Diversification vs Specialization + Integration vs Outsourcing

What is growth in strategy?

Development of a company’s strategic business activities (SBAs).

What is the goal of corporate strategy?

To maximize the company's overall value by selecting the SBAs in which to invest and grow.

What is synergy?

When two or more SBAs (strategic business areas) generate more value together than separately.

What are the three main growth modes?

Internal growth, external growth, alliances.

What are the main growth paths?

• Diversification vs specialization

• Integration vs outsourcing

• Internationalization

What internal efficiency gains can growth generate?

• Lower production costs

• Lower commercial costs

• Lower management costs

What market power benefits can growth generate?

Lower supply costs, Lower financing costs

What other advantages can growth bring?

• Risk reduction

• Increased differentiation

• Increased prestige for managers

• Motivation internally

• Positive signal to markets

What are the main limits to growth?

• Financing constraints

• Loss of control

• Regulatory constraints

• Organizational complexity

• Dispersion of resources

• High cost of learning new businesses

• Costs can increase after a threshold

What types of synergies exist?

• Product synergies

• Technology synergies

• Market synergies

What benefits can synergies provide?

• Lower costs

• Improved differentiation

• Lower cost of differentiation

What are the risks of synergies?

• Hard to evaluate ex-ante

• Difficult to implement

• Implementation costs

What is specialization?

Maintaining a single SBA without adding new skills.

Advantages of specialization?

• Efficiency

• Critical size

• Good visibility (capital markets)

Disadvantages of specialization?

• High risks

• Dependence on one market

• May require refocusing

What is diversification?

Strategy of developing new SBAs, requiring new skills.

Reasons to diversify?

• Face new competitors

• Develop new skills

• Mobilize new resources

What is refocusing?

Reducing the number of activities to improve consistency.

What are the main types of diversification?

• Market-driven (same products, new customers)

• Product-related (new products, same customers)

• Unrelated diversification (new products + new customers; no synergies)

What benefits does diversification bring?

• Growth in mature markets

• Risk reduction

• Synergies & savings

• Satisfying manager ambition

What are the disadvantages of diversification?

• Strategic heterogeneity

• Failure to reach critical size

• Coordination costs

• Conglomerate discount

What are the four diversification motivations?

1. Diversification of investment

2. Diversification of reinforcement

3. Diversification of redeployment

4. Diversification of survival

(Depends on attractiveness & competitive position)

What is the purpose of portfolio matrices?

To evaluate SBA coherence and guide investment decisions.

What are the two axes of portfolio matrices?

• Competitive position

• Environmental attractiveness

What are the typical strategic outcomes?

• Invest / maintain

• Selective investment

• Maintain and “milk”

• Divest

What are the four categories of the BCG matrix?

• Stars (High RMS→ Relative Market Share, High growth)

• Cash Cows (High RMS, Low growth)

• Question Marks (Low RMS, High growth)

• Dogs (Low RMS, Low growth)

What is the strategic action for Cash Cows?

Limit investments and use cash flow to fund other SBAs.

What is the strategic action for Question Marks?

Invest heavily or divest.

What dimensions does the ADL (Strategic Condition Matrix) matrix use?

• Business maturity

• Competitive position

What are its strategy categories?

• Winning activities (maintain)

• Dilemma activities (select)

• Losing activities (withdraw)

What dimensions does the McKinsey matrix analyze?

• Business attractiveness

• Competitive strength

Possible strategic recommendations?

• Invest strongly

• Hold position

• Selective investment

• Milk

• Withdraw

What is vertical integration?

Taking over upstream or downstream activities in the value chain.

Upstream integration?

Securing supply sources, controlling processes.

Downstream integration?

Controlling distribution, improving differentiation, securing outlets.

Benefits of vertical integration?

• Control over value-creating activities

• Access to scarce resources

• Secure supply & outlets

• Reduced uncertainty

• Lower transaction costs

• Reduced competitive pressure

• Financial benefits

• Control areas of differentiation

What are the limits of integration?

• Similar to diversification risks

• May undermine core competencies

• Risk of strategic autarky

• High fixed investments

• Reduced flexibility

• Higher complexity

What is outsourcing?

Transferring previously internal tasks to external, legally autonomous partners.

What forms can outsourcing take?

• Subcontracting

• Outsourcing

• Impartition

Key benefits of outsourcing?

• Focus on core competencies

• Lower capital investment

• Flexibility

• Lower procurement costs

• Economies of scale

• Demand risk reduction

• Access to suppliers’ innovation

What are the main risks of outsourcing?

• Dependency on suppliers

• Loss of know-how

• Loss of confidentiality

• Loss of strategic capabilities

• Fragility due to focus

• Monitoring/control costs

• Social cost (worker exploitation)

• Environmental issues

What variables influence the choice between integration and outsourcing?

• Impact on competitive advantage

• Risk type & level

• Transaction frequency

• Specific investments

• Financial capacity

The BCG Matrix

The ADL matrix

The McKinsey Matrix