Chapter 6

Question 1

List two related issues in corporate-level strategy

Answer 1

What businesses should a corporation compete in?

How can these businesses be managed so they can create “synergy”

Question 2

Companies should work together through “synergy” which can have what two different meanings?

Answer 2

First: a firm may diversify into related businesses
(Benefit: derived from horizontal relationships which is businesses sharing intangible and tangible resources)
Second: enhances market power via pooled negotiating power and vertical integration

Question 3

Definition of Diversification

Answer 3

“The process of firms expanding their operations by entering new businesses”

Entering a different business; the difference is a matter of degree; different in terms of industry, geo markets, products, technologies, etc

Question 4

Definition of Related diversification

Answer 4

“Enables a firm to benefit from horizontal relationship across different businesses in the diversified corporation by:”

• Leveraging core competencies (Econ of Scope)
• Sharing activities (Econ of Scope)
• Building market power

Question 5

What is Related Linked

Answer 5

“When the business units can vary widely”

Ex: Nike shares the Nike brand and the swoosh logo across a number of its businesses but few other resources

Question 6

Definition of Related Constrained

Answer 6

“There are a large number of resource links between the business units”

Example: Polaris uses shared components designs, production facilities, and distribution systems for its snowmobiles, ATV, and EVs

Question 7

What is Economies of Scope and how do you get into different businesses using the same resources? Rule of thumb?

Answer 7

“Cost savings from leveraging core competencies or sharing related activities among businesses in the corporation”

Rule of thumb:

• Economies: indicate cost savings
• Scale: produce more of the same things
• Scope: produce different things by sharing existing resources

Question 8

What is Core Competencies

Answer 8

Reflect the collective learning, achieved by transferring accumulated skills and expertise across the business units in a corporation

Also referred to as: the essence or central aspect of the company; the glue that binds existing businesses together

Question 9

For core competencies to create value and synergy they must meet what three criteria?

Answer 9

• They enhance competitive advantage by creating superior customer value
• At least one element in the value chain across separate business must require similar skills (competencies)
• They are difficult for competitors to imitate or find substitutes

Question 10

What is Sharing Activities

Answer 10

Shared tangible and value-creating activities can provide payoffs:

• Cost savings through elimination of redundant roles, facilities, and related expenses, or economies of scale
• Revenue enhancements through increased differentiation and sales growth

Example: Shared retail locations of banks can provide access to different divisions such as consumer banking, mortgages, investments

Question 11

What is Market Power

Answer 11

“Firm’s ability to profit through 1) restricting or controlling supply to a market 2) coordinating with other firms to reduce investment”

Question 12

Market power can create synergy through what two strategies?

Answer 12

Pooled negotiating power: similar businesses working together to improve bargaining position
Ex: Being part of Nestle

Vertical integration: becoming its own suppliers or distributors through:
-Backwards integration of value chain
-Forward integration
-Downstream
-Upstream
Ex: Oil refinery securing land leases and developing their own drilling capacity to have constant supply of oil

Question 13

What is Unrelated Diversification

Answer 13

Unrelated diversification enables a firm to benefit from vertical or hierarchial relationships between the corporate office and individual business units through parenting advantage; restructuring and portfolio management

Question 14

What is Parenting?

Answer 14

“Allows the corporate office to create value through 1) management expertise: M&A, efficient operations 2) central functions”

Question 15

In restructuring the parent intervenes in:

Answer 15

• Asset restructuring: the sale of unproductive assets
• Capital restructuring: change debt- equity mix, adding debt or equity
• Management restructuring: changes in the top management team, organizational structure, and reporting relationships for a business unit

All three can create more value

Question 16

What is Portfolio management

Answer 16

“Achieve a balanced portfolio of businesses (profitability, growth, and cash flow characteristics complement each other and adds up to a satisfactory overall corporate performance) by”:

• Assessing the competitive position of a portfolio
• Suggesting strategic alternatives for each business
• Identifying priorities for the allocation of resources across the businesses

Question 17

What is each of the SBUs in the BCG Matrix

Answer 17

IGR: Industry growth rate
RMS: Relative market share

Question marks: High IGR, Low RMS
Stars: High IGR, High RMS
Cash cows: Low IGR, High RMS (Provide immediate cash)
Dogs: Low IGR, Low RMS

Question 18

Benefits from horizontal and hierarchical relationships are what?

Answer 18

Not mutually exclusive

Question 19

Benefits derive from horizontal relationships are what?

Answer 19

Economies of Scope

• Sharing intangible resources/capabilities such as core competencies (marketing)
• Sharing tangible resources such as production facilities and distribution channels via vertical integration

Market Power:

• Pooled negotiation
• Vertical integration

Question 20

Benefit derived from hierarchical relationships are what?

Answer 20

Parenting: value creation derived from the corporate office; leveraging support activities in the value chain
Restructuring: assets, capital, manufacturing
(Balanced) Portfolio: competitive positions, strategic alliances