Chapter 8

Question 1

What is Corporate Strategy?

Answer 1

Corporate strategy is about the overall scope of the organisation and how value is added to the constituent businesses of the organisation as a whole.

Question 2

What is the scope of the organisation

Answer 2

Scope is concerned with how far an organisation should be diversified in terms of two different dimensions: products and markets. may be adjusted through growth or contraction.

Question 3

What is Parenting Advantage?

Answer 3

The value-adding effect of head office to individual SBUs that make up the organisation’s portfolio is termed parenting advantage

Question 4

What is the diversification?

Answer 4

Diversification involves increasing the range of products or markets served by an organisation.

Question 5

What is the difference between related and unrelated diversification?

Answer 5

Related diversification involves expanding into products or services with relationships to the existing business. Unrelated diversification involves diversifying into products or services with no relationships to existing businesses.

Question 6

What are the four strategy directions following the Anssof Matrix?

Answer 6

Market Penetration, Product and service development, Market development, Unrelated diversification

Question 7

What is Market penetration?

Answer 7

Market penetration implies increasing share of current markets with the current product or service range

Question 8

What is Product and service development?

Answer 8

Product and service development is where organisations deliver modified or new products (or services) to existing markets.

Question 9

What is market development? what does this strategy involve?

Answer 9

Market development involves offering existing products to new markets. This strategy involves:
* new users(e.g.extending the use of aluminium to the automobile industry);
* new geographies(e.g.extending the market to new areas – international markets being the most important);
* meeting the critical success factors of the market;
* new strategic capabilities(e.g.in marketing).

Question 10

What is unrelated diversification?

Answer 10

Unrelated diversification takes the organisation beyond both its existing markets and its existing products and radically increases the organisation’s scope.

Question 11

What is consolidation and Retrenchment?

Answer 11

Consolidation refers to a strategy by which an organisation focuses defensively on their current markets with current products.
Retrenchment refers to a strategy of withdrawal from marginal activities in order to concentrate on the most valuable segments and products within their existing business.

Question 12

What are the diversification drivers?

Answer 12

• Exploiting economies of scope – efficiency gains through applying the organisation’s existing resources or competences to new markets or services.
• Stretching corporate management competences (‘dominant logics’) that is, applying these competences across a portfolio of businesses.
• Exploiting superior internal processes. Internal processes within a diversified corporation can be more efficient than external processes in the open market.
• Increasing market power via mutual forbearance or cross subsidisation.

Question 13

what are synergies?

Answer 13

Synergies are benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts. ‘2 + 2 = 5’ effect.

Question 14

what are Value-destroying diversification drivers ?

Answer 14

• Responding to market decline;
• Spreading risk;
• Managerial ambition can sometimes drive inappropriate diversification.

Question 15

What is Vertical Integration?

Answer 15

Vertical integration describes entering activities where the organisation is its own supplier or customer.

Question 16

Backward integration and Forward integration

Answer 16

Backward integration refers to development into activities concerned with the inputs into the company’s current business.
- Forward integration refers to development into activities concerned with the outputs of a company’s current business.

Question 17

dangers of vertical integration?

Answer 17

two dangers. First, vertical integration involves investment. Expensive investments in activities that are less profitable than the original core business will be unattractive to shareholders because they are reducing their average or overall rate of return on invest- ment. Second, even if there is a degree of relatedness through the value network, vertical integration is likely to involve quite different resources and capabilities.

Question 18

what is outsourcing?

Answer 18

Outsourcing is the process by which value chain activities previously carried out internally are subcontracted to external suppliers. An argument for outsourcing to suppliers is often based on their unique capabilities that allow lower costs to the sourcing organisation Specialists in a particular activity are likely to have superior capabilities than an organisation for a particular activity not central to its business

Question 19

what is divestment?

Answer 19

Divestment occurs when an organisation decides to pull out of one or more of its businesses. The decision to divest may occur if the SBU in question is not adding value to the firm and the price obtained through sell-off is more than it standalone value

Question 20

What are the reasons and the types of divestment?

Answer 20

Reasons: poor performance; investor pressure; valueof unit is more than value generated.
Two types:
– Sell-off: SBU sold to another company.
– Spin-off: SBU shares distributed to parent company shareholders.
Equity carveout: parent sells a portion of shares to the public and retains a significant portion to retain control of the business. This is generally a temporary arrangement.

Question 21

what are the value-adding activities?

Answer 21

There are five main types of activity by which a corporate parent can potentially add value:
* Envisioning.
* Facilitating synergies.
* Coaching. T
* Providing central services and resources.
* Intervening.

Question 22

What are the value destroying activities?

Answer 22

However, there are three ways in which the corporate parent can inadvertently destroy value:
* Adding management costs
* Adding bureaucratic complexity
* Obscuring financial performance