FAQ’s: Corporate & Business Strategy

Course: Strategic Management, Jan-Apr 2011

Comparison: SWOT analysis with portfolio analysis.

• They are both attempts to summarize the key strategic factors coming out of an in-depth analysis of the external and internal environment . They are also provide easy to remember buzz-words for use in the situational analysis.

• S.W.O.T. is not really a technique to aid in situation analysis. It merely is a ‘memory-aid’ to help a person remember to search for strategic variables.

• Portfolio analysis is a term for a whole series of different techniques for analyzing internal and external environmental factors.

• Neither is really a substitute for the other and can actually complement each other.

What is the value of the TOWS Matrix in strategy formulation?

• The TOWS Matrix is a logical extension of SWOT Analysis and helps keep strategic managers flexible in terms of possible options. – The real value of this technique is not to suggest a particular strategy

the firm should follow, but to act as a brainstorming tool/check-list to help create

– a series of alternative strategies management might not otherwise consider.

• It forces strategic managers to develop both growth and retrenchment strategies, even though they might not believe that both sets of strategies are applicable to their corporation's situation.

What are the tradeoffs between an internal and an external growth strategy?

Internal GrowthPros

• More likely to be based on some proprietary development giving competitive advantage.

• More likely to fit well with current business units/products.

• Can finance slowly out of returned earnings.

• If plan no good, can always cut losses before in too deep.

Cons• May take a long time to

develop a product/ concept.• May be hard to get current

managers to try something new.

• May ignore other uses of money with quicker return.

• Favored program may take time away from current businesses.

What are the tradeoffs between an internal and an external growth strategy? …ctd

External Growth

Pros• Can grow quickly.• Good way to use financial

leverage to boost EPS.• Don't have to build anything

from scratch.• Can generate a lot of

excitement in Share Markets and boost stock price.

Cons• All or nothing gamble.• Need a lot of money and/or

financial muscle to do it right.

• Can purchase someone else's problems.

• 50% of all acquisitions fail to achieve the purchaser's objective.

How does horizontal growth differ from vertical growth & concentric diversification?

• Horizontal growth is the expanding of a firm's activities into other geographic regions and/or by increasing the range of products and services offered to current markets.– It often involves the acquisition of another firm in the same industry– could also be through the expansion of a firm's products in its current

markets (e.g. line-extensions) – expansion into another geographic region

• Vertical growth involves a firm's taking over a function previously performed by a supplier or a distributor. – involve the addition of activities in other industries either forward

(downstream) or backward (upstream) on the industry value chain in terms of support of the current product lines

How does horizontal growth differ from vertical growth & concentric diversification? …ctd

• Concentric (or Related) diversification is the addition of products or divisions which are related to the corporation's main business, but are added because of the intrinsic attractiveness of those industries rather than because they support the activities of the current product lines. – may be through acquisition or through internal development: – the firm buys or develops another division which is similar to its

present product-line e.g. PepsiCo's snack-foods to complement beverages.

(If PepsiCo bought RC Cola, it would be an example of horizontal integration.)

– the products are not alike, but have a "common thread" relating them.

• The basic difference between these two approaches to corporate strategy lies in the questions they attempt to answer. – Portfolio Analysis (is concerned with cash flow for best

returns): • How much of our time and money should spend on our best

products and business units in order to ensure that they continue to be successful?• How much of our time and money should we spend developing

new costly products, most of which will never be successful?• Views product-lines/businesses as investments from which to

maximize returns by constantly refreshing the ‘portfolio’.

How is corporate parenting different from portfolio analysis?

– Corporate Parenting (focuses on use of resources and capabilities for maximizing returns):• What businesses should this company own and why?• What organizational structure, management processes, and

philosophy will foster superior performance from the company's business units?• Views the central job of corporate headquarters as not that of an

internal banker, but coordinator of diverse units to achieve synergy.

– Corporate parenting is similar to portfolio analysis in that it attempts to manage a set of diverse product lines/business units to achieve better overall corporate performance.

How is corporate parenting different from portfolio analysis? …ctd

• Michael Porter argues that a business unit which is unable to achieve one of the competitive strategies is likely to be "stuck in the middle" and is doomed to below-average performance

• Research by Greg Dess and others, suggests that this may not be the case – firms can pursue both simultaneously:– Japanese companies such as Toyota and Matsushita (Panasonic and

National) are good examples. Their offer of low price and innovative features created serious problems for those companies following only cost leadership in the U.S.

– Suzuki in India dominates the low-cost car segment with range of feature-differentiated models.

Is it possible for a company/BU to follow a cost leadership & a differentiation strategy

simultaneously?

• According to D'Aveni, companies in a hypercompetitive industry learn to quickly imitate the successful strategies of market leaders - making it increasingly difficult to sustain any competitive advantage.

• Companies must thus be willing to cannibalize their own successful products in order to sustain their competitive advantage (e.g. Toyota ‘Qualis’ replaced by ‘Innova’).

• The only real sustainable competitive advantage lies not in a corporation's product line, but in its ability to learn and to adapt to constantly changing conditions (The Learning Organization).

Is it possible for a company to sustain competitive advantage under hyper-competition?

• Strategic alliances are formed (general rationale) to remedy a weakness or to generate a new strength:– It is thus an admission that a firm cannot achieve an objective on its

own.– Once a firm learns what it needs, it has less reason to continue with

the alliance. Why share profits that a company now can earn on its own?

– Or , with time, the ‘opportunity’ has eroded/been fully exploited by all or any partner. The alliance has served its purpose.

• Strategic alliances became especially popular during the 1990s when involvement with vertical integration kept firms from adapting successfully to rapidly changing conditions.

Why are most strategic alliances temporary?

Whether to invest in current known or in new, but untested, technology?

Igor Ansoff recommends that strategic managers deal with the issue of technology substitution by (1) continuously searching for sources from which new technologies are likely, (2) as the technology surfaces, making a timely commitment either to acquire the new technology or to prepare to leave the market, and

(3) reallocating resources from improvements in the older process‑oriented technology to investments in the newer, typically product‑oriented, technology as the new technology approaches commercial realization. A quantitative approach to this question is provided by the use of a Deterioration of Cost Index, which compares the average unit cost of the currently installed technology to that of the expected average unit cost of state-of-the-art technology.