Corporate Strategy for Diversification Diversification strategies raise a wide range of strategic management issues. For this assignment, select a KSA company whose strategy includes or included diversification and explore its motives, competitive advantage, and strategic planning based on the topics from Chapter 12 and the assigned reading. 1. Identify and provide company strategic details and consider what circumstances existed that motivated this company to diversify. 2. What mode of diversification did the company adopt? How does this relate to their resources and capabilities? 3. What are the benefits of diversification in this industry and how significant are they in the shape and growth of the industry? 4. Discuss the implications of the strategy chosen for the: Organizational structure, Management systems, and Allocation of decision making within the diversified firm. Support your submission with course material concepts, principles, and theories from the textbook along with at least two scholarly, peer-reviewed journal articles. A mark of zero will be given for any submission that includes copying from other resource without referencing it. Write at least 6 pages in length, excluding the title page, abstract and required reference page, which are never a part of the minimum content requirements.environment of the firm is common to most approaches
to strategy analysis. The best-known and most widely
used of these is the “SWOT” framework, which classifies
the various influences on a firm’s strategy into four categories:
Strengths, Weaknesses, Opportunities, and
Threats. The first two—strengths and weaknesses—
relate to the internal environment of the firm, primarily its
resources and capabilities; the last two—opportunities
and threats—relate to the external environment.
Which is better, a two-way distinction between
internal and external influences or the four-way SWOT
taxonomy? The key issue is whether it is sensible and
worthwhile to classify internal factors into strengths
and weaknesses and external factors into opportunities
and threats. In practice, these distinctions are
problematic.
Was Zlatan Ibrahimovic a strength or a weakness for
Manchester United? As the team’s top scorer during the
2016–17 season and ranking among the world’s top-10
players, he was a strength. But as a player whose best
days were behind him and whose dominant presence
intimidated his younger team-mates, he was a weakness.
Is global warming a threat or an opportunity for the
world’s automobile producers? By encouraging higher
taxes on motor fuels and restrictions on car use, it is a threat.
By encouraging consumers to switch to fuel-efficient and
electric cars, it offers an opportunity for new sales.
The lesson here is that classifying external factors
into opportunities and threats, and internal factors into
strengths and weaknesses, is arbitrary. What is important
is to carefully identify the external and internal forces that
impact the firm, and then analyze their implications.
In this book, I will follow a simple two-way classification
of internal and external factors and avoid any premature
categorization into strengths or weaknesses, and opportunities
or threats.
Note: For more on SWOT see: T. Hill and R. Westbrook, “SWOT
Analysis: It’s Time for a Product Recall,” Long Range Planning, 30
(February 1997): 46–52; and M. Venzin, “SWOT Analysis: Such
a Waste of Time?” (February 2015) http://ideas.sdabocconi.it/
strategy/archives/3405.
CHAPTER 1 The Concept of Strate gy 11
states that “Strategy is the creation of a unique and differentiated position involving a
different set of activities.”3 The key is how these activities fit together to form a consistent,
mutually reinforcing system. Ryanair’s strategic position is as Europe’s lowest-
cost
airline providing no-frills flights to budget-conscious travelers. This is achieved by a
set of activities that fit together to support that positioning (Figure 1.3).
The concept of strategic fit is one component of a set of ideas known as
contingency theory. Contingency theory postulates that there is no single best
way of organizing or managing. The best way to design, manage, and lead an organization
depends upon circumstances—in particular, the characteristics of that organization’s
environment.4
A Brief History of Business Strategy
Origins and Military Antecedents
Enterprises need business strategies for much the same reason that armies need military
strategies—to give direction and purpose, to deploy resources in the most effective
manner, and to coordinate the decisions made by different individuals. Many
of the concepts and theories of business strategy have their antecedents in military
strategy. The term strategy derives from the Greek word strategia, meaning “generalship.”
However, the concept of strategy predates the Greeks: Sun Tzu’s classic, The Art
of War, from about 500 BC is regarded as the first treatise on strategy.5
Military strategy and business strategy share a number of common concepts and
principles, the most basic being the distinction between strategy and tactics. Strategy
is the overall plan for deploying resources to establish a favorable position; a tactic
is a scheme for a specific action. Whereas tactics are concerned with the maneuvers
necessary to win battles, strategy is concerned with winning the war. Strategic
decisions, whether in military or business spheres, share three common characteristics:
●● They are important.
●● They involve a significant commitment of resources.
●● They are not easily reversible.
Low operating costs
Secondary
airports
Point-to-point routes
25-min
turnaround
High aircraft
utilization
No-frills product
offering
High labor
productivity
Low prices;
separate charging
for additional
services
Single class; no
reserved seating
No baggage
transfer
Internet-only
check-in
Job
fle xibility
Direct
sales
only
Boeing
737s only
FIGURE 1.3 Ryanair’s activity system
12 PART I INTRODUCTION
Many of the principles of military strategy have been applied to business situations.
These include the relative strengths of offensive and defensive strategies; the merits of
outflanking over frontal assault; the roles of graduated responses to aggressive initiatives;
the benefits of surprise; and the benefits of deception, envelopment, escalation,
and attrition.6 At the same time, there are major differences between business competition
and military conflict. The objective of war is (usually) to defeat the enemy. The
purpose of business rivalry is seldom so aggressive: most business enterprises seek to
coexist with their rivals rather than to destroy them.
Despite parallels between military and business strategy, we lack a general theory
of strategy. The publication of Von Neumann and Morgenstern’s Theory of Games in
1944 gave rise to the hope that a general theory of competitive behavior would emerge.
Since then, game theory has revolutionized the study of competitive interaction, not
just in business but in politics, military studies, and international relations as well.
Yet, as we shall see in Chapter 4, game theory has achieved only limited success as a
broadly applicable general theory of strategy.7
From Corporate Planning to Strategic Management
The evolution of business strategy has been driven more by the practical needs of
business than by the development of theory. During the 1950s and 1960s, senior executives
experienced increasing difficulty in coordinating decisions and maintaining control
in companies that were growing in size and complexity. While new techniques of
discounted cash flow analysis allowed more rational choices over individual investment
projects, firms lacked systematic approaches to their long-term development. Corporate
planning (also known as long-term planning) was developed during the late-
1950s to serve this purpose. Macroeconomic forecasts provided the foundation for
the new corporate planning. The typical format was a five-year corporate planning
document that set goals and objectives, forecasted key economic trends (including
market demand, the company’s market share, revenue, costs, and margins), established
priorities for different products and business areas of the firm, and allocated capital
expenditures. The new techniques of corporate planning proved particularly useful for
guiding the diversification strategies that many large companies pursued during the
1960s.8 By the mid-1960s, most large US and European companies had set up corporate
planning departments. Strategy Capsule 1.4 provides an example of this formalized
corporate planning.
By the early 1980s, confidence in corporate planning had been severely shaken. Not
only did diversification fail to deliver the anticipated synergies, but the oil shocks of
1974 and 1979 ushered in a new era of macroeconomic instability, while Western companies
came under increasing pressure from Japanese, Korean, and Southeast Asian
competitors. Companies could no longer plan their investments and actions five years
ahead—they couldn’t forecast that far.
The result was a shift in emphasis from planning a company’s growth path to
positioning the company so that it could best exploit available opportunities for
profit. This transition from corporate planning to what became called strategic
management involved a focus on competition as the central characteristic of the
business environment and on performance maximization as the primary goal of
strategy.
This emphasis on strategy as a quest for performance directed attention to the
sources of profitability. At the end of the 1970s, Michael Porter pioneered the application
of industrial organization economics to analyzing the profit potential of different
CHAPTER 1 The Concept of Strate gy 13
industries and markets.9 Other studies examined how strategic variables—notably
market share—determined how profits were distributed between the firms within an
industry.10
During the 1990s, the focus of strategy analysis shifted from the sources of profit in
the external environment to the sources of profit within the firm. The resource-
based
view of the firm identified the resources and capabilities of the firm as its main
source of competitive advantage and the primary basis for formulating strategy.11 This
emphasis on internal resources and capabilities has encouraged firms to identify how
they are different from their competitors and to design strategies that exploit these
differences.
During the 21st century, new challenges have continued to shape the principles
and practice of strategy. Digital technologies have had a massive impact on
the competitive dynamics of many industries, creating winner-take-all markets
and standards wars.12 Disruptive technologies13 and accelerating rates of change
have meant that strategy has become less and less about plans and more about
creating options of the future,14 fostering strategic innovation,15 and seeking the
“blue oceans” of uncontested market space.16 The complexity of these challenges
has meant that being self-sufficient is no longer viable for most firms—alliances and
other forms of collaboration are an increasingly common feature of firms’ strategies.
The 2008–2009 financial crisis triggered closer scrutiny of purpose of business. Disillusion
with the excesses and unfairness of market capitalism has renewed interest in
corporate social responsibility, ethics, sustainability, and the legitimacy of profit as the
dominant goal of business.17
Figure 1.4 summarizes the main developments in strategic management since the
mid-20th century.
STRATEGY CAPSULE 1.4
Corporate Planning in a Large US Steel Company, 1965
The first step in developing long-range plans was to
forecast the product demand for future years. After calculating
the tonnage needed in each sales district to provide
the “target” fraction of the total forecast demand, the
optimal production level for each area was determined.
A computer program that incorporated the projected
demand, existing production capacity, freight costs, etc.
was used for this purpose.
When the optimum production rate in each area was
found, the additional facilities needed to produce the
desired tonnage were specified. Then, the capital costs
for the necessary equipment, buildings, and layout were
estimated by the chief engineer of the corporation and
various district engineers. Alternative plans for achieving
company goals were also developed for some areas,
and investment proposals were formulated after considering
the amount of available capital and the company
debt policy. The vice president who was responsible for
long-range planning recommended certain plans to the
president, and, after the top executives and the board
of directors reviewed alternative plans, they made the
necessary decisions about future activities.
Source: H. W. Henry, Long Range Planning Processes in 45
Industrial Companies (Englewood Cliffs, NJ: Prentice-Hall,
1967): 65.
14 PART I INTRODUCTION
1950 1960
• Operational budgeting
• DCF capital budgeting
Financial Budgeting:
1970
Corporate Planning:
• Corporate plans based on medium-term
economic forecasts
1980
Emergence of Strategic Management:
• Industry analysis and competitive positioning
1990
The Quest for Competitive Advantage:
• Emphasis on resources and capabilities
• Shareholder value maximization
2000 2018
• Refocusing, outsourcing, delayering, cost
cutting
Adapting to Turbulence:
• Adapting to and exploiting digital technology
• The quest for flexibility and strategic innovation
• Strategic alliances
• Social and environmental responsibility
FIGURE 1.4 Evolution of strategic management
Strategy Today
What Is Strategy?
In its broadest sense, strategy is the means by which individuals or organizations
achieve their objectives. Table 1.1 presents a number of definitions of the term
strategy. Common to most definitions is the notion that strategy involves setting goals,
allocating resources, and establishing consistency and coherence among decisions
and actions.
Yet, as we have seen, the conception of firm strategy has changed greatly over
the past half-century. As the business environment has become more unstable and
unpredictable, so strategy has become less concerned with detailed plans and more
about guidelines for success. This is consistent with the introductory examples to
this chapter. Neither Queen Elizabeth nor Lady Gaga appears to have articulated any
explicit strategic plan, but the consistency we discern in their actions suggests both
possessed clear ideas of what they wanted to achieve and how they would achieve
it. This shift in emphasis from strategy as plan to strategy as direction does not imply
any downgrading of the role of strategy. The more turbulent the environment, the
more strategy must embrace flexibility and responsiveness. But it is precisely under
these conditions that strategy becomes more, rather than less, important. When the
firm is buffeted by unforeseen threats and where new opportunities are constantly
appearing, then strategy becomes the compass that can navigate the firm through
stormy seas.
CHAPTER 1 The Concept of Strate gy 15
Why Do Firms Need Strategy?
This transition from strategy as plan to strategy as direction raises the question of
why firms (or other types of organization) need strategy. Strategy assists the effective
management of organizations, first, by enhancing the quality of decision-making, second,
by facilitating coordination, and, third, by focusing organizations on the pursuit
of long-term goals.
Strategy as Decision Support Strategy is a pattern or theme that gives coherence
to the decisions of an individual or organization. But why can’t individuals
or organizations make optimal decisions in the absence of such a unifying theme?
Consider the 1997 “man versus machine” chess epic in which Garry Kasparov was
defeated by IBM’s “Deep Blue” computer. Deep Blue did not need strategy. Its phenomenal
memory and computing power allowed it to identify its optimal moves
based on a huge decision tree.18 Kasparov—although the world’s greatest chess
player—was subject to bounded rationality: his decision analysis was subject to the
cognitive limitations that constrain all human beings.19 For him, a strategy offered
guidance that assisted positioning and helped create opportunities. Strategy improves
decision-
making in several ways:
●● It simplifies decision-making by constraining the range of decision alternatives
considered and acting as a heuristic—a rule of thumb that reduces the search
required to find an acceptable solution to a decision problem.
●● The strategy-making process permits the knowledge of different individuals to
be pooled and integrated.
●● It facilitates the use of analytic tools—the frameworks and techniques that we
will encounter in the ensuing chapters of this book.
Strategy as a Coordinating Device The central challenge of management is
coordinating the actions of multiple organizational members. Strategy acts as a communication
device to promote coordination. Statements of strategy are a means by
TABLE 1.1 Some definitions of strategy
●● Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect.
—Wordsmyth Dictionary (www.wordsmyth.net)
●● The determination of the long-run goals and objectives of an enterprise, and the adoption of
courses of action and the allocation of resources necessary for carrying out these goals.
—Alfred Chandler, Strategy and Structure
(Cambridge, MA: MIT Press, 1962)
●● Strategy: “a cohesive response to an important challenge.”
—Richard Rumelt, Good Strategy/Bad Strategy
(New York: Crown Business, 2011): 6.
●● Lost Boy: “Injuns! Let’s go get ’em!”
John Darling: “Hold on a minute. First we must have a strategy.”
Lost Boy: “Uhh? What’s a strategy?”
John Darling: “It’s, er … it’s a plan of attack.”
—Walt Disney’s Peter Pan
16 PART I INTRODUCTION
which the CEO can communicate the identity, goals, and positioning of the company
to all organizational members. The strategic planning process provides a forum in
which views are exchanged and consensus developed; once formulated, strategy can
be translated into goals, commitments, and performance targets that ensure that the
organization moves forward in a consistent direction.
Strategy as Target Strategy is forward looking. It is concerned not only with how
the firm will compete now, but also with what the firm will become in the future.
A forward-looking strategy establishes direction for the firm’s development and sets
aspirations that can motivate and inspire members of the organization. Gary Hamel
and C. K. Prahalad use the term strategic intent to describe this desired strategic
position: “strategic intent creates an extreme misfit between resources and ambitions.
Top management then challenges the organization to close the gap by building new
competitive advantages.”20 The implication is that strategy should embrace stretch and
resource leverage and not be overly constrained by considerations of strategic fit.21
Jim Collins and Jerry Porras make a similar point: US companies that have been sector
leaders for 50 years or more have all generated commitment and drive through setting
“Big, Hairy, Ambitious Goals.”22 Striving, inspirational goals are found in most organizations’
statements of vision and mission. One of the best known is that set by President
Kennedy for NASA’s space program: “before this decade is out, to land a man on the
moon and return him safely to earth.” However, goals on their own do not constitute
a strategy. Unless an organization’s goals are backed by guidelines for their attainment,
they are likely to be either meaningless or delusional.23
Where Do We Find Strategy?
Strategy has its origins in the thought processes of organizational leaders. For the entrepreneur,
the starting point of strategy is the idea for a new business. Until the new
business needs to raise finance, there is little need for any explicit statement of strategy.
At that point, the entrepreneur articulates the strategy in a business plan. In large
companies, strategy formulation is an explicit management process and statements of
strategy are found in board minutes and strategic planning documents, which are invariably
confidential. However, most companies—public companies in particular—see
value in communicating their strategy to employees, customers, investors, and business
partners. Collis and Rukstad identify four types of statement through which companies
communicate their strategies:
●● The mission statement describes organizational purpose; it addresses “Why
we exist.”
●● A statement of principles or values outlines “What we believe in and how we
will behave.”
●● The vision statement projects “What we want to be.”
●● The strategy statement articulates the company’s competitive game plan, which
typically describes objectives, business scope, and advantage.24
These statements can be found on the corporate pages of companies’ websites. More
detailed statements of strategy—including qualitative and quantitative medium-
term
targets—
are often found in top management presentations to analysts, which are
typically
included in the “for investors” pages of company websites. Strategy Capsule
1.5 shows statements of strategy by McDonalds and Twitter.
CHAPTER 1 The Concept of Strate gy 17
STRATEGY CAPSULE 1.5
Statements of Company Strategy: McDonald’s and Twitter
McDONALD’S CORPORATION
Our goal is to become customers’ favorite place and
way to eat and drink by serving core favorites such
as our World Famous Fries, Big Mac, Quarter Pounder
and Chicken McNuggets.
The strength of the alignment among the
Company, its franchisees and suppliers (collectively
referred to as the “System”) has been key to McDonald’s
success. By leveraging our System, we are able to identify,
implement and scale ideas that meet customers’
changing needs and preferences.
McDonald’s customer-focused Plan to Win (“Plan”)
provides a common framework that aligns our global
business and allows for local adaptation. We continue
to focus on our three global growth priorities
of optimizing our menu, modernizing the customer
experience, and broadening accessibility to Brand
McDonald’s within the framework of our Plan. Our
initiatives support these priorities, and are executed
with a focus on the Plan’s five pillars—People, Products,
Place, Price and Promotion—to enhance our
customers’
experience and build shareholder value
over the long term. We believe these priorities align
with our customers’ evolving needs, and—combined
with our competitive advantages of convenience,
menu variety, geographic diversification and System
alignment—will drive long-term sustainable growth.
Source: www.mcdonalds.com.
TWITTER, INC.
We have aligned our growth strategy around the
three primary constituents of our platform:
Users. We believe that there is a significant opportunity
to expand our user base…
◆◆ Geographic Expansion. We plan to develop a
broad set of partnerships globally to increase relevant
local content … and make Twitter more accessible
in new and emerging markets.
◆◆ Mobile Applications. We plan to continue to
develop and improve our mobile applications…
◆◆ Product Development. We plan to continue to
build and acquire new technologies to develop
and improve our products and services…
Platform Partners. We believe growth in our
platform partners is complementary to our user
growth strategy…
◆◆ Expand the Twitter Platform to Integrate More
Content. We plan to continue to build and acquire
new technologies to enable our platform partners
to distribute content of all forms.
◆◆ Partner with Traditional Media … to drive more
content distribution on our platform…
Advertisers… [I]ncrease the value of our platform
for our advertisers by enhancing our advertising
services and making our platform more accessible.
◆◆ Targeting. We plan to continue to improve the targeting
capabilities of our advertising services.
◆◆ Opening our Platform to Additional Advertisers.
We believe that advertisers outside of the United
States represent a substantial opportunity…
◆◆ New Advertising Formats.
Source: Twitter, Inc. Amendment no. 4 to Form S-1, Registration
Statement, SEC, November 4, 2013.
18 PART I INTRODUCTION
All these are intentions and, as we shall see, strategic intent is not necessarily realized.
Ultimately, strategy is realized as action. Hence, strategy is observable in where
and how a firm chooses to compete. For example, information on a firm’s business
scope (products and its markets) and how it competes within these markets can be
found in a company’s annual reports. For US corporations, the description of the
business that forms Item 1 of the 10-K annual report to the Securities and Exchange
Commission (SEC) is particularly informative about strategy.
Checking a company’s pronouncements about strategy against its decisions and
actions may reveal a gap between rhetoric and reality. As a reality check upon grandiose
and platitudinous sentiments of vision and mission, it is useful to ask:
●● Where is the company investing its money? Notes to financial statements
provide detailed breakdowns of capital expenditure by region and by
business segment.
●● What technologies is the company developing? Identifying the patents that a
company has filed (using the online databases of the US and EU patent offices)
indicates the technological trajectory a firm is pursuing.
●● What new products have been released, major investment projects initiated, and
top management hired? These strategic decisions are typically announced in
press releases and reported in trade journals.
To identify a firm’s strategy it is necessary to draw upon multiple sources of
information in order to build an overall picture of what the company says it is doing
matches what it is actually doing. We will return to this topic when we discuss competitive
intelligence in Chapter 4.
Corporate and Business Strategy
Strategic choices can be distilled into two basic questions:
●● Where to compete?
●● How to compete?
The answers to these questions define the two major areas of a firm’s strategy: corporate
strategy and business strategy.
Corporate strategy defines the scope of the firm in terms of the industries and markets
in which it competes. Corporate strategy decisions include choices over diversification,
vertical integration, acquisitions, and new ventures, and the allocation of
resources between the different businesses of the firm.
Business strategy is concerned with how the firm competes within a particular
industry or market. If the firm is to prosper within an industry, it must establish a
competitive advantage over its rivals. Hence, this area of strategy is also referred to as
competitive strategy.
The distinction between corporate strategy and business strategy corresponds to the
organizational structure of most large companies. Corporate strategy is the responsibility
of corporate top management. Business strategy is primarily the responsibility of
the senior managers of divisions and subsidiaries.
This distinction between corporate and business strategy also corresponds to the primary
sources of