Chp 6 Flashcards
Corporate level strategy (company-wide)
Actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of SBUs.
Business level strategy (competitive)
A means of competing in a product market.
How can firms obtain growth?
- Horizontal integration
- Vertical integration
- Enter different geographic markets
Goals of corporate-level strategy
Profit, revenue, and growth. Help the firm earn above-average returns by creating value.
What’s the basic corporate-level strategy?
Product diversification
What does a successful corporate strategy look like?
Reducing variability in the firm’s profitability as earnings are generated from different businesses
Levels of diversification
- Low
- Moderate to High
- Very High
Low levels of diversification
- Single business
- Dominant business
Moderate to high levels of diversification (value-creating diversification)
- Related constrained
- Related linked
Very high levels of diversifcation
- Unrelated
Single business diversification strategy
Firm generates 95% or more of its sales revenue from its core business.
Dominant business diversification strategy
Firm generates between 70 and 95% of its total revenue within a single business area
Pros of low levels of diversification
- Develop market-specific capabilities
- Superior customer service
- Easier time reaching EoS
- Efficient use of resources
Related constrained diversification strategy
Firm generates more than 30% of its revenue outside a dominant business. Businesses are related to each other by using similar sourcing, throughput, and outbound processes.
Pros of related constrained diversification strategy
- Sharing resources and capabilities
- Transfer of knowledge across businesses
- Customers and markets are similar
- R&D approach
Related linked diversification strategy
Firm generates more than 30% of its revenue outside a dominant business. Businesses only have a few links between them.
Pros of related linked diversification strategy
- Transfer of knowledge across businesses
Unrelated diversification strategy (conglomerates)
A highly diversified firm with no relationships between SBUs.
Reasons for diversification
- Value-creating diversification
- Value-neutral diversification
- Value-reduced diversification
Value-creating diversification
- Economies of scope
- Market power
- Financial economies
Value-neutral diversification
- Antitrust regulation
- Tax laws
- Low performance
- Uncertain future cash flows
- Risk reduction for firm
- Tangible resources
- Intangible resources
Value-reducing diversification
- Diversifying managerial employment risk
- Increasing managerial compensation
Economies of scope
Cost savings a firm creates by successfully sharing resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses.
Corporate-level core competencies
Complex set of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise
Market power
Firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level, or both
Multipoint competition
When two or more diversified firms simultaneously compete in the same product areas or geographical markets
Vertical integration
When a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration).
- Acquiring a company in the supply chain
Financial economies
Cost savings realized through improved allocations of financial resources based on investments inside or outside the firm
Types of financial economies
- Efficient internal capital market allocation
- Restructuring of assets
Efficient internal capital market allocation
Capital markets are believed to efficiently allocate capital Efficiency results as investors take equity positions (ownership) with high expected future cash-flow values. Capital is also allocated through debt as shareholders and debt holders try to improve the value of their investments by taking stakes in businesses with high growth and profitability prospects.
Restructuring of assets
Creating value by buying, restructuring, and then selling the restructured companies’ assets in the external market
How does growth occur?
Diversification –> profitability –> outsourcing all risk to smaller firm
