Chapter 9: Corporate strategy

Question 1

What is corporate strategy?

Answer 1

Corporate strategy is about the overall scope of the organization and how value is added to the business as a whole.

Question 2

What are the three dimensions of scope?

Answer 2

Product scope

Vertical scope

Geographical scope

Question 3

What are the 4 different strategy directions?

Answer 3

Ansoffs matrix 1988 suggests four directions for organizational growth with two concepts as the basis for it:

Diversification and unrelated diversification.

The directions are:
Market penetration
Product and service development
Market development
Unrelated diversification

Question 4

What is unrelated diversification and why would you want to do it?

Answer 4

Unrelated diversification involves moving into products or services that has no relationship to existing business.
1. Pure growth desires (good performing busiesses can balance out poor performing ones)
2. Risk diversification (financial cost reductions due to becoming a larger organisation).

Question 5

What are some diversification drivers when talking about corporate scope?

Answer 5

1. Exploiting economies of scope
2. Stretching corporate management capabilities
3. Exploiting superior internal processes
4. Increasing market power

Question 6

What is 3 value-destroying diversification drivers?

Answer 6

Also called negative synergies.

1. Responding to market decline
   Kodak example
2. Spreading risk too much
3. Managerial ambitions being too high

Question 7

What is the relationship between diversification and performance?

Answer 7

Some diversification is good but not too much.

Question 8

What is vertical disintegration?

Answer 8

Vertical disintegration is when you previously owned a stage of the value chain and no longer wish to own it, this is common in the form of outsourcing.

Question 9

What is vertical integration?

Answer 9

Vertical integration is when you are entering activities where your organisation is its own supplier or its own customer.

Vertical integration can be done forwards and backwards.

Question 10

What is forward integration?

Answer 10

Forwards integration: going further forward in the value chain, like instead of a retailer selling your cars your selling them yourself instead.

Question 11

What is backwards integration?

Answer 11

Backwards integration: is letting someone else, like a supplier, supply you with specific steel components, just as an example. But by a backwards integration, you are owning that stage yourself, suppling yourself with steel.

Question 12

What is horizontal integration?

Answer 12

particularly for related diversification, when bringing together different value systems and realizing synergies, like Volvo having car manufacturing, bus manufacturing, truck manufacturing).

Question 13

What is important to ask yourself for the make or buy decision?

Answer 13

• does the subcontractor have the potential to do the work significantly better?
• is the subcontractor likely to take advantage of the relationship over time? (risk of opportunism)

Question 14

What is divestment?

Answer 14

Selling off or closing down parts of a businesss. Common for unrelated diversified businesses, SBUs with poor performance.

Two types:
Sell off
Spin off

Question 15

What is the role of the corporate parent?

Answer 15

Corporate parents need to demonstrate that they create more value than they cost. Companies who’s shares are traded freely on stock markets face a further challenge: they must demonstrate that they create more value than any other rival corporate parent could. So competition takes place between different corporate parents for the right to own and control businesses and the corporate parent that shows that they have parenting advantage are in the right position. Parent must hence show how they create value. Parenting activities can be both value-adding and value-destroying.

Question 16

What are the 5 value adding activities of corporate parents?

Answer 16

1. Envisioning a clear strategic intent
2. Faciliating synergies
3. Coaching the business unit managers
4. Providing central services and resources
5. Intervene to assure appropriate performance

Question 17

What are some value destroying activities of corporate parents?

Answer 17

5.1.2.1 Adding management costs

5.1.2.2 Adding bureaucratic complexity

5.1.2.3 Obscuring financial performance

Question 18

What are the three types of parenting roles?

Answer 18

1. The portfolio manager
Operates as an active investor in a way that shareholders in the stock market are too inexpert to do themselves. They identify and acquire under-valued assets or businesses and improve them. Portfolio managers do not get closely involved in the routine management of the business, only acting over shorter periods of time to improve performance by target setting.

2. The synergy manager
The synergy manager is a corporate parent seeking to enhance value for business units by managing synergies across business units.

Synergies are likely to be rich when the new activities are closely related to the core business.

Achieving synergistic benefits involves at least three challenges:

• excessive costs
• overcoming self-interest
• illusory synergies

3. The parental developer
The parental developer focuses on the resources and capabilities they have as parents which they can transfer downwards to enhance the potential of business units.

It would seem that McDonalds believed it had identified parenting opportunity with its acquisition of Chipotle.

Question 19

What is a portfolio matrix?

Answer 19

Portfolio matrices help companies balance their portfolio of products or businesses by identifying which areas are worth investing in for growth, which are stable cash generators, and which may not be worth further investment. By categorizing units this way, companies can make informed strategic decisions and allocate resources effectively to maximize long-term value.

Each model gives more of less attention to at least one of three criterias:
- the balance of the portfolio
- the attractiveness of the business units
- the fit that the business units have with each other in terms of synergies

Question 20

What are the three portfolio matrixes?

Answer 20

BCG (growth/share matrix)

The GE-McKinsey (directional policy) matrix)

The parent matrix

Question 21

What are the 3 cons of vertical integration?

Answer 21

1. Inhibits development of distinctive capabilities
2. Difficulties managing strategically different businesses
3. Limits flexibility (Ecco)

Question 22

What facts explain why some stages are vertically integrated, while others are linked by market transactions?

Answer 22

• can be explained by the economies of scale
• specialization (distinctive capabilities); competitive advantage

Question 23

What are the motives for diversification? (3)

Answer 23

Risk spreading (but can only diversify away risk that is unsystematic).

Growth (but growth can destroy shareholder value, esp by acquisition)

Value creation (create synergies and value, connected to Porters Three Essential Tests)

Question 24

What is Porters three essential tests?

Answer 24

For diversification to create shareholder value, it must meet three tests:

1. The attractiveness test
2. The cost of entry test
3. The better-off test

Question 25

What are some ways in which profitability can be increased?

Answer 25

1. Transfer competencies between business units indifferent industries
2. Share resources between business units to realize synergies or economies of scope
3. Use product bundling

Question 26

Economies of scope in diversification derive from two types of relatedness. Which?

Answer 26

1. Operational relatedness
2. Strategic relatedness

Question 27

What is the problem of operational relatedness (economies of scope)

Answer 27

The benefits from economies of scope may be dwarfed by the administrative costs involved in their exploitation.

Question 28

What are the three strategy methods that corporate strategy deals with?

Answer 28

Organic development.

M&A.

Strategic alliances

Question 29

Give an example of a company that is vertically integrated

Answer 29

Tesla. They do everything themselves.

Question 30

What is compounding of risk?

Answer 30

Problems in one stage that you VI will threaten other stages within the VI business. So you take on more firm specific risk if you VI.

Question 31

How can you assess if diversification will lead to shareholder value?

Answer 31

By using Porters Three Essential tests.

1. The attractiveness test (direct diversification towards attractive industries, so you have to know about the five forces)
2. The cost of entry test (entring a new industry comes with costs, it should not offset the attractiveness of the industry) and yes, it will be more costly to enter an attractive industry so point 1 and 2 kinda goes in clash).
3. The better off test (synergy must be present). Pixar was better off being owned by Disney (Disney had parenting advantages).

Question 32

What are two sources of competitive advantage from diversification?

Answer 32

1. Economies of scope
   The synergies that arise when one or more of a diversified company business units are able to lower costs or increase differentiation by:

Sharing tangible resources
Sharing intangible resources
Transferring functional capabilities
Applying common general management capabilities for different businesses

2. Economies from internalizing transactions
   Economies of scope is not a sufficient basis for diversification - it must be supported by transaction costs in markets for resources
   Diversified firms can avoid external transactions by operating internal capital and labor markets
   Diversified firms has better information on resource characteristics than external markets

Question 33

What is commonality?

Answer 33

Commonality refers to shared components, processes, or technologies across products, services, or business units within a company. The goal is to reduce costs or increase efficiency by using the same elements across different products or areas.

Example: A car manufacturer using the same engine model in different cars is utilizing commonality to simplify production.

Question 34

What is product bundling?

Answer 34

Product bundling is a way for companies to offer added value, increase sales, and improve the appeal of products by combining them at a lower price than the individual items.

Ex: Microsoft or Adobe offers software bundles (like Microsoft Office or Adobe Creative Cloud), where you can get Word, Excel, and PowerPoint together, or Photoshop, Illustrator, and InDesign. The bundle is usually at a discounted rate compared to purchasing each software individually.

Question 35

Economies of scope in diversification derives from two types of relatedness. Which?

Answer 35

1. Operational relatedness
   Synergies from sharing resources across businesses, like joint R&D
2. Strategic relatedness
   Synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses

Question 36

What does Collis & Montgomery say about creating corporate advantage?

Answer 36

The article explores how companies can achieve a corporate advantage by managing a diverse portfolio of business units effectively. Collis and Montgomery argue that successful corporations add value beyond what each unit could achieve alone. They emphasize strategic coordination, resource sharing, and effective corporate governance as ways to create synergy among units, rather than simply focusing on financial returns. This approach ensures that a corporation maximizes its competitive advantage across all business areas.

Question 37

What does Stuckey & White say in “When and when not to vertically integrate”?

Answer 37

The article provides a guide for companies on deciding whether vertical integration is a strategic fit. Here’s a summary of the key points:

1. The Vertical Integration Decision:
   
   • Vertical integration involves a company expanding into different stages of its supply chain—either backward integration (controlling supply sources) or forward integration (controlling distribution and sales). This choice significantly impacts competitiveness, control, and profitability.
2. When to Integrate:
   
   • Market Imperfections: Vertical integration is beneficial when there are issues such as high transaction costs, information asymmetry, or unreliable suppliers or buyers.
   • Control Over Critical Inputs: If a firm needs stable access to specific inputs for quality or cost reasons, integration ensures this.
   • Supply Stability: When consistent supply is crucial to avoid production interruptions, integration helps maintain reliability.
   • Cost Reduction: Integration can reduce costs if internal production or distribution is cheaper than outsourcing.
3. When Not to Integrate:
   
   • Competitive Dynamics: Rapid technological or market changes may make integration too rigid and unresponsive.
   • Focus on Core Competencies: Integration can distract from a company’s main strengths, leading to inefficiency.
   • Excess Capacity: Over-investment in assets can lead to underused capacity and financial strain.
   • Innovation Reduction: Integrating may limit exposure to external innovations, as the firm relies solely on its own resources.
4. Strategic Assessments:
   
   • Before integrating, companies should analyze industry structure, competitive forces, and their unique capabilities to ensure alignment with long-term goals.

This article emphasizes that vertical integration is not a universal strategy; companies should assess whether it aligns with their specific conditions and strategic objectives.

Question 38

What did Quinn & Hilmer mean by strategic outsourcing?

Answer 38

Strategic outsourcing is about choosing to outsource certain business functions for more than just cost savings. Instead, it is a strategy to enhance competitive advantage by focusing on core competencies and outsourcing non-core activities.

• Companies use outsourcing strategically to gain specialized expertise, increase focus on core areas, and encourage innovation by collaborating with external partners.
• Outsourcing helps companies manage risk, as they share responsibilities with trusted service providers.
• The authors suggest distinguishing between core activities (essential to competitive advantage) and context activities (non-core but necessary for operations). Core activities should be retained internally, while context activities can be outsourced.
• When done thoughtfully, strategic outsourcing can reduce costs, enhance flexibility, and provide access to higher quality and innovation.

This approach positions outsourcing as a method for creating value rather than simply cutting costs.