Ch 6 - Corporate-level strategy

Question 1

Corporate-level strategy

Answer 1

Specifies actions a firm takes to gain competitive advantage by selecting and managing a group of different businesses competing in different product markets. It helps companies to select new strategies positions - positions that are expected to increase the firm’s value. By creating value, the firm earns above-average returns. Successful example: Amazon, Unsuccessful example: GE (experienced revenue decline in several areas of businesses)

Question 2

Levels and types of diversification

Answer 2

Low level Diversification :
-Single Business
-Dominant business
Moderate to High Levels of diversification
-Related constrained
-Related Linked (mixed related and unrelated)
Very high levels of diversification:
-Unrelated

Question 3

Low levels of diversification

Answer 3

Single business: 95% or more of revenue comes from a single business. (One circle) Example: Family Company Tabasco sauce business
Dominant-business: between 70% and 95% of revenue comes from a single business (2 circles related) Example: UPS has 63% of revenue from its US package delivery business, 20% international package business, 17% from no package business.

Question 4

Moderate and high levels of diversification

Answer 4

Related Constrained: (3 circles attached) Less than 70% of revenue comes from the dominant business, and all businesses share product, technological and distribution linkages. Links between firm’s businesses are direct - they use similar sourcing technologies in production of its equipment allowing a transfer of knowledge across these businesses.
Related linked (mixed related and unrelated): (3 circles, 2 attached): less than 70% of revenue comes form the dominant business, and there are only limited links between businesses. Ex: corporation has a number of consumer businesses that are not related to each other, and the firm makes no efforts to share activities or to transfer core competencies between or among them.

Question 5

Reasons for diversification

Answer 5

Value-creating-diversification
Def: diversification is used to increase the firm’s value by improving its overall performance. Value is created - either through related diversification or through unrelated diversification - when the strategy allows a company’s business to increase revenues or reduce costs/
->Economies of scope (related diversification)
-sharing activities
-Transferring core competencies
->market power (unrelated diversification)
-Blocking competitors through multipoint competition
-Vertical integration
->financial economies (unrelated diversification)
-Efficient internal capital allocation
-Business restructuring
Value-Neutral diversification:
Def: nothing to do with increase a firm’s value. A desire to match a new neutralize a competitor’s market power (ex:to neutralize another firm’s advantage by acquiring a similar distribution outlet)
-Antitrust regulation
-Tax laws
-Low performance
-Tangible and intangible resources
-Risk reduction for firm
->Value reducing diversification:
-Diversifying managerial employment risk
-Increasing managerial compensation

Question 6

Value-Creating diversification strategies: Operational and corporate relatedness

Answer 6

Check in photos the graph

Question 7

Economies of scope (related diversification)

Answer 7

Def: are cost savings a firm creates by successfully sharing resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its business to another of its businesses

Question 8

Sharing resources and capabilities

Answer 8

Firm can create operational relatedness by sharing either a primary or support activity. It may reduce risk and create value. Cons: require careful coordination between the business involved and if demand for one business product is reduce , it may not generate sufficient fixed costs required to operate the shared facilities.

Question 9

Transferring of core competencies

Answer 9

1. Expense of developing a core competence has already been incurred in one of the firms business, transferring this competence to a second business eliminates the need for that business to allocate resources to develop it. 2. Intangible resources are hard to imitate -> transferring corporate-level competence often gains an immediate competitive advantage over its rivals. The “know how”.

Question 10

Market power (related diversification)

Answer 10

Def: exists when a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level , or both. (Multipoint competitive and vertical integration)

Question 11

Multipoint competitive (market power)

Answer 11

Def: exists when 2 or more diversified firms simultaneously compete in the same product areas or geographical markets. Usually, rivals feel pressure to diversify. Ex: UPS and FedEX made overnight delivery decisions

Question 12

Vertical integration (market power)

Answer 12

Def: exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration). Market power is gained as the firm develops the ability to save on its operations, avoid sourcing and market costs, improve product quality, possibility protect its technology from imitation by rivals.

Question 13

Financial economies (non diversification related)

Answer 13

Def: are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm.

Question 14

Efficient internal capital market allocation

Question 15

Asset restructuring