MA in Management – Strategic Analysis Module
Methods and Directions of Corporate Strategy Development
Page
A. INTRODUCTION TO SESSION
This Session introduces the concept of corporate (multi-business) strategy by exploring the
ways in which companies develop new directions for their activities and the methods by
which these directions can be achieved. Session 7 builds on this base to explore how multibusiness companies can manage the creation of value across the organisation as a whole
Your Objectives
By the end of this session you should be able to:
•
Appreciate the range of challenges to be confronted by corporate strategy.
•
Outline the alternative directions in which organisations can develop and assess the
factors likely to influence the attractiveness of following such strategies.
•
Outline and evaluate the various methods of corporate strategy development and their
relationship with the alternative directions.
B.
THE CHALLENGE OF CORPORATE STRATEGY
So far, the discussion of strategy process and content has concentrated largely upon the
search for sustainable competitive advantage within a single business area. However, most
organisations tend to move into new business areas as they develop and seek to exploit new
opportunities. Generally underpinning these developments is a belief that risks can be
reduced and opportunities expanded by relying on more than one activity. As a
consequence, organisations become more complex, with operations spread across many
geographic areas, serving different customers and offering different products/services.
Corporate strategy focuses on the strategic decisions involved in trying to manage this
complexity. As well as decisions on how to compete in each area, the organisation needs to
decide in which directions to develop, what methods of development to use, how far to
extend the scope of the business and how to create and manage synergies to achieve
value as a corporate whole.
It is not just in large, often multi-national, companies that these issues are relevant. As part
of the Troubleshooter series, John Harvey-Jones has visited a family farming business in
Suffolk, England on several occasions over more than a decade. His visits have highlighted
the challenges of corporate strategy that have confronted the family over the years. The
following illustration describes the evolution of the Peake’s family business up to the time of
John Harvey Jones first visit in 1989, the challenges they faced and the decisions they took.
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Illustration
DEVELOPING COPELLA - THE CHALLENGE OF CORPORATE STRATEGY
Devora Peake started to farm on the edge of the Dedham Valley in Suffolk over fifty years
ago. Over the years, the family business developed through expansion in the extent of land
farmed and in range as they moved from sheep and arable farming to include orchards and
organic produce. In the late 1960s they started to press their reject apples into fruit juice,
and the famous Copella cloudy apple juice was born. They opened the Stoke-by-Nayland
Golf Club in 1972 on some of their poorer land, adding an additional 18 holes in 1978. In
1989 the business had a turnover of over £2.3 million and employed Devora’s two
daughters, son and two sons-in-law, in senior roles.
Copella, which is made largely from Cox’s Orange Pippins, is a quintessential English freshpressed apple juice. It had become a leading brand in the rapidly expanding fruit juice
market of the 1970s and 1980s. Partly to get greater utilisation of their heavy investment in
presses and bottling plant, the company had also started to produce supermarket own-label
brands for Marks & Spencer, Tesco and Safeway. They also launched a range of apple
juices mixed with other fruit juices and the organic product “Mrs. Peake’s Organic Apple
Juice. However, as the market matured, competition became more intense and the future of
Copella was by no means certain.
The storms, which hit southern England in October 1987, were the final straw - the Peakes
lost 5,000 apple trees in one night and all their late-season apples. In order to meet
contracts, they were obliged to buy more apples from other growers at high prices that led to
a substantial loss.
The family invited John Harvey-Jones, as part of the BBC Troubleshooter television series,
to discuss the options available to them. The future of the juice business lay at the heart of
the problem. John Harvey-Jones agreed with the family that they needed to move Copella
up-market, away from the intense price competition of own-label brands, but this would
involve a big marketing campaign and resources, both finance and expertise, were limited.
There was also the impact of such a strategy on the farming and leisure activities to
consider. In the words of John Harvey-Jones, “You can’t grow everything all the time”.
John Harvey-Jones recommended selling the juice business and concentrating on their
golfing/leisure activities. However, the Peake family decided to sell only a majority share
holding in the Copella business to the Taunton Cider Company, with the younger members
of the family continuing to be involved its management. As a large drinks company, Taunton
Cider was in a position to provide the resources necessary to move Copella up-market.
When John Harvey-Jones returned in 1992, he found the Peake family in the process of
buying back Copella from Taunton Cider, who were about to go public and had decided that
soft drinks no longer fitted into their strategy. With three year’s development work on the
brand, substantial new investment and a valuable training course, he concluded that this
was an attractive proposition for the family, despite continuing worries about the business as
a whole being undercapitalised.
Source: Based on extracts from J Harvey-Jones and A Masey, Troubleshooter, Chapter 2 (pp. 41-70) and later
television programmes.
The illustration shows how the family moved in a variety of directions over the years:
expanding the range of agricultural activities from arable farming into orchards, creating the
fruit juices business and building the golf courses. Moving the Copella brand up-market
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required the Peakes to adopt a different method of developing the business: entering into a
joint venture with Taunton Cider rather than relying on their own resources and capabilities.
With limited resources, the family faced choices about how to develop their farming, fruit
juices and leisure businesses. Recognising that that they could not “grow everything all the
time”, they needed to decide which businesses to build, hold, harvest or divest.
The common theme across all the Peake’s activities was the land they owned in Suffolk, so
deciding how far to move from their original agricultural roots raised issues about the scope
of business and how to manage the potential synergies. Interestingly, when Taunton Cider
sold Copella back to the Peakes in 1992 this reflected a decision that Taunton had taken
about the future scope of their own business.
All these issues are typical of the corporate strategy challenges facing most multi-business
organisations. The rest of this Session will concentrate upon the directions and methods of
development, with the other issues being explored in the next Session.
C.
DIRECTIONS OF DEVELOPMENT
The best known framework for describing alternative directions of development was
developed by Igor Ansoff in the 1960s and is still well used today. The framework explores
the varying directions that are the result of developing combinations of existing and new
products and markets.
The article by George Stalk, Philip Evans and Lawrence Shulman, Competing on
Capabilities, discussed in the last Session, suggested that products and markets were
becoming less important building blocks of corporate strategy than capabilities. Whilst
Figure 6:1 outlines Ansoff’s framework, with each of the directions discussed in more detail
in the following sub-sections, the implications of new stress on capabilities will be explored
later in the Session.
PRODUCTS
Existing
New
Develop Current Position
Product Development
Existing
Withdrawal
Consolidation
Market Penetration
Product Range Extension
New Product Range
Market Development
Diversification
Market Extension
New Uses
Geographic Expansion
Related
- Vertical Integration
(Backward/Forward)
- Horizontal Integration
MARKETS
New
Unrelated or Conglomerate
Figure 6:1 – Ansoff’s Directions of Development Framework
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Whilst the framework is largely a means of describing the range of possible directions that
an organisation can pursue, the PIMS (Profit Impact of Market Strategy) database offers
empirical evidence of the implications of following these directions based on the experiences
of over 3,000 businesses. In their book Exploring Corporate Strategy, Gerry Johnson and
Kevan Scholes discuss the PIMS results and some of the key findings are mentioned below.
 Development of 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.

Consolidation
Whilst there are exciting attractions in doing something new, many organisations can derive
particular benefits from consolidating their position by protecting the market share and
maintaining the quality of existing products sold within existing market sectors.
The discussion about generic strategies in the previous Session highlighted the benefits that
might be derived from a large market share in terms of building competitive advantage
underpinned by economies of scale. Consequently, it is important for organisations to
ensure they invest in either low prices or added value to protect their position or a reduction
in volume may lead to these advantages being eroded.
Companies pursuing focus strategies may have a low total market share but they also need
to protect the particular market segment(s) in which they operate from competitive intrusion.
This means continuing to invest in those factors that serve the needs of customers in these
segments particularly well, be it very low prices or high perceived added value, so building
barriers to the entry of new competitors.
The PIMS findings that suggest market share and quality are important factors in
determining profitability add empirical weight to such consolidation strategies. They also
highlight the risks of shrinking markets for such strategies.

Market Penetration
Rather than just protecting the current position, market penetration strategies aim to
increase the market share of existing products sold within existing markets. The PIMS
findings suggest that such strategies are most likely to work in growing markets rather than
in static markets where share can only be taken directly from competitors (who may decide
to react!). However, there may be opportunities for smaller companies to succeed in static
markets where a complacent market leader has failed to continue to invest in perceived
quality – because customers become willing to try alternative suppliers.

Withdrawal
The directions outlined above are about holding, harvesting or building existing activities.
The other option to be considered is divesting or exiting a particular activity. As will be
described later, this does not have to involve closing down a business; there may be
opportunities to sell the business or enter into some form of partnership. Companies may
pursue such options because the existing market is in decline or the existing product is
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becoming dated, but it may be more to do with better opportunities lying elsewhere and
resources would otherwise be stretched.
 Product Development
Organisations may identify opportunities to develop new products for existing markets.
Rather than regard this as one broad option, it is better to see product development as
ranging 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 as well as launching completely new models.
Most discussion about product development focuses upon the need to engage in or gain
access to research and development. However, whilst there are great potential benefits
such activity is not always a good thing. Johnson and Scholes discuss the implications and
problems undertaking research and development. In particular they point to the PIMS
evidence that highlights the dangers of supporting a broad product range and shortening
time scales between new product introductions. Rapid product development damages
profits because companies can struggle to learn new competences and successfully launch
new products. The risks of failure of new products can be high and shortening product life
cycles can mean that the costs of development are not fully recouped. All these problems
can be a particular problem for companies with low market shares as the costs are spread
over smaller sales base and the risks of failure are proportionately higher.
 Market Development
Market development involves finding new markets for existing products. Three common
forms of market development are outlined below:

Market extension
This involves moving into new market segments not currently served within the overall
market for the product. This might imply some modification of the existing product to
meet the demands of new customers. The University of Durham Business School launched
its part-time MBA programme based on the existing full-time course, but the delivery of
lectures was changed to reflect full-day teaching, given that students only attended the
School for two days at a time.

New uses for existing products
During the 1980s, British Steel launched a marketing campaign to persuade architects,
builders and engineers to design multi-storey office blocks using steel rather than concrete
for the structural frame of the building. Coupled with a changing relative price structure that
started to favour steel over concrete, this became a very successful example of finding a
new use for an existing product.

Geographic expansion
Expanding into new geographic markets is a classic 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. Increasingly, a high market share in one country is becoming
inadequate to deal with the advantages possessed by companies operating across many
markets – cost advantages are becoming global. Further, it may be important to locate
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some operations in strategic markets either in order to gain access to the innovations that
emerge from within an industrial cluster like Silicon Valley, or to be close to key customers.
 Diversification
Diversification involves organisations moving simultaneously into new products and new
markets and can be divided between related and unrelated diversification:

Related diversification
This involves moving into activities that combine both new products and new markets, but
where there is some degree of relationship with current activities of the company forming part of the same broad value system. This can be divided into vertical
integration, which itself can be further sub-divided into backward and forward integration,
and horizontal integration:

Backward integration means moving into related supply activities, such as a retailer
becoming involved with the manufacture of the products it sells.

Forward integration means moving into those activities that are closer to the final
customer. For example, a steel manufacturer might set up a steel distribution and
stockholding business.

Horizontal integration involves moving into complimentary or competitive activities.
The tyre, exhaust and brake specialist Kwik-Fit, mentioned in the last Session, had
moved into selling car insurance and was considering entering businesses like
windscreen replacement and car body repairs.
Companies might undertake related diversification for a number of reasons including greater
control over supply and distribution chains; opportunities to integrate activities to achieve
cost savings; spreading the risk across a range of business activities or exploiting
economies of scope across complimentary products.
However, there are many risks associated with such moves, frequently associated with the
implications of entering into unfamiliar activities without the capabilities needed to manage
them. Even where there seems to be a link between existing and new activities, the reality is
often that the links are illusory with each activity having very different requirements.

Unrelated or conglomerate diversification
This involves moving into new product and new market activities that have little direct link
with current activities. However, many companies undertaking such moves argue that
there are relationships in terms of the business processes undertaken - particularly in
terms of exploiting competences or other resources.
Companies undertake unrelated diversification for many reasons. They may seek to move
out of declining business areas into new more attractive opportunities, seek to spread risk or
balance business cycles (as in the apocryphal example of an ice cream producing umbrella
company). There may be opportunities for financial engineering like using excess cash or
buying a tax loss, or a company may seek to exploit other underused resources. There is
also strong anecdotal evidence to suggest that such moves may be undertaken in order to
build the prestige of senior managers.
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There have been many debates about the performance of diversification strategies in
practice, with many of the argument revolving around the creation and management of
synergy. Frequently, these debates arise when an unrelated diversification is achieved as
the result of an acquisition. These issues will be explored in more depth in the next section.
SAA 1
Re-read the illustration Developing Copella – The Challenge of Corporate Strategy and
identify the various directions of development undertaken by the company over the years
covered.
Where possible, use the material in the section above to comment upon the reasons why the
Peake family undertook these developments and any challenges they might have posed.
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D.
COMBINING DIRECTIONS AND METHODS
The Peake family’s attempt to move Coppella up-market was achieved by entering into a
joint venture agreement with Taunton Cider. This illustrates how a development direction,
in this case market development, is coupled with a method of development, the joint venture
being a particular form of strategic alliance. Three broad methods of development can be
identified:
•
Internal development – where the organisation seeks to develop using its own
resources and capabilities
•
Mergers and acquisitions – where the organisation seeks to develop by buying another
organisation or two organisations combine their assets and activities.
•
Strategic alliances – where organisations seek to develop using a range of approaches
based on co-operation with other organisations.
Some of the many combinations of direction and method of corporate development are
illustrated in Figure 6:2. Reflecting the fact that corporate development can involve changing
the scope of an organisation by getting out of some activities, as well as growing others,
withdrawal is identified as a separate direction of development. Each of these methods is
explored in greater detail below.
Withdrawal
Consolidation /
Market
Penetration
Product
Development
Market
Development
Diversification
Internal
Development
Closure of a
particular business
operation
Marketing campaign
to maintain/increase
market share
Mergers &
Acquisitions
Disposal, demerger
or management
buyout
Merger with existing
competitor in market
Increased research
& development
activity
Open sales office in
export market
Buy company which
has created a new
product
Acquire company in
export market
Forward integration
into distribution
using own vehicles
& warehouses
Acquisition of
business in
unrelated product &
market activities
Strategic Alliances
Licensing of older
brands to another
manufacturer
Consortia of local
councils to create
combined fire &
rescue service
Agreement with
competitor to jointly
develop new product
Joint venture between
foreign entrant and
local company
Retailer combines
with banker to create
telephone banking
service
Figure 6:2 – Combining the Methods and Directions of Corporate Development
 Internal Development
Clearly organisations can choose to develop existing activities, or enter new markets and
products relying upon their own resources. Closure of a particular business operation or
business unit can be seen as a withdrawal from existing activities without involving other
organisations.
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The great advantage of developing the organisation using “organic” methods is that skills
and expertise are built internally, which may itself spawn further advances, for example the
development of a successful research and development team that leads to the creation of
new products and services. Control of developments can also be easier for managers
because greater familiarity with people and processes is maintained. However, time or costs
frequently suggest that other methods also need to be considered.
 Acquisitions and Mergers
Acquisitions involve an organisation developing its resources and capabilities by
purchasing the assets and activities of another organisation. Frequently this is referred to as
a takeover – which might proceed on an agreed or friendly basis or may be the hostile
result of a stock market battle where the shareholders sell the company over the heads of
the management team. A merger occurs when two companies combine their assets and
activities into a new organisation.
Acquisitions, in all their guises, have long been considered are a major tool of corporate
strategy, particularly in the USA and UK where corporate structure and the prominent role of
stock markets lend support to both hostile and friendly takeovers, as well as mergers
between companies. Within Europe, the UK has traditionally been seen as a focus for
acquisition activity; one study by Geroski and Vlassopoulus calculated that in 1988 UK firms
accounted for 85% by number or 75% by value of all European acquisitions. However, this
position has changed in recent years, with one of the effects of globalisation being
increasing acquisition activity in countries like Germany and cross-border acquisitions
becoming more prominent. This is well illustrated by the European car industry which has
seen BMW’s ultimately doomed takeover of Rover, Volkswagen’s acquisition of the Rolls
Royce factory (although not the name!) and Bentley, and the merger between Daimler-Benz
and the American car giant Chrysler.
Despite their popularity, the evidence supporting mergers and acquisitions as a successful
method of strategy development is at best mixed, as Figure 6:3 illustrates.
Method of evaluation
Subjective opinions of
company personnel
Acquired business kept in
long term
Comparison of profitability
before and after acquisition
Effect on stock market
valuation
Major studies
Hunt et al (1987)
Conclusions
Around half are successful
Ravenscraft & Scherer
(1987) and Porter (1987)
Meeks (1977);
Mueller et al (1980);
Ravenscraft & Cosh et al
(1990) and Scherer (1987)
Franks & Harris (1986);
Franks, Harris & Mayer
(1988)
More divested than retained
Nil to negative effect
Positive initial impact
Figure 6:3 - Evidence on the Performance of Acquisition Strategies
Source: J Kay, Foundation of Corporate Success, OUP, 1995
Whilst some of this evidence now seem a little dated, more recent evidence still supports the
broad conclusions drawn. A study by KPMG published in 1999 sampled the evidence from
700 cross-border deals conducted between 1996 and 1998. With responses from 107
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companies, it found that 83% of cross-border mergers had failed to produce any business
benefit in terms of shareholder value.
Frequently, the reason for an acquisition is given as diversification. Indeed it is often
difficult to disentangle the problems that might be attributable to the company moving too far
away from its existing capabilities, from those that result from the acquisition itself. Many of
the results in Figure 6:3 reflect such unrelated diversification by acquisition, where no
synergy is created.
In his article on The Synergy Trap, Mark Sirower argues that acquisitions frequently involve
the payment of a price premium by the acquirer, which is justified by the expectation of
potential synergies as a result of the deal. However, the failure of managers to fully
recognise and quantify the real synergies available leads to the company falling into a
“synergy trap” where any premium paid for the acquisition unlikely to be realised.
In common with others, Sirower suggests that post acquisition integration is a critical issue in
ensuring the ultimate success of the strategy, alongside a careful evaluation of what can
really be achieved prior to the deal. He outlines four cornerstones of synergy where
managers need to ensure consonance between the companies and between the
cornerstones themselves:




Strategic Vision – this needs to be clear and shared across both organisations.
Operating Strategy – there needs to be a clear idea as to how competitive
advantage will be created in practice.
Systems Integration – managers need to plan for how the organisations and
particularly their systems are to be integrated.
Power and Culture – these “soft issues” need to be recognised and managed as
part of the integration process.
In a similar vein, the KPMG report mentioned above identifies six keys on which successful
companies focused, particularly at the pre-deal stage but which also underpinned postacquisition integration: synergy evaluation; integration project planning; due diligence;
selecting the management team; resolving cultural issues and communication.
Many of these issues are reflected in the merger between the consumer goods
manufacturers Electrolux and Zanussi during the mid-1980s.
Illustration
In 1984, the Swedish manufacturer, Electrolux acquired the Italian company Zanussi. Whilst
both produced domestic appliances, the product range was extended as Electrolux was
stronger in products like refrigerators and vacuum cleaners, whilst Zanussi was best known
for “wet products” like washing machines. These complimentary product ranges were
matched by their relative strengths in European markets, with Electrolux strong in
Scandinavia and Northern Europe, and Zanussi strong in the South. Electrolux also
achieved some vertical integration, thanks to Zanussi’s component manufacturing
operations.
For Electrolux, the acquisition allowed it to pursue its strategy of growth in order to become a
domestic goods manufacturer of global scale. However, Zanussi’s owners also welcomed
the deal as it allowed a loss-making company to be turned around.
The time spent developing the deal, the previous expertise of Electrolux in acquisitions
management and full consideration of post-acquisition integration before the deal was
signed were all seen as vital tasks within the process.
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Viewed a number of years after the event, the acquisition was largely seen as successful.
Certainly, Zanussi’s financial position had been turned around, but results of the broader
globalisation strategy were still uncertain.
Source: based on “Electrolux: the acquisition and integration of Zanussi” case study by S Ghoshal & P
Haspeslagh, INSEAD
In recent years, demergers have also become a major aspect of corporate development.
Here, it is argued, the diversified corporation can be unbundled, allowing each part to
concentrate on a more closely related set of operations. The demerger of ICI in the mid1990s saw the creation of a smaller ICI focusing on chemicals businesses and Zenica, a
pharmaceuticals and biotechnology company. After many years of managing a disparate
conglomerate, Lord Hanson began the break-up of the company named after him in 1996,
creating a number of more closely focused groups.
Disposal of part of a corporation by selling it to another corporation is another method of
withdrawal from particular activities. Management buyouts, where the business is sold to
the existing management team, often supported by investment bankers, also rose in
prominence in the UK and France during the late 1980s and 1990s. The privatisation and
break-up of British Rail in 1995/6 included a number of management buyouts of train
operating companies.
 Strategic Alliances
Strategic alliances have become a major trend within many industries since the 1980s.
Often these arrangements extend across national boundaries and are frequently linked to
discussions about the increasing globalisation of business, as the example of the world
airline industry indicates.
Illustration
ALLIANCES IN THE WORLD AIRLINE INDUSTRY
In 1995, the magazine “Airline Business” identified 320 different alliances between
companies within the world airline industry. These alliances were generally of a codesharing format, were the airlines combined connecting services on a single ticket.
A similar study of the airline industry around that period concentrated upon 274 alliances and
attempted to classify the arrangements based on the number of activities shared between
the companies. It found 230 loose arrangements (3 or less activities) which were mainly
code-sharing; 30 intermediate arrangements (4 to 6 activities); and 14 strong form
arrangements (more than 6 activities shared) which often extended into formal joint venture
agreements.
The current attempts by British Airways and American Airlines to combine their operations to
create one of the world’s largest airlines has excited the attentions of both competitors and
regulators on both sides of the Atlantic Ocean.
Source: based on an unpublished MBA research project and various newspaper reports
It can be seen from this illustration that it is probably a misnomer to call alliances one
method of corporate development as they can take a variety of forms of joint development
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between organisations. Formal joint ventures have been a feature of business life for many
years, with the Royal Dutch/Shell Group growing out of an agreement made in 1907.
However, recent years have seen an explosion in the number and range alliances, varying
from formal agreements to much looser arrangements. Some of the main types of
arrangement are outlined in Figure 6:4.
Type of Alliance
Joint Venture
Consortia
Franchising
Licensing
Sub-contracting
Networks
Description
Partners set up a new, jointlyowned, operation
Usually focused on a particular
project, and may involve more
than two partners
Selling of a business concept
Grant rights to make or distribute
a product
Contract part of a service or
process
Collaboration of two or more
organisations through trust/mutual
understanding rather than a
formal link
Examples
Royal Dutch/Shell Group; Unilever
Airbus Industrie;
Trans Manche Link - which built the
Channel Tunnel between the UK and
France
McDonalds restaurants
Coca Cola licenses bottling and
distribution in most countries
House building in the UK is based on
sub-contracting the separate trades
such as bricklaying, plumbing etc.
Best Western - an international
network of independent hotels
Figure 6:4 – Types of Strategic Alliances
The reasons for organisations adopting these approaches can vary. Farok Contractor and
Peter Lorange argued that companies can co-operate as well as compete against each other
and went on to identify a range of potential reasons for alliances, ranging from risk reduction
to quasi vertical integration.







Risk Reduction - product portfolio diversification; dispersion/reduction of fixed costs;
lower capital investment required; faster entry and payback
Economies of Scale and/or Rationalisation - lower average cost for larger volume;
lower cost by using comparative advantage of each partner
Complimentary Technologies and Patents - technological synergy; exchange of
patents and territories
Co-opting or Blocking Competition - defensive joint ventures to reduce competition;
offensive joint ventures to increase costs and /or lower market share for third company
Overcoming Government Restrictions - local partner requirements; local content
requirements
Initial International Expansion - benefit from local partner know-how
Vertical Quasi-integration - access to materials, technology, labour & capital;
regulatory permits; access to distribution channels; benefits of brand recognition;
establishing links with major buyers; drawing on existing fixed marketing establishment
Figure 6:5 – Reasons for Strategic Alliances
Source: F Contractor and P Lorange, Cooperative Strategies in International Business, Lexington Books, 1988
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In outlining and evaluating the reasons for strategic alliances, a number of authors stress the
importance of the capabilities and resources of the organisations. Gary Hamel, Yves Doz
and C K Prahalad argue that the main reason for entering into alliances with competitors is
learning. For them, strategic alliances promote the transfer, support or acquisition of core
competences. In a similar vein, Kenichi Ohmae in his article “The Global Logic of Strategic
Alliances” described how companies could learn from their competitors as well as sharing
the costs and risks of globalising markets. Indeed, he argued that alliances were vital in
the emerging global economy. Stephen Preece expands on this approach by identifying six
cooperative objectives that focus upon the capabilities of the organisations:






Learning – acquire needed know-how (markets, technologies, management).
Leaning – replace value chain activities and/or fill in missing firm infrastructure.
Leveraging – fully integrate firm operations with partner to create entire new portfolio
of resources.
Linking – closer links with suppliers and customers.
Leaping – pursue radically new area of endeavor.
Locking out – reduce competitive pressures from non-partners.
The example of the alliance between Rover and Honda shows how the capabilities of both
partners can be enhanced, albeit in differing ways, through a series of cooperative
arrangements.
Illustration
THE DEVELOPING ALLIANCE BETWEEN ROVER AND HONDA
During the late 1980s and early 1990s an alliance developed between the car manufacturers
Rover and Honda. The British company wanted access to new technology and models to
assist product development. In contrast, Honda wanted experience of the styling demands
of European customers in order to support its market entry strategy. Both seemed to get
benefits from the relationship, which developed from a loose agreement, with Rover
assembling knock-down Honda’s under the Triumph badge, to a position of much greater
trust and commitment, with joint manufacturing and research and development. In many
ways the alliance was seen as a success by both sides. The alliance ended in 1994 when
British Aerospace sold Rover to BMW, much to Honda’s annoyance.
A final thought on strategic alliances: whilst an acquisition or merger implies a permanent
arrangement not all alliances are intended to last into the long term, so the end of the
agreement should not necessarily be seen as failure. The initial relationship between Rover
and Honda was of a fairly informal nature and not necessarily long-term – if for no other
reason than the models involved would become outdated. In this case the agreement
served to build up trust between both sides and a series of more involved projects were the
outcome. In the later stages there was even a 20% share exchange between Rover and
Honda Manufacturing (UK) Ltd. However, many alliances remain relatively informal and end
when both companies are satisfied that the objectives have been met.
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SAA 2
Return to your analysis of the development of the Peake family’s businesses undertaken in
SAA 1. For each of the particular development directions, identify the method used to
achieve them.
Now examine more closely the strategy to move the Copella brand up-market. Why did the
family choose to enter into a joint venture with Taunton Cider rather than pursue this
direction with other methods?
Compare this deal with the general comments on strategic alliances made above and
assess the extent to which both sides were likely to benefit from the arrangement.
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E.
INCORPORATING CAPABILITIES
In outlining Ansoff’s directions of development framework above, mention was made that an
understanding of capabilities was changing the traditional view of the importance of
products and markets. Organisations increasingly see themselves in terms of business
processes that can help to create value or competitive advantage, implying an additional
dimension to the framework.
The original Ansoff Matrix sees development directions very much in terms of discrete
boxes. However, it is often useful to see them as directional vectors, moving increasingly
away from the known (consolidation) to the unknown (unrelated diversification), combining
elements of movement in both products and markets. Withdrawal can also be seen as a
move in the opposite direction. This can simplify the original matrix into a single dimension:
•
•
•
•
moving from withdrawal,
through existing developments (consolidation and market penetration),
to related developments (product and market development to related diversification)
and unrelated developments (conglomerate diversification).
It now becomes easier to see developments in business processes along the same scale.
To use a university example, an economics department might extend the range of its
collective knowledge by recruiting academics in a related discipline like finance. These new
academics will then create opportunities for the department to engage in new research,
create new courses and expand the numbers of students.
As outlined above, the directions of development can be combined with a variety of
methods, creating a wide range of development options. For example, our university
department may enter into an agreement to jointly submit research along with another
department - a related development via a strategic alliance. Pressures to get to the top of
research league tables has also seen whole departments of academics moving from one
institution to combine with another - a development in an existing activity by (often hostile)
acquisition.
The range of developments in terms of direction and method is outlined by the framework in
Figure 6:6.
Mergers &
Acquisitions
METHODS
Strategic
Alliances
Internal
Methods
Withdraw
Existing
Related
Unrelated
DIRECTIONS
(Products/Markets/Processes)
Figure 6:6 – A Revised Framework for Directions and Methods
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SAA 3
Use the framework outlined in Figure 6:6 to plot the various developments mentioned in the
illustrations within this Session. You may also wish to add other examples of which you are
familiar and don’t worry if all the boxes are not filled in.
Mergers
&
Acquisitions
M
E
T
H
O
D
S
Strategic
Alliances
Internal
Methods
Withdraw
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Existing
Related
DIRECTIONS
(Products/Markets/Processes)
Unrelated
F.
SUMMARY
This Session has introduced the concept of corporate strategy and the challenges faced by
organisations as they seek to manage complex multi-business organisations. Two of the
challenges to be faced by in corporate strategy are to decide upon the scope of the
organisation and how to manage opportunities to create value by developing synergies.
These issues will be revisited in the next Session.
The focus of this Session has been upon two key dimensions of corporate strategy: outlining
and assessing the alternative directions in which organisations might move as they seek to
develop and the methods by which they might do this.
Since the 1960s, the directions in which an organisation could develop have been defined by
the way in which it could use existing and new products in existing or new markets. The
growing stress upon capabilities within the strategy debate since the 1990s suggests that
business processes need to be added as a further element of directional choice. These
choices can range from withdrawal; to the development of existing products, markets and
processes; extending through developments of related areas and finishing with unrelated
developments.
The other key dimension of corporate strategy development is the method used to achieve a
particular choice. There are three broad methods of development internal developments,
acquisitions and mergers, and strategic alliances.
The choice of both methods and directions of development for a particular organisation will
largely rest upon many issues including its competitive position and resources available to it.
Some of the empirical evidence and practical considerations about engaging in any
corporate development have been highlighted. The views taken by managers on the ways
to manage corporate complexity and create synergy are also important in the choices made
by organisations and are explored further in the next Session.
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