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MANA 4385 - Strategic Management Intro > CH 8 - Corporate Level Strategies > Flashcards

CH 8 - Corporate Level Strategies Flashcards

1
Q

Learning objectives

A
  1. What is corporate-level strategy and how does it differ from business-level strategy?
  2. What is vertical integration and what are its benefits?
  3. What are the 3 types of diversification and when should they be used?
  4. What are 4 methods that a firm can use to implement its corporate strategy?
  5. Why and how might a firm retrench or restructure?
  6. What is portfolio planning and why is it useful?
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2
Q

2 Questions of Corporate-Level Strategies

A
  1. What businesses should the firm be in?
  2. How can being in those businesses create synergy and improve performance?
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3
Q

What are the 3 types of strategies covered in the book?

A
  1. Business-level
  2. Corporate-level
  3. International
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4
Q

Business-level strategies focus

A

how firms compete head to head on products and services that they offer.

Intent - to provide a competitive advantage so that buyers will choose your products/services over competitors’

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5
Q

Corporate level strategy

Definition

A

specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses in several industries and/or product markets

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6
Q

2 Basic Questions of Corporate Level Strategy

A
  1. What businesses should we be in?
  2. How should we manage the portfolio to achieve synergy/create value?
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7
Q

3 Questions to consider when

answering: what businesses should we be in?

A
  1. In what stage of the industry value chain should we participate?
  2. What range of products and services should we offer?
  3. Where geographically should we compete?
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8
Q

Synergy - business definition

A

Synergy in the business context means the cooperation or interaction of two or more business units so that they perform more effectively together than they would if independent

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9
Q

Ways of diversification

A
  1. Enter new domains/industries
  2. Geographic diversification
  3. Value chain (buying suppliers)
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10
Q

3 Types of Diversification

A
  1. Related diversification - diversifying into new business lines in the same industry
  2. Unrelated diversification - going into new, unrelated industries.
  3. Geographic diversification - operating in various geographic markets.

Goal of diversification - to achieve synergy

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11
Q

3 Tests for determining if Diversification is a good idea

A
  1. How attractive is the industry the firm is considering entering? Should have strong profit potential
  2. How much will it cost to enter the industry?
  3. Will the new unit and the firm be better off? Does at least one side gain a competitive advantage?
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12
Q

Core competency

A

is a skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business (

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13
Q

How do most unrelated diversifications go?

A

They don’t have happy endings

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14
Q

Horizontal Integration

A

Horizontal integration refers to pursuing a diversification strategy by acquiring or merging with a rival. The term merger is generally used when two similarly sized firms are integrated into a single entity. In an acquisition, a larger firm purchases and absorbs a smaller firm.

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15
Q

Why is Horizontal Integration an attractive diversification option?

A
  1. It aims to lower costs by achieving greater economies of scale
  2. Gaining access to strategic resources (ex: brand names)
  3. Access to new distribution channels
    4.
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16
Q

What is the average/common result of mergers and acquisitions?

A

Erosion of shareholder value in 60% of them

70-90% of mergers fail

Reasons for failure:

  1. Differing cultures not meshing well
  2. Overpaying for the target company and never earning it back
17
Q

Vertical Integration Strategy

A

when a firm gets involved in new portions of the value chain.

Good for when buyers and suppliers are flexing their power on you

18
Q

Backward Vertical Integration

Strategy

A

Is when a firm moves back along the value chain and enters a supplier’s business.

19
Q

Forward vertical integration

Strategy

A

involves a firm moving further down the value chain to enter a buyer’s business

(Ex: Disney owning retail stores)

20
Q

Diversification

A

Diversification strategies involve a firm stepping beyond its existing industries and entering a new value chain. Generally, related diversification (entering a new industry that has important similarities with a firm’s existing industries) is wiser than unrelated diversification (entering a new industry that lacks such similarities). Geographic diversification is another strategy to drive synergy

21
Q

4 Ways of implementing a corporate diversification strategy

A
  1. Internal Development - developing and launching new businesses yourself. Costly, but can be very lucrative if successful.
  2. Strategic Alliance - mutually beneficial contractual relationships.
  3. Joint Venture - 2 companies come together and form a 3rd company together.
  4. Merger & Acquisition - when a company buys another. Name depends on size differences
22
Q

Strategies for getting smaller (2)

A
  1. Retrenchment
  2. Restructuring
23
Q

Retrenchment

A

Firms following a retrenchment strategy shrink one or more of their business units. Much like an army under attack, firms using this strategy hope to make just a small retreat rather than losing a battle for survival. It is also commonly referred to as “downsizing” or “rightsizing.”

24
Q

Restructuring

A

Spin-offs occur when businesses create a new firm from a piece of their operations. Because some diversified firms are too complex for investors to understand, breaking them up can create wealth by resulting in greater stock market valuations. Spinning off a company also reduces management layers, which can lower costs and speed up decision making. Below we describe a variety of firms that were created as spin-offs.

25
Q

Divestments

A

Divestment refers to selling off part of a firm’s operations

Sometimes used to reverse vertical diversification

26
Q

Diversification discount

A

Investors often struggle to understand the complexity of diversified firms, and this can result in relatively poor performance by the stocks of such firms. This is known as a diversification discount.

27
Q

Why might you want to get smaller?

A

Executives sometimes need to reduce the size of their firms to maximize the chances of success. This can involve fairly modest steps such as retrenchment or more profound restructuring strategies.

Live to fight another day

28
Q

Portfolio Planning

A

Portfolio planning is a process that helps executives assess their firms’ prospects for success within each of its industries, offers suggestions about what to do within each industry, and provides ideas for how to allocate resources across industries.

29
Q

Portfolio Planning

Boston Consulting Group (BCG) Matrix

A

Categorizes a firms’ businesses as high or low along 2 dimensions:

  1. Its share of the market
  2. And the growth rate of its industry

4 Quadrants of the Matrix:

Matrix:

X-axis - relative market share

Y-axis - market growth rate

Top left - Question Marks: low market share within fast-growing industries. Executives must decide whether to build them into stars, hold, or divest.

Top right - Stars: high market share in a fast-growing industry. Great candidates/prospects for growth

Bottom left - Dogs: low market share in slow-growing industries. Good candidates for divestment.

Bottom right - Cash Cows: high market share in slow-growing industries. Because their industries have a bleak prospect, profits should be invested/diverted to more promising businesses.

30
Q

BCG Matrix Picture

A
31
Q

BCG Decision Making

A
32
Q

3 Limitations of Portfolio Planning

A
  1. Oversimplifies by only considering 2 dimensions
  2. Potential to create motivational problems among employees, if they find out they’re in the dog or cash-cow categories.
  3. Does not help identify new opportunities

MANA 4385 - Strategic Management Intro (12 decks)

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