Chapter 4 - The difference between corporate strategy and competitive strategy

Question 1

What are the two factors that determine profit potential for companies? Describe them!

Answer 1

1) Industry attractiveness
- in some industries it is easier to make good profits than in others → dependent on the degree of competition
- the more competition in one industry the less attractive and the less profit potential

2) Competitive advantage
- to what degree can the company create a competitive advantage

Ideally, companies operate in an industry with both: high attractiveness and competitive advantage

Question 2

What is the difference between corporate strategy and competitive strategy?

Answer 2

Corporate strategy → it is about the portfolio of businesses a company will be active in

e.g. Coca-Cola focuses on beverage industry; meanwhile PepsiCo is next to beverage industry also active in the food industry

Competitive strategy → it is about strength of the position that a company is able to build up in each of these businesses

Question 3

Describe Corporate strategy in more detail!

Answer 3

Choose the Strategic Business Unit (SBU) you will operate in

SBU = cluster of one or more product market combinations that are homogeneous → one and the same competitive strategy can be developed

Selection of SBUs is linked with concept of relatedness → Degree to which there is similarity between different businesses
a) single business
b) related diversification
c) unrelated diversification

Question 4

What is the Diversification strategy? Also point out the downsides of Diversification

Answer 4

It is a growth strategy (one of the four main strategies for growth identified by Igor Ansoff)
→ companies develop new products in new markets

However, not only growth is key but also other aspects as for example optimally utilize the given resources or exit unsustainable / unprofitable industry environments

→ Diversification strategy, however, is the riskiest and most complex strategies out of all four because the company is entering a new unknown market and does not have the knowledge / experience yet
→ Human and financial resources might not be allocated correctly

Question 5

What is Diversification?

Answer 5

Diversification is used by businesses to expand into markets and industries that they currently haven’t explored yet.
→ Leads to new avenues for sale, which eventually can increase the profits
→ Can help to minimize the risk of an industry downturn by spreading the risk to several activities
→ Defense mechanism to protect from strong competition

Question 6

What are the four types of diversification?

Answer 6

1) Horizontal diversification
Add a product or service outside the current line that allows cross-selling, e.g. a paper company starts selling and producing printers

2) Vertical integration
Forward vertical integration: A company starts to take over activities from clients that perform activities downstream, e.g. an iron mining company that purchases a steel factory

Backward vertical integration: A company at the end of a supply chain looks for growth opportunities upstream, e.g. Netflix starts to create their own films

→ Risk of vertical integration: company looses focus of core-business and cultural fit is not guaranteed

3) Concentric Diversification
Adding a product or service that is technologically related to the main product or service. Technical relatedness gives advantages by leveraging industry experience, technical know-how, and sometimes manufacturing processes e.g. Honda offers products that all use the combusting engine technology like lawn mowers, motorcycles or generators

4) Conglomerate Diversification
Add new products or services that are totally unrelated to your current business. It can create a unique and independent revenue for success, but also can dilute the existing brand.