3H Strategy & International Business 2001/02
Session 10 – Directions of Development
So far, our discussion of strategy process and content has concentrated largely upon the search for
sustainable competitive advantage within specific product/market areas. However, most
organisations, and particularly multi-national organisations tend to have operations across many
geographic and product market areas. As well as decisions on how to compete in each area, they
also face choices at a corporate level: in what directions to develop, using which methods and how
to manage the organisation to create value as a corporate whole. These are all issues concerning
corporate strategy – where “corporate” implies multi-business level strategy
Examples of corporate developments
In the case studies we have used so far in the course we have seen many examples of strategic
development, often at a corporate level:
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Churchill Tableware - launch of new Mille Fleur range by the Tableware Division.
Brasseries Kronenbourg - formed by Kronenbourg and Kanterbrau, then acquired by BSN in
1970s.
Brasseries Kronenbourg - Licence agreement for Kronenbourg in UK.
Brasseries Kronenbourg - bought San Miguel of Spain in 1997. Bought Wurther then combined
with Peroni, taking 25% stake in merged company in Italy. Bought Alken and Anglo-Belge in
Belgium then in 1988 created a joint venture with Maes to increase to 25% market share.
Danone - sold Lansen and Pommery champagne businesses in 1990.
Danone - produces dairy products, mineral waters and glass packaging, as well as beer. The
company made many acquisitions between 1993 and 1995.
Brewery Group Denmark - created from joint venture between Ceres (also owned Thor) and
Faxe.
Brewery Group Denmark - direct exports to Italy (with joint venture with Tulip slaughterhouse
on distribution); Vitamalt for Caribbean, including licensing deal with Heineken for the
Bahamas; exports to Germany and Baltic States, as well as Brazil (including partnership with
Café Bom Dia on distribution).
Brewery Group Denmark - also bought Cain’s in Liverpool.
All these strategic actions show a variety of moves, both in terms of direction and method. Most
actions involve combinations of both - but it is useful to identify these separately so that all the
combinations become apparent.
Directions of Development
The best known framework for describing alternative directions of development was developed by
Igor Ansoff in the 1960s.
PRODUCTS
Existing
New
Develop Current Position
 Withdrawal
Existing  Consolidation
 Market Penetration
MARKETS
Market Development
 Market Extension
 New Uses
New  Geographic Expansion
Product Development
 Product Range Extension
 New Product Range
Diversification
 Related
- Vertical Integration
(Backward/Forward)
- Horizontal
Integration
 Unrelated
- Conglomerate
Johnson and Scholes have adapted this framework to take into account the competence base of the
organisation.
Figure 7.1 Directions for strategy development
PRODUCTS
Existing
A
New
B
PROTECT/BUILD
Existing
MARKETS
New
withdrawal
consolidation
market penetration
C
MARKET
DEVELOPMENT
new segments
new territories
new uses
PRODUCT
DEVELOPMENT
on existing competences
with new competences
D
DIVERSIFICATION
on existing competences
with new competences
Developing Current Position
Opportunities for an organisation to develop frequently come from existing markets served by
existing products/services. Consolidation involves the organisation protecting and strengthening
its current position, whilst market penetration implies an attempt to increase market share. Whilst
not strictly about existing products and markets, withdrawal implies a further option for the
organisation - exiting from existing activities.
The factors which might influence an organisation in adopting any of these courses of action are
discussed by Johnson and Scholes, who spend some time considering the implications of the PIMS
(Profit Impact of Market Strategy) database.
Figure 7.2 The PIMS framework for assessing strategic potential
Competitive strength
Market attractiveness
Market share
Relative share
Relative quality
Patents
Customer coverage
Growth
Concentration
Innovation
Bargaining power
Logistical complexity
ROI
Lean production
Investment intensity
Fixed vs. liquid assets
Capacity utilisation
Productivity
Make vs. buy
People excellence
Lean organisation
Participative culture
Incentives
Training
Insiders vs. outsiders
Source: PIMS Associates Ltd. Reproduced with permission.
The PIMS findings do not imply a general prescription for organisations, but they do point to
relevant considerations about how a particular strategy might affect a particular organisation.
PIMS and Consolidation Strategies (Slide)
 Market share is important:
- Asset turnover better for larger companies (economies of scale)
- Purchasing costs lower for larger companies (economies of scale & buyer power)
- Marketing costs (brand ranking important for fmcg goods)
 Quality Matters:
- High share means resources for R&D leading to differentiation & price premium
- Quality, innovation & intellectual property raise perceived value & build barriers to
entry
- Superior quality and low share can also be profitable
 Marketing cannot substitute for quality – customers are not daft
 Capital intensity damages profits if exit barriers lead to capacity filling
 Shrinking markets squeeze profits – withdraw or turnaround?
PIMS and Market Penetration (Slide)
 Easier in growing markets
 Costly in static markets – taking customers from established competitors
 Complacency a danger for market leaders who fail to invest in perceived quality
 Segments can be used as “bridge-heads” – smaller company builds reputation in segment of
little interest to leader then penetrates wider market e.g. Japanese cars on US West Coast
 Perceived quality – a key issue for leaders and low-share firms aiming for rapid penetration
Product Development
Organisations may identify opportunities to develop new products, which can range from extending
the existing product range to developing a completely new product range. Aircraft
manufacturers like Boeing and Airbus Industrie have launched a number of variants of their
commercial aircraft, in order to meet the differing operating demands of the world’s airline
companies.
Johnson and Scholes discuss the implications and problems inherent in looking to develop the
organisation through product development. Whilst stressing the importance of research and
development and/or the ability to acquire new products from other companies, they highlight the
dangers of a broad product range and shortening time scales between new product introductions. In
particular, the evidence from PIMS suggests (Slide):
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Low share firms suffer from high R&D – with fewer sales to carry product failures
Rapid product development damages profits – as firms struggle to learn new competences, with
low-share firms at a particular disadvantage
Market Development
Market development involves finding new markets for existing products.
Market extension means moving into market segments not currently served within the overall
market for the product, which may imply some modification of the existing product to meet the
demands of new customers, as with Churchill’s move up-market.
During the 1980s, British Steel launched a marketing campaign to persuade architects, builders and
engineers to design multi-storey office blocks using a steel rather than concrete for the structural
frame of the building. This became a very successful example of finding a new use for an existing
product.
Expanding the geographic markets of the company is a classical form of market development ancient peoples like the Phoenicians traded throughout the Mediterranean from around 1000 BC.
Today, many companies face the challenges of globalisation and the need to operate in markets
across the world.
Diversification
Diversification involves organisations moving into new product and market activities. Frequently,
the justification for moving into increasingly unfamiliar territory is to balance risks and potential
returns - the umbrella manufacturer who also sells ice cream.
Diversification can be divided between related and unrelated diversification. Related
diversification involves moving into activities that have some degree of relationship with current
activities - forming part of the same broad value system.
Figure 7.9 Related diversification options for a manufacturer
BACKWARD INTEGRATION
Raw materials
manufacture
Raw materials
supply
Components
manufacture
Machinery
manufacture
Product/process
research/design
Machinery
supply
Financing
Components
supply
Transport
HORIZONTAL
INTEGRATION
Competitive
products
Manufacturer
By-products
Complementary
products
FORWARD
INTEGRATION
Distribution
outlets
Transport
Marketing
information
Repairs and
servicing
Note: Some companies will manufacture components or semi-finished items. In those cases
there will be additional integration opportunities into assembly or finished product manufacture.
Backward integration means moving into related supply activities, such as a OEM manufacturer
becoming involved with components manufacturing, as happened when Electrolux acquired their
competitor Zanussi. Forward integration means moving into activities closer to the final
customer, such as brewers moving into the management of pubs. Horizontal integration means
moving into complimentary or competitive activities, Honda makes cars and motorcycles.
Unrelated diversification involves moving into new product and market activities that have little
direct link with current activities. However, many companies argue that there might be
relationships in terms of the business processes undertaken - particularly in terms of exploiting
competences or other resources, as with the AA’s decision to develop its Homeline service (see
Johnson & Scholes Illustration 7.4). At the extreme end of the spectrum is conglomerate
diversification where there is no direct relationship between the existing business and the new
activities.
There is much discussion about the performance of diversification strategies in practice, with much
of the argument revolving around the creation and management of synergy. As we will see in later
sessions, the theoretical benefits of synergy are sometimes not realised and de-merger has become
a prominent trend during the 1990s – with companies like Hanson and Lonrho moving away from a
conglomerate structure to create separate companies with greater market focus.
Arguing from a discussion about The Diversified Organization, Henry Mintzberg also concludes
that many of the potential benefits of the large multi-business organisation are harder to realise in
practice. Lack of autonomy within business units, the risks of one division pulling down the rest
(c.f. Barings and Nick Leeson) and poor responsiveness to environmental changes are all potential
“downside” risks quoted by Mintzberg. In addition, the often used justification of the diversified
corporation being able to allocate capital better than capital markets is questioned by Mintzberg and
others (as we shall see).