The Directions for Strategic Development in Business

THE DIRECTIONS FOR STRATEGIC DEVELOPMENT

CEU
Universidad
San Pablo

THE SCOPE OF THE FIRM AND ITS STRATEGIC DEVELOPMENT

1. THE DIRECTIONS FOR STRATEGIC
   DEVELOPMENT
2. THE SCOPE OF THE FIRM AND ITS STRATEGIC
   DEVELOPMENT.
3. EXPANSION STRATEGY.
4. FIRM DIVERSIFICATION.
5. VERTICAL INTEGRATION.
6. RESTRUCTURING THE BUSINESS PORTFOLIO.
   1. BUSINESS TURNAROUND.
   2. BUSINESS PORTFOLIO RESTRUCTURING.

25%
25%
25%
15%
79.5
69.32
25%
25%
75%
25%
75%
62.21
56.7
31.32
36.24
45.2
29.19Corporate Strategy & Implementation
Analysis
Formulation
Implementation
Vision, Mission, Values
The Future Direction of the Company
Company Governance
Competitive Strategy
Strategy and Competitive Advantage.
Competitive Strategies by Industry
Evaluation
External Analysis
General Business Environment
Competitive Environment
Organizational Support
Corporate Strategy
Internal Analysis
Internal Diagnosis
Resources and Capabilities
Development Directions and Methods
Global Expansion
Strategic Planning and Control

1. Understanding the core business, the general
   environment, and the Company's R&C
2. Design and select strategies
3. Implement the chosen strategy

The Scope of the Firm and its Strategic Development

1.1 The Scope of the Firm and its Strategic Development.
➢ Corporate strategies involve defining and evolving the range of activities a company engages in.
This includes determining the firm's scope or business portfolio and developing strategies for business growth over time.

DEFINING THE SCOPE OF THE FIRM

. The definition of the scope of the firm refers to the choice of the range of products and markets in which a firm
wishes to compete.
. That is, the set of businesses in which the firm is to compete and how those businesses will be interrelated.
. This is a crucial strategic decision, as it influences the entire firm's direction and future growth.

CHARACTERISTICS OF FIRM SCOPE

. According to Abell (1980), this decision is the starting point of strategy and is typically reflected in the company's
mission to define its core identity.
. It is proposed at the corporate level, it conditions the creation of the strategic business units (SBU) and the
strategy to be followed by each of them.
· Methods:
" The company's set of products and markets (Ansoff)
· Abell's three-dimensional model:
Functions
Customer groups
Technologies
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A firm defines its field of operations or range of businesses
through two variables:
1) the scope
2)
differentiation between strategic segments

Scope and Differentiation between Strategic Segments

Scope and Differentiation between strategic segments (I)

Scope:
. This refers to the number of functions, customer groups or technologies a firm uses (quantitative
dimension).
· A narrow or focused scope means a firm serves a single_function, customer group, and uses one
technology.
· A broad scope involves multiple functions, customer groups, and technologies.
<
Functions
Functions
Functions
Customer
Groups
Customer
Groups
Customer
Groups
Technology
Technology
Technology
Broad scope of functions
Broad scope of customers
Broad scope of technologies
e.g. a Telecommunications provider that seeks to
cater for all household communication needs
(voice, internet, data transmission, TV on
demand, sundry services, etc.) using cable
technology.
e.g. a Telecommunications provider that
seeks to cater for both private customers,
small and medium enterprises (SMEs) and
large corporations.
e.g. a Telecommunications provider that offers its
customers data transmission services through a
range of technologies that includes broadband,
mobile phones, cable and satellite.
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Scope and Differentiation between strategic segments (II)

Differentiation between strategic segments :
· Represent the different possible combinations between functions, customers and technologies.
. Differentiation between strategic segments refers to the degree to which a firm treats the various segments
differently according to each one of the basic dimensions.
. This differentiation is seen as a response to the varying needs of consumers, whereby it can be achieved
mainly in two ways:
· by modifying the actual product or
· through some change in the firm's commercial strategy
· The differentiation refers not so much to the quantity of functions, customer groups and technologies, but
rather to the variety of the same and the manner in which a firm addresses that variety. It is therefore a
qualitative aspect in the definition of the scope of its business.
. Thus, a firm that caters for several customer groups may decide to homogenise its offer or seek to customise
it according to each segment of demand targeted.
. According to the differentiation between strategic segments, the scope of the firm may be, within the same
field, more differentiated and varied or less differentiated.
. The combination of the variables scope and differentiation among strategic segments ultimately defines a
firm's field of activity.
. As the field becomes broader and this differentiation greater, the scope of the firm becomes more complex
and demanding for it.

Factors Influencing the Field of Activity

1. Company Mission and Objectives
2. Environmental factors
   a. Technology Evolution: Competitors from other industries perform the same functions
   for the same customers, with different technologies.
   b. Consumer buying behavior: price sensitivity, interest in bundled product/function
   offers, diversity of tastes and needs.
3. Resources and Capabilities Needs
   a. R&C Availability.
   b. Greater scope and differentiation, greater quantity and variety of R&C.
   Factors can change over time
   Changes in the Field of Activity
   DEVELOPMENT STRATEGIES

Firm Growth and Development

Once its scope has been defined, a firm evolves over time as a consequence both of its
current operations and of any possible strategic decisions adopted. A firm's growth and
development refer to an evolutionary process whereby the firm changes its size or its scope.

FIRM GROWTH

. Refers to increases in the size of variables such as the volume of assets, output, sales, profits
and headcount.
. Synonymous with "good corporate health."
. It is essential in competitive environments to maintain a competitive position. It is related to
the level of utility of the company's executives.

DEVELOPMENT

. The concept of development is broader than that of growth, as it includes the firm's qualitative
variations (e.g., in the scope of its business), and although it tends to be accompanied by
growth in most cases, this is not always the case.
. It must be oriented towards the value creation for the company as a whole.
Development can create value with or without growth, even with a reduction in
the size of the company.
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Business Development

DEVELOPMENT DIRECTIONS

whether or not to modify its field of activity

DEVELOPMENT METHODS

Decisions on how to achieve the goal set in the
chosen development direction
Expansion/Specialization
or Diversification?
Internal or external development?
Which Direction to Go?
How to Get it?

DEVELOPMENT STRATEGIES

Decisions made by business management regarding the future evolution of the field of
activity, relating to both quantitative aspects (growth) and qualitative aspects
(business portfolio composition) > CORPORATE STRATEGY
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DEVELOPMENT METHODS (growth-based)

Internal Development

. Investments made by and for the company itself.
· Growth requires time.
. It is the primary path for a specialization strategy during the growth phase.
. If the strategy is diversification, the key criterion for internal growth is the ability to innovate
and learn the new business.

External Development

. It is carried out through acquisitions or alliances.
. In specialization strategies: acquisition of competitors.
. In diversification strategies: acquisition of other business areas.
A way to quickly acquire competencies or market share
Fast but internally costly due to cultural differences

DEVELOPMENT DIRECTIONS

Basic strategies according to Ansoff : Expansion/Specialization or Diversification

PRODUCTS
Present / Traditional
New
MARKET
Present / Traditional
Expansion/
Specialization
New
Diversification
Source: Ansoff (1976:144)
• Classification is based on the relationship between the current situation and new business developments, in
products and markets.
· Expansion strategy implies maintaining a close relationship with the present situation either through traditional
products, traditional markets, or both at the same time.
· Diversification strategy, implies something of a fresh start, with the firm developing in response to new markets
and products.
. Although it remains largely valid, this classification poses the problem of identifying development with firm growth.
Nevertheless, firms may also consider the option of downsizing their business portfolio in search of the greater
specialisation or consistency of their core activities.
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Identification of Development Strategies (following Ansoff)

a. Development strategies may be identified according to the FIELD OF ACTIVITY and the
specific composition of the business portfolio at the present time
b. Considering different alternatives according to four fundamental CRITERIA:
. whether or not the strategy chosen changes the scope of the firm
· whether or not the strategy chosen implies growth
. whether or not operations continue with the same products and in the same markets
. whether or not the new products and markets accessed are related to traditional ones, as
well as the type of relationship maintained.

Basic Development Directions

REESTRUCTURING
BUSINESS
abandoned
- Market
penetration
- Product
development
NEW
PORTFOLIO
-Market
development
1
..
CURRENT
PORTFOLIO
NEW
BUSINESS
CURRENT
PORTFOLIO
CURRENT
PORTFOLIO
NEW
BUSINESS
CONSOLIDATION
..
UNRELATED HORIZONTAL
DIVERSIFICATION
RELATED HORIZONTAL
DIVERSIFICATION
NEW
BACKWARD
BUSINESS
NEW
FORWARD
BUSINESS
CURRENT
PORTFOLIO
VERTICAL
DIVERSIFICATION: INTEGRATION
CURRENT
PORTFOLIO
EXPANSION
SOURCE: Guerras y Navas (2022)
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Basic Development Directions Overview

> Restructuring: The firm reorganizes its business portfolio, which may involve closing or restructuring businesses, often to maintain or reduce size, thereby modifying its scope.
o e.g. General Electric (GE): In 2017, GE announced a major restructuring plan which included the decision to exit its lighting business, a division that had been part of the
company for over a century. This move was part of a broader strategy to focus on its core industrial businesses, such as aviation, power, and renewable energy. By divesting its
lighting division, GE aimed to streamline operations and improve overall financial performance.
Expansion: The firm grows by maintaining a close relationship with its current products or markets, which may or may not change the firm's scope.
Consolidation: The firm aims to maintain its current performance without growth or changes in scope, often in mature or declining industries to protect its position. Consolidation
involves the unification of operations, products, or services to improve efficiency, reduce costs, and strengthen market position.
o e.g. IBM's Focus on Core Business: In recent years, IBM has focused on consolidating its operations to maintain its current performance without significant growth or changes
in scope. IBM has divested several non-core businesses, such as selling its semiconductor manufacturing business to GlobalFoundries in 2014 and its x86 server business to
Lenovo in 2015. These moves allowed IBM to concentrate on its core competencies in cloud computing, artificial intelligence, and enterprise services, thereby protecting its
position in these mature and competitive industries. (Restructuring + Consolidation).
Diversification: The firm introduces new products and enters new markets, leading to growth and a change in scope. This can be related or unrelated to existing businesses.
o Related Diversification: e.g. Disney diversified from its core business of animation and film production into related areas such as theme parks (Disneyland and Disney World),
cruise lines (Disney Cruise Line), and media networks (ESPN, ABC). This strategy leverages Disney's strong brand and content library to create synergies across its
entertainment offerings.
o Unrelated Diversification: e.g. Virgin Group: founded by Richard Branson, is a prime example of unrelated diversification. Originally starting as a record label (Virgin Records),
the company expanded into a wide range of industries, including airlines (Virgin Atlantic), telecommunications (Virgin Mobile), and even space travel (Virgin Galactic). Each of
these ventures operates in completely different markets, showcasing Virgin Group's strategy of entering unrelated industries to diversify its business portfolio.
> Vertical Integration: The firm becomes its own supplier or customer by launching new businesses related to its core product, either upstream (backward integration) or downstream
(forward integration)
o New Backward Business: e.g.Tesla has implemented backward vertical integration by producing its own batteries for electric vehicles. Instead of relying on external suppliers,
Tesla manufactures its own batteries at its Gigafactories. This strategy allows Tesla to control the quality, cost, and supply of a critical component in its electric vehicles, enhancing efficiency and reducing dependency on third-party suppliers.
o New Forward Business: e.g. Apple has employed forward vertical integration by opening its own retail stores. By selling its products directly to consumers through Apple Stores
and its online platform, Apple controls the customer experience, pricing, and product presentation. This strategy enhances brand loyalty, provides valuable customer
feedback, and increases profit margins by eliminating intermediaries.
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