Chapter 6

Question 1

Corporate Level Strategy

Answer 1

The strategy that top management formulates for the overall company.
Strategies exist at three levels in any organization: (1) the corporate or firm level, (2) the business unit or competitive level, and (3) the functional or tactical level.

Question 2

Compete in a single industry

Answer 2

Allows a firm to specialize, but “all eggs are in a single basket.”
Firms operating in a single industry are more susceptible to sharp downturns in business cycles, however.

Question 3

Compete in related industries (synergy)

Answer 3

Allows a firm to develop synergy among the business units. Synergy occurs when the combination of two organizations results in higher effectiveness and efficiency than would otherwise be generated separately.

Question 4

Compete in unrelated industries

Answer 4

Minimizes risk through diversification.
Participating in numerous unrelated businesses may result in uncertainties associated with losing touch with the fundamentals of each business.

Question 5

Growth (1)

Answer 5

Increase in size. Internal growth and external growth

Question 6

Stability (2)

Answer 6

Retain current size

Question 7

Retrenchment (3)

Answer 7

Decrease in size. Turnaround, divestment, and liquidation.

Question 8

Internal Growth

Answer 8

Expanding by internally increasing its size and sales. Is accomplished when a firm increases revenues, production capacity, and its workforce; it can occur by growing an existing business or creating new ones. Internal growth enables a firm to maintain control over the enterprise by adding new products, facilities, or businesses incrementally. Internal growth enables the firm to preserve its corporate culture and image while expanding at a more controlled pace.

Question 9

External Growth

Answer 9

External growth is accomplished when two firms merge or one acquires the other. A merger occurs when two or more firms, usually of roughly similar sizes, combine into one through an exchange of stock. An acquisition is a form of a merger whereby one firm purchases another, often with a combination of cash and stock. The combined organization possesses all the strengths of the individual firms. When two firms possess complementary resources and cooperate in a friendly acquisition or merger, the results can be positive

Question 10

Growth stages (internal vs external)

Answer 10

External growth can usually occur more quickly than internal growth, but integrating newly acquired entities into the current organization can be difficult.
The pursuit of external growth can enable a firm to modify its corporate profile.
Growth is not necessarily the best strategic alternative for every healthy organization.

Question 11

5 growth alternatives

Answer 11

Horizontal (related) Integration
Horizontal (related) diversification
Conglomerate (unrelated) diversification
Vertical integration
Strategic Alliances (Partnerships)

Question 12

Horizontal (related) Integration

Answer 12

A firm that acquires other companies in the same line of business is engaging in horizontal integration. Doing so allows a firm operating in a single industry to grow rapidly without moving into other industries. Desire for increased market share

Question 13

Horizontal (related) diversification

Answer 13

A firm engages in horizontal related diversification when it acquires a business outside its present scope of operation but with similar or related core competencies, the firm’s key capabilities and collective learning skills that are fundamental to its strategy, performance, and long-term profitability. The purpose of horizontal related diversification is to create synergy by transferring and/or sharing the capabilities among the various business units.

Question 14

Conglomerate (unrelated) diversification

Answer 14

When a corporation acquires a business in an unrelated industry to reduce cyclical fluctuations in cash flows or revenues, it is pursuing conglomerate (unrelated) diversification. Diversifying into unrelated industries is primarily financially driven

Question 15

Vertical integration

Answer 15

Vertical integration refers to merging various stages of activities in the distribution channel.
When a firm acquires its suppliers (i.e., expanding “upstream”), it is engaging in backward integration, whereas a firm acquiring its buyers (i.e., expanding “downstream”) is engaging in forward integration.
Pro: Transactions costs between suppliers and buyers may be reduced when the same firm owns both entities.
Con: It raise production costs and reduce efficiency because of the lack of supplier competition

Question 16

Strategic Alliances (Partnerships)

Answer 16

Strategic alliances—often called partnerships—occur when two or more firms agree to share the costs, risks, and benefits associated with pursuing new business opportunities.
Strategic alliances are considered to be a form of growth, but the firm does not necessarily gain revenues and there is no exchange of resources.
First, they minimize increases in bureaucratic, developmental, and coordination costs when compared to mergers and acquisitions. Second, each company can share in the benefits of the alliance without bearing all the costs and risks itself. The major disadvantage of a strategic alliance is that one partner in the alliance may offer less value to the project than other partners but may gain a disproportionate amount of critical know-how from the cooperation with its more progressive partners.

Question 17

Stability Strategy

Answer 17

Stability—attempting to maintain the present size and scope of operations—may be more attractive than growth when:

1. Industry growth is slow or non-existent.
2. Costs associated with growth do not exceed its benefits.
3. Growth may place great strains on quality and customer service. (Agreement not universal at this point)
4. Large, dominant firms may not want to risk prosecution for monopolistic practices.

Question 18

Retrenchment Strategies

Answer 18

When performance is disappointing, however, a retrenchment strategy may be appropriate. A firm deliberately reduces its size when it employs a retrenchment strategy.
A retrenchment strategy is often accompanied by a reorganization process known as corporate restructuring.

Question 19

Turnaround

Answer 19

A turnaround seeks to transform the corporation into a leaner, more effective firm, and includes such actions as eliminating unprofitable outputs, pruning assets, reducing the size of the workforce, cutting costs of distribution, and reassessing the firm’s product lines and customer groups.
A turnaround typically occurs when a firm performs poorly but anticipating problems and retrenching before problems intensify is advisable.
Turnarounds often accompany change in company leadership.
When a turnaround involves layoffs, firms must be prepared to address their effects on both departing employees and survivors

Question 20

Divestment

Answer 20

Divestment—selling one or more of a firm’s business units—may be necessary when the industry is in decline, or when a business unit drains resources from more profitable units, is not performing well, or is not synergistic with other corporate holdings.

Question 21

Liquidation

Answer 21

Liquidation is the strategy of last resort, and terminates the business unit by selling its assets. In effect, liquidation represents a divestment of all the firm’s business units and should be adopted only under extreme conditions.

Question 22

Case Analysis Step 9 Identify Corporate Strategy

Answer 22

What is the corporate profile?
What is the corporate strategy?
Provide support and explain the details

Question 23

Boston Consulting Group Growth-Share Matrix

BCG Matrix

Answer 23

The Boston Consulting Group (BCG) Matrix is corporate portfolio framework that examines the relationships among business units held by a single firm. Growth is on vertical axis and horizontal position is market share.
Stars- high growth potential & high market share
Question Marks- high growth potential, but low market share
Cash Cows- low growth potential, but high market share
Dogs- low growth potential & low market share

Question 24

BGC 4 options for strategic managers

Answer 24

1. Build market share with stars and question marks.
2. Hold market share with cash cows.
3. Harvest (milk) as much short-term cash as possible. The businesses harvested usually include dogs, question marks that demonstrate little growth potential, and some weak cash cows.
4. Divest a business unit.

Question 25

Corporate Strategy Considerations (global concerns)

Answer 25

Involvement at the international level (minimal)
Involvement at the multinational level (moderate)
Involvement at the global level (maximum)

Question 26

International Level

Answer 26

Importing
Exporting
International Licensing- a foreign licensee purchases the rights to produce a company’s products and/or use its technology in the licensee’s country for a negotiated fee structure.
International Franchising- a longer-term form of licensing in which a local franchisee pays a franchiser in another country for the right to use the franchiser’s brand names, promotions, materials and procedures
(licensing manufacturers, franchising service)
Strategic Alliances

Question 27

Multinational Level

Answer 27

In addition to the International Level…
Direct investments in other countries
Subsidiaries operate independently from each other.

Question 28

Global Level

Answer 28

In addition to the International Level…
Direct investments abroad
Subdivisions are interdependent

Question 29

Global Orientation Assessment (6 Questions)

Answer 29

1. Are customer needs abroad similar to those in the firm’s domestic market?
2. Are differences in transportation and other costs abroad conducive to producing goods and services abroad?
3. Are the firm’s customers or partners already involved in global business?
4. Will it be difficult to distribute goods and services abroad?
5. Will government trade policies facilitate global expansion?
6. Can managers in one country learn from managers in other countries?