Chapter 9 - Corporate Strategy Flashcards
Business strategy
For creative advantage in specific individual markets —> focus on single industry: 1) which customers to serve? -> who - segmentation 2) which customers needs to satisfy? ->what - differentiation 3) Resources + value chain activities necessary to satisfy customers needs How - core differentiation
Corporate strategy
For competing advantage for the whole company
—> focus on multiple industries + a set of business strategies:
1) what businesses should we be in?
2) how should these be managed?
3) how to create value for the creation as a whole?
Diversification = corporate strategy to create corporate advantage
Evaluation criterions
1) Conglomerate Premium
2) Parenting advantage
Evaluation criterion no. 1
Conglomerate Premium
-> what makes the corporate whole add up to more than the sum of its business parts
Evaluation criterion no. 1 - key questions
- which strategic business units to strategically select?
- how to coordinate the SBUs operatively, culturally, spatially?
- how can the SBUs be complementary?
=> strategic thinking driven by pursuit of value
Evaluation criterion no. 2
Parenting advantage
- multi-business companies create value by influencing/ parenting the businesses they own
- best parent companies create more value than any of their rivals would if they owned the business
Failure in corporate strategy
Conglomerate discount
Firms lose market value despite successful business strategies
Diversification general + motives
Possible recipe for long-term success Motives: growth Strategic renewal Efficiency gains Responding to declining markets Spreading risks Meeting stakeholder expectations
Types of diversification
- into related businesses
- into unrelated businesses
- into both
Diversification into related businesses
Build shareholder value by capturing cross-business strategic fits:
- transfer skills + capabilities
- share facilities/ resources to reduce costs
- leverage use of a common brand name
- combine resources to create new strength + capabilities
Diversification into unrelated businesses
> to grow revenue + earnings as a whole
- involves diversification without meaningful strategic fit
- spread risks across completely different businesses
- build shareholder value by superior choice of businesses to diversify + portfolio management of collection of the company’s businesses
Diversification into related business concepts
- strategic fit
- joint economies of scope
- similar value chain
- unifying strategic theme
Strategic fit (diversification related businesses concept)
-> when activities in value chains of different business are sufficiently similar
>present opportunities for..
- transferring expertise/technological know-how from one business to another
- cross-business collaboration to create competitively valuable Ressource strengths + capabilities
- combining common value chain activities => lower costs
- joint use a well-known brand name
Economies of scope (diversification into related businesses concept)
- cost reduction —> from operating i. Multiple businesses
- from strategic fit efficiencies along value chains of related businesses
- sources of economies of scope:
> use of common inputs in the generation of several outputs
> spreading fix costs over more products
> application of knowledge + core capabilities => generation of several outputs
Types of cross-business strategic fit along value chain
- R+D technology fits
- Supply chain fits
- manufacturing fits
- distribution fits
- sales and marketing fits
- managerial support fit
Supply chain fits (cross-business strategic fit)
- skill transfer and/or cost reduction
> joint procurement of materials
> greater bargaining power over common suppliers
> greater volume discounts
> Benefits of added collaboration with supply chain partners
Manufacturing fits (cross-business strategic fit)
Transfer of a diversifier’s expertise to another business:
- Quality manufacture
- cost efficient
- consolidation of production/ assembly activities to significantly reduce overall production cost
Distribution fits (cross-business strategic fit)
Cost saving opportunities via:
- sharing same distribution facilities
- sharing of whole sale distributors and retail dealers to access customers
Diversification into unrelated businesses criteria
- profitability targets
- size targets (sustainable contribution)
- capital requirements
- union + labor situation
- industry grow potential
- industry vulnerability to recession, inflation, interest rates, government regulations, other potential negative factors
Diversification into unrelated businesses advantages
- risk spread over different industries
- financial resources can be directed to SBUs offering best profit aspects
- purchase of bargaining-prices firms with big profit potential-> enhance share holder wealth
- stability of profits -> hard times on one industry => offset by good times in another
Diversification into unrelated businesses Disadvantages
> managerial requirements
- discerning good acquisition
- selecting capable managers
- judging strategies of business units
- restructuring/ divestment if units stumble
> lack of cross-business strategy fit=> no potential for competitive advantage
- consolidated performance of unrelated mostly not better than individual business
- promise of greater profit stability over business cycles seldom realized
Strategic action of diversification + performance models
- value-enhancing model
- inverted-U model
- value-destroying mode
Value enhancing model
1) market power advantages
2) economies of scale and scope due to multiple resources use
3) capital market advantages + more efficient allocation
4) reduction of risk + profit volatility
Inverted U-Model
1) Synergy + parenting advantages only to a certain degree of diversification
2) competitive advantages restricted to related diversification
3) the less related the diversification, the more costs outlast benefits
Value-destroying model
1) internal power struggles increase influence costs
2) inefficient internal capital markets
3) agency problems
Managing the business portfolio
1) what business should the corporation be in?
2) How should the corporate office manage its business units
Analysis steps for industry attractiveness/ SBUs competitive strength (Step 1+2)
- Select industry/ competitive strength attractiveness factors
- Assign weight to each factor (summed up 1,0)
- Rate each Industry/ SBU on each factor (1-10)
- Calculate weighted ratings; sum it get an overall industry/strength rating for each industry/ SBU
Interpretation of industry attractiveness score
<5,0 no pass
All >5,0 => group of industries the firm operates in is “attractive” as a whole
- “strong performer” => principal SBUs should be in attractive industries that have:
> good outlook for growth
> above-average profitability
Interpretation of competitive strength score
> 6,7 : SBU strong market contender
3,3< rating< 6,7 : SBU moderately competitive strong
< 3,3 : competitively weak market position
All SBUs rating over 5,0 : all fairly strong market contenders in their industries
Visualization in “nine cell matrix”
- Industry attractiveness on y-axis
- competitive strength on x-axis
- bubble size presents SBU’s revenues/ corporate revenues
Nine cell matrix consequences (competitive strength/ attractiveness)
- concentrate resources in SBUs with high industry attractiveness + competitive strength
- make selective investments in SBUs with intermediate positions
- withdraw resources from SBUs low in attractiveness + strength (unless exceptional potential)
Step 3 check for cross-business strategic fits
=> Identification of value chain strategic fits
Identify these SBUs to:
- transfer skills + capabilities
- share facilities/ resources => reduce costs
- leverage use of a common brand name
- combine resources => create new strength + capabilities
Step 4 check resource fit
Company wide performance
Financial strength
Specifics resource strength
Competitive capabilities
Step 5 Rank SBU based on performance + priority for resource allocation
Factors to consider
- sales growth
- profits growth
- contribution to company earnings
- return on capital employed
- economic value added
- cash flow generation
- industry attractiveness + competing strength rating
Step 6 craft new strategies moves to improve performance
Strategic options:
- stick closely with existing business lineup + pursue these opportunities
- broaden business scope by making new acquisitions i. new industries
- divest certain businesses + retrench to a narrower base of business
- restructure company’s business lineup
- pursue multinational diversification => globalize operations of SBUs
Portfolio matrices - The growth/ share (BCG) matriculates components
- Markte growth - relative share (Axis)
- Stars, cash cows, question marks, poor dogs
Stars (BCG matrix)
- Business unit with high market share in growing market
- High investment needs to keep up with growth or sufficient profits to be self-sufficient in terms of investment needs
Cash cows (BCG matrix)
- Business unit with high market share in mature market
- Low investment needs due to low growth
- Business units with high marketshare should be profitable
question marks (BCG matrix)
- business unit with low market share in growing market
- invest to grow business unit to star or divest
poor dog (BCQ matrix)
- business unit with low market share in static / declining market
- divestment or closure
growth/share matrix advantages
- Good way to visualize different needs and potentials of the business units within the corporate portfolio
- Transparency over possible development paths of business units
- Tool to generate internal financial balance
growth/share matrix disadvantages
- Definitional vagueness (market (share))
- Capital market assumptions
- Danger of self-fulfilling prophecy (cash cows -> poor dogs due to denied investments)
- Neglect of ties (dependencies) between business units
Business portfolio evaluation process
6-step evaluation process
- evaluate industry attractiveness
- asses competitive strength of SBUs
- Check for cross-business strategic fits
- Check resources fit
- Rank SBUs based on performance + priority for resource allocation
- craft new strategic moves to improve performance
Conglomerate discount potential reasons
- lack of coherence in SBUs activities
- increasing coordination and control costs
- in-transparency
- resource inefficiency/ misallocation hypothesis: cross subsidies
- influence costs: middle managers manipulate/ embellish business plans
- analyst mismatch
