CH 6 Flashcards
What is the importance of a corporate level strategy?
Must maintain focus on creating value
How should diversification create value?
1) Joint Ventures
2) Internal Development
3) Strategic Alliances
4) Mergers and Acquisitions
J.I.S.M
What justifies diversification tactics?
The creation of value for shareholders
What determines value for shareholders?
Synergy between two or more businesses.
1 + 1 should be greater than 2
True or False: Benefits derived from diversification are NOT mutually exculsive
True
Related diversification is also called?
Horizontal Relationships
Unrelated diversification is also called?
Hierarchical Relationships
How are benefits derived from related businesses?
- Sharing core competencies
- Sharing tangible resources (production plants)
How are benefits derived from unrelated businesses?
- Corporate Offices (IT and HR)
- Leveraging these activities into the value chain
What are the benefits of economies of scope?
- Leverage core competencies
- Share related activities
- Enjoy greater revenues
How do related businesses gain market power?
- Pooled negotiating power
- Vertical integration
What is economies of scope?
Cost savings from leveraging core competencies or sharing related activities among businesses in a corporation
What is another way a firm can gain revenue?
If both businesses together produce greater revenues than if they were separate (synergy)
What is market power?
A firm’s ability to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment
Q. Sharing core competencies is one of the primary potential advantages of diversification. In order for diversification to be most successful, it is important that:
The similarly required sharing for core competencies must be in the value chain, not in the product
How do core competencies create value and synergy?
1) Create superior customer value
2) Value chain elements in separate businesses require the same skills
3) Difficult for competitors to imitate
What is included in collective learning?
1) Coordinate diverse production skills
2) Integrate multiple streams of technologies
3) Market diverse products and services
True or false: It is essential that products between businesses or similar, not skills.
False. Similar skills are important, not products
What are sharing activities?
Activities of two or more businesses’ value chains done by one business
What are some tangible value-creating activities?
1) Manufacturing
2) Distribution
3) Sales Forces
How does sharing tangible value creating activities provide payoffs?
1) Cost savings
2) Revenue enhancements
How can market power raise value and synergy?
1) Pooled negotiating power
2) Vertical integration
True or False: Managers must be careful when it comes to negotiating power. Buyers/sellers may retaliate.
True
Q. Shaw industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own plastic fiber. This is an example of:
Vertical integration
What are the 5 factors to evaluate when considering vertical integration?
1) Quality of services of current sellers/distributors
2) Outsourced activities in value chain that could create more profit
3) Demand stability of product
4) Necessary competencies for vertical integration
5) Will vertical integration be negative to stakeholders?
What is transaction cost perspective?
The choice of a transaction’s structure is influenced by transactions costs
What are transaction costs?
Sum of all market transactions
From the transaction cost perspective, when is vertical integration beneficial?
Transaction costs > Admin costs
What is the parenting advantage?
Positive contributions of the corporate office to a new business as a result of expertise and support, and not as a result of restructuring
What is restructuring?
Intervention in corporate office to change assets, capital, or management
What is portfolio management?
Analyzing the competitive position of a portfolio of businesses within a corporation
What are five ways of understanding using portfolio management?
1) Suggesting strategic alternatives
2) Identifying allocation of resources
3) Using Boston Consulting Groups matrix
4) Identify strategic acquisitions
5) Provide financial resources
What are stars?
Long term growth potential, increased investment
What are question marks?
High growth industries with weak market shares, increased investment
What are cash cows?
Low growth industries with high market share, source of cash for investments
What are dogs?
Weak potential, divest
What are some limitations of portfolio models?
1) Two dimensional comparisons
2) Ignores synergies
3) Looking at processing as mechanical
4) Strict allocation rules
5) Overly simplified predictions
What are three ways a firm can diversify?
1) Mergers & Acquisitions
2) Joint venture or strategic alliance
3) Internal development
What are 5 limitations to mergers and acquisitions?
1) High costs
2) Advantages can be imitated
3) Synergies can be imitated
4) Manager’s egos can get in the way
5) Cultural issues
Q. Divestment can be a common result of an acquisition. Divesting businesses can accomplish many different objectives. These include:
1) Enabling managers to focus efforts
2) Provide more resources
3) Raising cash
