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Strategic Management > Chapter 8: Corporate Strategy > Flashcards

Chapter 8: Corporate Strategy Flashcards

1
Q

What are the 3 distinct facets involved with crafting corporate strategy?

A
  1. Picking new industries to enter + means of entry
  2. Pursuing opportunities to leverage cross-business value chain relationships
  3. Initiating actions to boost the combined performance of the corporation’s collection of businesses
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2
Q

What are the (4) strategic options for improving a corporation’s overall performance?

A
  1. Sticking closely with with the existing business lineup and pursuing opportunities presented by these businesses
  2. Broadening scope of diversification by entering additional industries
  3. Retrenching to a narrower scope of diversification by divesting either poorly performing businesses or those that no longer fit into management’s long-range plans
  4. Broadly restructuring the entire company by divesting some businesses, acquiring others, and reorganizing
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3
Q

When should a corporation consider diversifying?

A

Where growth opportunities are limited and markets with buyer demand that is flat or declining. Changing industry conditions can also negatively impact a company.

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4
Q

What is the ultimate justification for diversifying?

A

Adding long-term economic value for shareholders.

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5
Q

What are the Tests of Corporate Advantage?

A

3 tests a company must pass to add shareholder value by moving to diversify into a new business.

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6
Q

What are the 3 tests of corporate advantage?

A
  1. Industry attractiveness test
  2. Cost of entry test
  3. The better-off test
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7
Q

What is the industry attractiveness test?

A

Test of corporate advantage. Industry to be entered through diversification must be structurally attractive (in terms of the 5 forces), have resource requirements that match those of the parent company, offer good growth prospects.

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8
Q

What is the cost of entry test?

A

Test of corporate advantage. Cost of entering a target industry must not be so high as to exceed the potential for good profitability.

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9
Q

What is the better-off test?

A

Test of corporate advantage. Diversifying into a new business must offer potential for the company’s existing businesses and the new business to perform better together under a single caproate umbrella - synergy. (1 + 1 = 3)

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10
Q

What is synergy?

A

1 + 1 = 3 effect, where the whole of a multibusiness company is greater than the sum of its parts.

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11
Q

What are the 3 forms of entering new businesses?

A
  1. Acquisition
  2. Internal startup
  3. Joint ventures
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12
Q

What is an acquisition premium?

A

Also known as a control premium, it’s the amount by which the price offered exceeds the pre-acquisition market value or stock price of the target company.

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13
Q

What costs are involved with an acquisition?

A

Not only the acquisition price (including an acquisition premium) but also the costs of performing the due diligence to ascertain the worth of the other company.

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14
Q

What is the average acquisition premium?

A

20 to 25 percent

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15
Q

How does a company achieve diversification through internal development? What is this referred to as?

A

Starting a new business subsidiary from scratch. Corporate venturing or new venture development.

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16
Q

What is corporate venturing?

A

Also called “new venture development”. This is the process of developing new businesses as an outgrowth of a company’s established business operations.

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17
Q

What hurdles does a company face when entering a new business via internal development?

A

Not only does an internal new venture have to overcome industry entry barriers, it must also invest in new production capacity, develop sources of supply, hire + train employees, build distribution channels, grow a customer base etc.

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18
Q

In what 5 situations does internal development of a new business generally appeal in?

A
  1. The parent company already has in-house most of the resources and capabilities it needs
  2. There is ample time to launch
  3. Internal cost of entry is lower than cost of entry via acquisition
  4. Adding new production capacity will not adversely impact the supply-demand balance in the industry
  5. Incumbent firms are likely to be slow and ineffective in response to new entrants’ efforts to crack the market
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19
Q

When is it useful to enter a new business via a joint venture?

A
  1. Pursuing an opportunity that is too complex, uneconomical, or risky for one to pursue alone
  2. Opportunities in a new industry require a broader range of competencies and know-how than a company can marshal on its own
  3. In situations where pooling of resources is wiser and less risky
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20
Q

Which new business entry option is generally the least durable? Why?

A

Joint ventures due to potential for conflicting objectives, disagreements.

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21
Q

What must the true cost of an acquisition include? (which cost)

A

Transaction costs of identifying and evaluating potential targets, negotiating a price, and completing other aspects of the deal.

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22
Q

What are transaction costs?

A

The costs of completing a business agreement or deal, over and above the price of the deal. Include costs of searching for a target, evaluating its worth, bargaining costs, and costs of completing the transaction.

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23
Q

What are related and unrelated businesses?

A

Related businesses possess competitively valuable cross-business value chain and resource commonalities. Unrelated businesses have dissimilar value chains and resource requirements, with no competitively important cross-business commonalities at the value chain level.

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24
Q

When does strategic fit exist?

A

Whenever one or more activities constituting the value chains of different businesses are sufficiently similar to present opportunities for cross-business sharing or transferring of resources and capabilities that enable these activities.

25
Q

What is related diversification based on?

A

Value chain matchups with respect to key value chain activities.

26
Q

What are specialized resources and capabilities?

A

Ones that are shared or transferred with related diversification. Have very specific applications and their use is limited to a restricted range of industry and business types.

27
Q

What are general resources and capabilities?

A

Those that can be widely applied across a wide range of industry and business types.

28
Q

What defines a well-crafted related diversification strategy?

A

Not the product relatedness. The businesses must be related in terms of their key value chain activities and the specialized resources and capabilities that enable those activities.

29
Q

What does strategic fit in supply chain activities look like?

A

Transference of skills in procuring materials, sharing resources and capabilities in logistics, collaborating with common supply chain partners, and/or increasing leverage with shippers in securing volume discounts on incoming parts and components.

30
Q

Why do businesses with strategic fit in R&D or technology perform better together than apart?

A

Potential cost savings in R&D, shorter times in getting new products to market, more innovative products or processes.

31
Q

When can cross-business strategic fit in manufacturing-related activities be recognized?

A

When a diversifier’s expertise in quality control and cost-efficient production methods can be transferred to another business.

32
Q

What cost-saving opportunities can arise from diversifying into businesses with closely related sales and marketing activities?

A
  • A single sales force can often be used
  • Products of related businesses can be promoted in the same ways
  • Sales and marketing skills can be applied to be all businesses
33
Q

Where does strategic fit occur on the distribution side of related businesses?

A

Potential cost savings in sharing the same distribution facilities or using many of the same wholesale distributors and retail dealers.

34
Q

Where do cost savings or differentiation advantages occur from strategic fit in customer service activities?

A
  • Consolidating after-sale service may result in cost savings
  • Different businesses can use the same customer service infrastructure
35
Q

What are economies of scope?

A

Cost savings that flow from operating in multiple businesses.

36
Q

How do economies of scope differ from economies of scale?

A

Cost savings from economies of scale accrue from a larger-sized operation, while economies of scope accrue cost savings through operation of multiple businesses.

37
Q

How does the cost advantage from economies of scope arise?

A

Resource sharing allows a multi-business firm to spread resource costs across its businesses and to avoid the expense of having to acquire and maintain duplicate sets of resources.

38
Q

Which companies are often labeled conglomerates?

A

Companies that pursue a strategy of unrelated diversification whose business interests range broadly across diverse industries.

39
Q

How do companies engaged in unrelated diversification nearly always enter new businesses?

A

By acquiring an established firm.

40
Q

What is corporate parenting?

A

The role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and other types of general resources and capabilities.

41
Q

What is an umbrella brand?

A

A corporate brand name utilized as a general resource that can be leveraged in unrelated diversification by being applied to a wide assortment of business types.

42
Q

What are the ways corporate parents add value to their unrelated businesses?

A
  • Provide general resources
  • Use of corporate name (umbrella brands)
  • Judicious cross-business allocation of financial resources
  • Acquiring and restructuring undervalued companies
43
Q

What is restructuring?

A

Overhauling and streamlining the activities of a business.

44
Q

When is restructuring often taken?

A

When a diversified company acquires a new business that is performing well below levels that the corporate parent believes are achievable.

45
Q

What are the 3 tests of corporate advantage?

A
  1. Industry-attractiveness test
  2. Cost of entry test
  3. Better-off test
46
Q

When does a diversified company have a parenting advantage?

A

When it is more able than other companies to boost the combined performance of its individual businesses through high-level guidance, general oversight, and other corporate-level contributions

47
Q

What are the drawbacks of unrelated diversification?

A
  • Demanding management requirements

- Limited competitive advantage potential due to lack of cross-business strategic fit benefits

48
Q

What are misguided reasons for pursuing unrelated diversification? (4)

A
  • Risk reduction (does not create long-term shareholder value as shareholders can reduce risk exposure through diversification)
  • Growth (require profitable growth)
  • Stabilization (research shows that there is no benefit by diversifying to stabilize earnings during recessions)
  • Managerial motives such as increases to compensation
49
Q

What are the 6 steps involved in evaluating a diversified company’s strategy?

A
  1. Assess industry attractiveness
  2. Assess competitive strength of the company’s business units
  3. Evaluate extent of cross-business strategic fit
  4. Check whether firm’s resources fit requirements
  5. Rank performance of business prospects to determine appropriate resource allocation
  6. Craft new strategic moves to improve overall corporate performance
50
Q

Which measures are used to calculate industry-attractiveness scores? (7)

A
  1. Market size and projected growth rate
  2. Intensity of competition
  3. Emerging opportunities and threats
  4. Presence of cross-industry strategic fit
  5. Resource requirements
  6. Social, political, regulatory, environmental factors, industry profitability
51
Q

Which measures are used to calculate competitive strength scores for each business unit? (8)

A
  1. Relative market share
  2. Costs relative to competitors’ costs
  3. Ability to match or beat rivals on key product attributes
  4. Brand image and reputation
  5. Other valuable resources and capabilities
  6. Ability to benefit from strategic fit with other business units
  7. Ability to exercise bargaining leverage with key suppliers or customers
  8. Profitability relative to competitors
52
Q

What can be used to simultaneously portray industry attractiveness and competitive strength?

A

A nine-cell matrix

53
Q

When does a company exhibit resource fit?

A

When its businesses have matching specialized resource requirements along their value chains.

54
Q

What is an internal capital market and what does it allow?

A

An internal capital market is a way to describe how a parent company can allocate financial resources among different businesses. It allows a diversified company to add value by shifting capital from business units generating FCF to those needing additional capital.

55
Q

What are cash hogs?

A

Business units in rapidly growing industries. Cash flows generated aren’t big enough to fund operations and capital requirements for growth.

56
Q

What are 4 broad strategic moves to improve overall corporate performance of a company that’s already diversified?

A
  1. Stick closely with existing business lineup and pursue existing opportunities
  2. Broaden scope by making new acquisitions in new industries
  3. Divesting certain businesses and retrenching to a narrower base of operations
  4. Restructuring the company’s business lineup and putting a whole new face on the company’s business makeup
57
Q

What is a spin-off?

A

An independent company created when a corporare parent divests a business by selling shares publicly via IPO or distributing shares in the new company to shareholders of corporate parent.

58
Q

What does companywide restructuring involve?

A

Divesting some businesses and/or acquiring others.

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