Chapter 6 - Corporate Level Strategy - Value through Diversification Flashcards
- Corporate level strategy
Where to compete? a strategy that focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses or industries
What are the three dimensions of corporate strategy
o Stages of industry value chain and degrees of vertical integration
o What range of products and services and degress of horizontal integration and diversification
o Where in the world to compete in global strategy
o Economies of scale
average per-unit decreases as its output increases
o Economies of scope
cost savings from leveraging core competencies or sharing related activities among businesses in a corporation.
- Vertical Integration
- an expansion or extension of the firm by integrating preceding or successive production processes.
- o If the cost of doing it inhouse is cheaper than the cost of hiring outside firms, them vertical integration is good
How managers can create value through diversification
- mergers/acquisitions
- strategic alliances
- joint ventures
- internal development
- leverage core competencies
- sharing activities
- pooled negotiating power,
- vertical integration
- corporate restructuring
- corporate parenting
- portfolio management
Related diversification
- a firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power
Aspects of related diversification
- economies of scope (leveraging core competencies or sharing related activities among businesses), or market power
- . Market power can be exercised through pooled negotiating power, where a diversified firm can restrict or control supply to a market, or vertical integration into the buyer or supplier industry.
Unrelated diversification
- a firm entering a business that uses different core competencies and operates in different markets
Aspects of unrelated diversification
- Companies can benefit from unrelated diversification by improving the target business
- Two ways to improve these businesses are parenting, where the company will provide expertise and support such as improving planning, budgeting, management performance evaluation and procurement practices.
- The second way to improve the target business is through restructuring, which involves substantially changing the assets, capital structure, and/or management.
- Portfolio management is a method of assessing a corporation’s entire portfolio of businesses, and helps managers to determine the strategic options and contribution of each business to the corporate overall performance. For corporations with multiple unrelated businesses, portfolio management helps to develop restructuring strategies.
What are 3 ways to restructure a business?
- 3 types of restructuring are asset restructuring, capital restructuring, and management restructuring.
- Asset restructuring involves selling off unproductive assets and product lines and acquiring complementary assets needed to improve the business.
- Capital restructuring involves improving the debt/ equity ratio, adding different classes of debt and equity. - Management restructuring involves changing the composition of top management and the firm’s organization, as well as changes to the reporting relationships and management performance evaluation criteria.
Ways for firm to diversify and achieve vertical integration
- Firms can diversify using mergers and acquisitions, strategic alliances and joint ventures, or internal development.
- Boston Consulting group portfolio matrix:
o Stars: high growth rate, high market share; invest
o Cash cows: low growth rate, high market share; let them keep making profits but don’t invest a lot
o Dogs: low growth rate, low market share; avoid or eliminate
o Question marks: high growth rate, low market share; not sure of the future
