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Strategy & Organization > 7. Corporate Level Strategy > Flashcards

7. Corporate Level Strategy Flashcards

1
Q

What is corporate level strategy?

A

Actions a firm takes to gain competitive advantages by managing firms in different industries.

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2
Q

Why do firms use corporate level strategy?

A

For diversification and increasing value.

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3
Q

What are the three levels of diversification?

A

Low level, moderate level, high level.

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4
Q

What are the two strategies used for low level diversification?

A

1) Single business diversification strategy.

2) Dominant business diversification strategy.

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5
Q

How much percentage of a firm’s sales revenue is generated by a single business diversification strategy? And from where/

A

95% or more, from its core businesses area.

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6
Q

How much of a firm’s total revenue is generated by a dominant diversification strategy?

A

70% to 95% within a single business area.

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7
Q

What strategies are used for moderate to high level diversification?

A

1) Related diversification strategy

2) Unrelated diversification strategy

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8
Q

What does a related diversification Strategy entail?

A

A firm generates more than 30% revenue outside of its dominant business, but in a related business.

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9
Q

What are the two paths a related diversification strategy can take?

A

Constrained vs Linked

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10
Q

What does a related constrained diversification strategy entail?

A

Direct links between the companies.

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11
Q

What does a linked diversification strategy entail?

A

Linked companies that share fewer resources and focus on knowledge transfer. Combination of related and unrelated.

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12
Q

What is an unrelated diversification strategy?

A

A corporate level strategy for highly diversified firms with no well-defined relationships between its businesses.

Conglomerates use this strategy.

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13
Q

What does a firm’s revenue entail when it has an unrelated diversification strategy?

A

Less than 70% revenue comes from the dominant business.

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14
Q

What are the three reasons for diversification?

A

1) Increases firm value.
2) To match and neutralise rival’s power in the market.
3) Reduced managerial risk.

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15
Q

What do constrained and linked diversification strategies create for firms?

A

Value

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16
Q

How do firms create value from economies of scope using related diversification strategies? Give two examples.

A

1) Sharing activities (operational relatedness)

2) Transferring corporate level core competencies (corporate relatedness)

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17
Q

What does operational relatedness entail?

A

Activity sharing to increase strategic competitiveness and financial returns.

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18
Q

What are the risks of operational relatedness?

A

Linked outcomes

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19
Q

What does corporate relatedness entail?

A

Transfer of intangible assets (e.g. managerial and technological knowledge, experience, expertise).

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20
Q

How does corporate relatedness create value? List two ways.

A

1) Transferring core competencies from first firm to the second saves the second firm expenses that would’ve been needed for developing them.
2) Competitive advantage for second firm (intangible resources are hard to imitate).

21
Q

True or false: Key players are moved between firms for operational relatedness, but managers may be reluctant to give away their key players.

A

True

22
Q

What is a risk of corporate relatedness?

A

Over dependance on outsourcing may reduce usefulness of core competencies.

23
Q

How do firms increase market power through related diversification strategy?

A

Multipoint competition and vertical integration.

24
Q

What is multipoint competition?

A

Firms competing in the same product or geography markets.

25
Q

Give an example of multipoint competition.

A

FedEx vs UPS

26
Q

What is vertical integration?

A

Firm performing an activity that is usually outsourced. This helps increase market power by saving costs.

27
Q

What are the two types of vertical integration? Explain.

A

Backwards: produces own inputs

Forwards: own output distribution

28
Q

What is a limitation of vertical integration?

A

Outside suppliers can produce at lower cost.

29
Q

What is virtual integration?

A

Business through E-commerce. Might one day be more common than vertical integration.

30
Q

What is simultaneous operational relatedness and corporate relatedness?

A

Simultaneously creating economies of scope by sharing activities (operational relatedness) and transferring core competencies (corporate relatedness).

31
Q

How is a simultaneous operational relatedness and corporate relatedness strategy?

A

It is difficult for rivals to imitate.

32
Q

What is a possible consequence of simultaneous operational relatedness and corporate relatedness?

A

Diseconomies of scale: A company becomes too big/inefficient and costs rise.

33
Q

What is conglomerate strategy? (Part of unrelated diversification strategy)

A

Firms moving to a new industry with new products/ services significantly different from firm’s current ones.

34
Q

What is the risk level of a conglomerate strategy?

A

High

35
Q

What are financial economies?

A

Cost savings by improved financial allocations based on investments within or outside firms.

36
Q

Unrelated diversification strategies create value through two types of financial economies. What are they?

A

1) Efficient Internal Capital Market Allocation

2) Restructuring of Assets

37
Q

What does efficient internal capital market allocation entail?

A

Internal capital market allocation creates higher gains for stakeholders (more than what they would’ve gained from external allocations).

38
Q

What is a conglomerate discount?

A

Lower valuation than it would’ve been if it were a single business.

39
Q

What is the “Achilles Heel” in efficient internal capital market allocations?

A

Rivals can imitate financial economies (easier than with operational and corporate relatedness).

40
Q

What is a soft infrastructure? Why is this beneficial for unrelated diversification?

A

Intangible structure e.g. human. This is beneficial because firms won’t be worried about imitation of internal capital market allocations.

41
Q

Define restructuring of assets.

A

Creating value by buying and restructuring firms.

42
Q

What firms are best for restructuring of assets?

A

Low technology (less information overload), less reliant on customers

43
Q

True or false: Incentive for neutral-diversification comes from internal and external environments.

A

True

44
Q

Value Neutral diversification: What are external incentives to diversity? Give two reasons.

A

1) Anti-trust regulations: discouraging similar mergers, therefore many conglomerates are unrelated

2) Tax laws:
- reduced tax rates on single businesses means firms shift from acquisition investments (buying other firms) to paying dividends (for own firm).

  • reduced corporate tax advantages of diversification
45
Q

What is synergy?

A

When value of two or more firms working together is more than if they worked independantly.

46
Q

Value Neutral diversification: What are internal incentives to diversify? Give three reasons and elaborate.

A

1) Reduced synergy risk
2) Low performance: firms with low performance are willing to take more risks
3) Uncertain future cash flow: diversification is a defensive strategy

47
Q

How does a firm respond to synergy’s constrained flexibility?

A
  • reduced levels of technological change (slightly more related diversification)
  • constrain activity sharing for more unrelated diversification
48
Q

Why do managers decide to pursue value-reducing diversification? Give two reasons.

A

1) Diversify unemployment ris

2) Increased compensation (money)

49
Q

How are managers held in check? Give three ways.

A

1) Reputation
2) Fear of takeover (by other manager)
3) Governance mechanism (e.g. board of directors)

Strategy & Organization (14 decks)

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