MODULE 3 - DEVELOPING BUSINESS-LEVEL

STRATEGY OPTIONS
PURPOSE AND THE SWOT ANALYSIS – THE CONTRIBUTION OF ANDREWS
SWOT is an analysis of the strengths and weaknesses present internally in the organisation,
coupled with the opportunities and threats that the organisation faces externally.
ENVIRONMENT-BASED OPTIONS: GENERIC STRATEGIES – THE CONTRIBUTION
OF PORTER
Generic strategies are the three basic strategies of cost leadership, differentiation and focus
(sometimes called niche) open to any business.
Porter argued that there were three basic, i.E. Generic, strategies open to any business:
• Cost leadership
• Differentiation
• Focus.
LOW- COST LEADERSHIP
DIFFERENTIATION
FOCUS STRATEGY (SOMETIMES CALLED NICHE STRATEGY)
A focus strategy occurs when the organisation focuses on a specific niche in the market place
and develops its competitive advantage by offering products especially developed for that
niche

ENVIRONMENT-BASED STRATEGIC OPTIONS: THE MARKET OPTIONS MATRIX

• the market options matrix identifies the product and market options available to the
organisation, including the possibility of withdrawal and movement into unrelated
markets. the market options matrix examines the options available to the organisation
from a broader strategic perspective than the simple market/product matrix (called in
some texts the ansoff matrix).
 WITHDRAWAL
• Product life cycle in decline phase with little possibility of retrenchment.
• Over-extension of product range which can only be resolved by withdrawing some products.
• Holding company sales of subsidiaries.
• Raise funds for investment elsewhere.
DEMERGER Is a strategy where a company splits into separate businesses to unlock higher
value.
PRIVATISATION - In many countries around the world, there has been a trend to privatise
government-owned companies – that is, to sell the company’s shares into private ownership
MARKET PENETRATION IN THE EXISTING MARKET
MARKET DEVELOPMENT USING EXISTING PRODUCTS - DABUR CHYAWANPRASH
 DIVERSIFICATION: RELATED MARKETS

• FORWARD INTEGRATION Is when a company moves closer to customers, like

reliance industries entering retail through reliance retail.
• BACKWARD INTEGRATION Is when a company moves towards suppliers, such as
tata steel owning raw material sources like iron ore mines.
• HORIZONTAL INTEGRATION Is when a company expands into similar or related
businesses, like Aditya Birla group expanding into multiple related sectors like cement
and textiles.
DIVERSIFICATION: UNRELATED MARKETS
When an organisation moves into unrelated markets, it runs the risk of operating in areas where its
detailed knowledge of the key factors for success is limited
• ENVIRONMENT-BASED STRATEGIC OPTIONS: THE EXPANSION METHOD
MATRIX
The expansion method matrix explores in a structured way the methods by which the
market opportunities associated with strategy options might be achieved.
• Mergers- Mergers are similar to acquisitions in the sense of two
companies combining.

• A joint venture is the formation of a company whose shares are owned

jointly by two parent companies. It usually shares some of the assets and
skills of both parents.
• Franchise a franchise is a form of licensing agreement in which the
contractor provides the licensee with a preformed package of activity.
 INTERNATIONAL OPTIONS
• Turnkey - a contractor who has total responsibility for building and possibly
commissioning large scale plant.
• Licensing
• Exporting as a possible first expansion step.
• An overseas office may then be set up to provide a permanent presence.
• Overseas manufacture can take place, but this clearly increases the risk and exposure
to international risks such as currency.
• Multinational operations may be set up to provide major international activity.
• Global operations may be introduced.
 RESOURCE-BASED STRATEGIC OPTIONS: THE
RESOURCE-BASED VIEW

Finding resource-based options: architecture, reputation and innovation

• The network of relationships and contracts both within and around the
organization: the architecture .
• Reputation
• The organization's capacity to develop new products or services:
innovation
• Core competencies
RESOURCE-BASED STRATEGIC OPTIONS: COST
REDUCTION

The main routes to cost reduction are:

• Designing in cost reduction.
• Supplier relationships.
• Economies of scale and scope - economies of scale are the extra cost savings
that occur when higher volume production allows unit costs to be reduced.
• The experience curve.
• Capacity utilisation.
 USING THE EXPERIENCE CURVE EFFECT
• The experience curve is the relationship between the unit costs of a product and the
total units ever produced of that product, plotted in graphical form, with the units being
cumulative from the first day of production
CAPACITY UTILIZATION

Capacity utilization is the level of plant in operation at any time, usually expressed
as a percent age of total production capacity of that plant.
Developing corporate-level strategy options
• Corporate-level strategy means the strategic decisions that lead companies to diversify
from one business into other business areas, either related or unrelated.
The benefits of corporate-level strategy diversification

Financial economies are cost savings that arise from two sources:
1. Lower cost of capital (due to larger size)
• Imagine a big company like Tata group. Because of its strong reputation and size, it can
borrow funds from banks at a lower interest rate (say 7%).
2. Better allocation of financial resources
Consider reliance industries, which operates in telecom (Jio), retail, and energy.
• If the telecom business (Jio) is growing fast, the headquarters may allocate more funds
there.
• If the oil business is slow at a certain time, it may receive less investment temporarily.
Corporate-level strategy: the benefits and costs of diversifying
The corporate activity of such a headquarters will include:
• the selection of businesses to be part of the group;
• the management and leadership of each business within the group;
• the selection, incentivisation and motivation of senior managers in each business;
• the resources to be allocated by the centre to individual businesses.
The costs of a corporate-level strategy diversification
Three principal cost areas associated with the higher risks of diversification:
• the size and cost of the headquarters staff
• the complexity and management of the diversified firm
• the lack of a competitive resource-based focus.
Corporate options: degrees of diversification
Three main levels of diversification:
• Close-related diversification
• Distant-related diversification
• Unrelated diversification.
Corporate strategy and the role of the centre – the
principle of parenting

The corporate headquarters’ role might include the following possible areas:
• corporate functions and services such as international treasury management and central
human resource management;
• corporate development initiatives, such as centralised R&D and new acquisitions;
• additional finance for growth or problem areas;
• development of formal linkages between businesses such as the transfer of technology
or core competencies between subsidiaries;
• detailed comments on and evaluation of the strategies developed by the subsidiary
companies.
Corporate head quarters characteristics

• Key factors for success

• Contribute something extra
• If the diversified group is highly related , then HQ has a strong strategy linking role;
if the group is highly diversified , then HQ has a role closer to a banker who leaves
the strategy to the subsidiaries, raises the finance for the group and assesses the
performance of subsidiaries.
Determinants of the size and role of corporate headquarters

• The overall size of the group .

• The governance system of the group.
• The corporate strategy of the group .
What are the main activities undertaken by the corporate headquarters?
Corporate strategy: decisions about the company’s diversified
portfolio of products

• Diversified companies have a range of products serving many customers in

different markets: such companies have a diversified portfolio of products.
• The portfolio matrix analyses the range of products possessed by an organization
(its portfolio) against two criteria: relative market share and market growth.

BCG growth–share matrix

[Link] market share – for each product, the ratio of the share of the
organization's product divided by the share of the market leader;
[Link] growth rate – for each product, the market growth rate of the product
category.
Difficulties with the BCG growth–share matrix
• The definition of market growth .
• The definition of the market .
• The definition of relative market share .
Difficulties with all forms of product portfolio
matrices
• Dubious recommendations
• Innovation
• Divesting unwanted product areas
• The perceived desirability of growth and industry attractiveness
• The assumption that competitors will allow the organization freedom to make its
changes .
The tools of corporate-level options: from acquisitions
to restructuring
• In any multidivisional company, HQ transaction decisions involve the headquarters in
making the final decision with regard to acquisitions and other major restructuring.
• Based on the principle of the level of ownership by the group, the transactions
continuum represents the range of options that are available for ownership and control
by the group: they begin at one end with an acquisition with 100 per cent ownership and
end with divestment at the opposite end with zero per cent ownership.