth potential
Must be able to serve the customer sufficiently well
Must be able to build up sufficient size to be profitable and purchase efficiently

Richmond Academy Page 12 of 13 December 2015

P3 BUSINESS ANALYSIS
LECTURER: Stanford Allen
Class Notes 4
1.12 Success criteria
1.12.1 Suitability
Suitability relates to the strategic logic of the strategy. The strategy should fit the organisation's current strategic
position and should satisfy a range of requirements:
Exploit strengths: that is, unique resources and core competences
Rectify company weaknesses
Neutralize or deflect environmental threats
Help the firm to seize opportunities
Satisfy the goals of organization
Fill the gap identified by gap analysis
Generate/maintain competitive advantage
Involve an acceptable level of risk
Suit the politics and corporate culture
A number of techniques can be used to assess suitability.
Life cycle analysis: Product/industry lifecycle in terms of industry maturity & competitive position.
Business profile analysis. The expected effects of the strategy are forecasted and then compared to current
profile
Strategy screening. These include ranking, decision trees and scenario planning.

1.12.2 Feasibility
Feasibility asks whether the strategy can be implemented and, in particular, if the organization has adequate
resources:
Enough money
The ability to deliver the goods/services specified in the strategy
The ability to deal with the likely responses that competitors will make
Access to technology, materials and resources
Enough time to implement the strategy

1.12.3 Acceptability
The acceptability of a strategy depends on the views of stakeholders. It is therefore measured in
terms of risk, returns and stakeholders expectations.
(a) Financial considerations. Strategies will be evaluated by considering how far they contribute to meeting the
dominant objective of increasing shareholder wealth.
Return on investment Cash flow
Profits Price/Earnings
Growth Market capitalisation
EPS Cost-benefit analysis
Profitability analysis techniques include forecast ROCE, payback period and NPV, all of which you should be familiar
with. These methods should not be overemphasized.
(b) Customers may object to a strategy if it means reducing service, but on the other hand they may have no
choice.
(c) Banks are interested in the implications for cash resources, debt levels and so on.
(d) Government. A strategy involving a takeover may be prohibited under competition legislation.
(e) The public. The environmental impact may cause key stakeholders to protest. For example, out of town
superstores are now frowned upon by national and local government in the UK.
(f) Risk. Different shareholders have different attitudes to risk. A strategy which changed the risk/return profile,
for whatever reason, may not be acceptable.

Richmond Academy Page 13 of 13 December 2015