Content M-1: Selection & Synergy

Question 1

To hold the potential of sustained competitive advantage, a firm resource must have which four attributes?

Answer 1

• Valuable
  > If it’s able to generate rents
  > When resource meets market demand
• Rare (among a firm’s current and potential competitors)
  > If it’s not commonly found among rivals
  > Leading to superior rents
• Imperfectly imitable
  > If it’s difficult to replicate due to causal ambiguity, information asymmetries and social complexity.
  > Requires understanding of nature and history
• Non-substitutable
  > If it cannot be easily replaced
  > Requires understanding of the use value

> VRIN-Framework

Question 2

In the VRIN-framework, the value and rareness components determine…

Answer 2

rent generating potential at a point in time.

Question 3

In the VRIN-framework, the inimitability and non-substitutability components determine…

Answer 3

rent generating potential over time.

Question 4

What are dynamic capabilities?

Answer 4

Dynamic capabilities are the firm’s processes that use resources - specifically the processes to integrate, reconfigure, gain and release resources - to match and even create market change.

Simple terms: organizational strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die.

Question 5

What are four dynamic capabilities at a corporate level?

Answer 5

• Reconfiguration: Transforming and recombining resources by consolidation of support activities and by achieving economies of scale in core processes across BUs.
• Leveraging: Extending scope of resources into other BUs.
• Learning: Encouraging creation of new resources and provoking resource creation through controls.
• Integration: Integration resources by pooling resources of different BUs and by encouraging cross-BU collaboration.

Question 6

What is corporate strategy?

Answer 6

The way a company creates value through the configuration and coordination of its muti-business activities.

Question 7

What does the “corporate strategy triangle” entail? (Control, Coordination, Competitive advantage).

Answer 7

It’s about the fact that the ability to create advantage through control, coordination and organization depends on dynamic capabilities such as:

• Reconfiguration of business and resources
• Leveraging of resoruces
• Learning of resources
• Integration of businesses and resources

Because they contribute to synergy creation.

Question 8

What is the most important reason for an management task in corporate strategy?

Answer 8

The creation of fit and synergy

Question 9

Which two general types of synergies can be distinguished?

Answer 9

• Cost-reducing synergies
  > Economies of scale and scope
  > Subadditive
  > 2+2=3
• Revenue-enhancing synergies
  > Superadditive
  > 2+2 = 5

Question 10

What are the four synergy types/operators with respect to the 4C framework?

Answer 10

• Combination
• Connection
• Consolidation
• Customization

Question 11

On which two dimensions does the best synergy operator depend?

Answer 11

• Similarity of resources (similar vs. dissimilar)
• Modification of resources required (low vs. high)

Question 12

When do you choose which synergy operator?

Answer 12

Modification required: Low & Similar resources:
- Combination (cost-reducing synergy; low competitive potential)

Modification required: Low & Dissimilar resources:
- Connection (revenue-enhancing synergy; low competitive potential)

Modification required: High & Similar resources:
- Consolidation (cost-reducing synergy; high competitive potential)

Modification required: High & Dissimilar resources:
- Customization (revenue-enhancing synergy; high competitive potential)

Question 13

What is the difference between competitive strategy and corporate strategy?

Answer 13

Competitive strategy: the ways in which a single-business firm or an individual business unit of a larger firm competes within a particular industry or market.

Corporate strategy = the ways in which a corporation manages a set of businesses together.

Question 14

What are the six resource creation configuration?

Answer 14

1. Provoked learning configuration
2. Encouraged learning configuration
3. Reconfiguration support activities
4. Reconfiguration core processes
5. Leverage configuration
6. Create integration configuration

Question 15

Resource creation configuration.
What does the “provoked learning configuration” entail?

Answer 15

• Rewards are based on the achievement of financial targets.
• The centre causes SBU resources to be developed through the setting and administering of though financial controls.
• The SBUs are provoked into creating resources in order to meet imposed performance targets.

Question 16

Resource creation configuration.
What does the “encouraged learning configuration” entail?

Answer 16

• Rewards are based on financial and non-financial measures.
• The structure of the corporation is similar to that required with provoked learning, but the performance measure and relationships between centre and the SBUs are quite different.

Question 17

Resource creation configuration.
What does the “reconfiguration of support activities” configuration entail?

Answer 17

The centre reconfigures loosely coupled support activities and conducts these activities on behalf of the SBUs. The SBUs would need to be similar to the extent that they could use the centralized support functions and would need to be limited by specific coordination between centralized activities and the SBUs.

Question 18

Resource creation configuration.
What does the “reconfiguring core processes” configuration entail?

Answer 18

• The centre (HQ) delivers resources by reconfiguring core processes to exploit economies of scale.
  The SBUs are highly dependent on these centrally controlled resources and thus may be only partially profit accountable.

Question 19

Resource creation configuration.
What does the “leverage configuration” entail?

Answer 19

• The centre creates new SBU resources through either replication or by extending the scope of a resource.
• Know-how developed in 1 SBU cease to be a resource but it may be transferrable to a new SBU context where it would be able to function as a resource.

Question 20

Resource creation configuration.
What does the “creative integration configuration” entail?

Answer 20

• The centre encourages and facilitates SBU learning that leads to product or process innovation.
• The centre may be aiming to set up ‘webs of collaborations’ across the corporation and between the corporations, its clients and suppliers.

Question 21

What do the six resource creation configurations mean?

Answer 21

• They can be seen as alternative corporate strategies
• They are potentially realizable corporate strategy options that are coherent with regard to the relationships between the asset-creation aims of the strategy and the required structures and processes.

Question 22

What is a corporate strategist?

Answer 22

A strategist in the corporate HQ of a multi-business firm or anybody advising/assisting somebody playing that role.

Question 23

What is a business model?

Answer 23

The set of choices about customers, products, and value chain activities that every business must make.

The who/what/how choices:
> Who are the customers?
> What are we selling them?
> How can e produce what we are selling?

Question 24

What does the term “synergy” entail?

Answer 24

Synergy describes the various ways in which the cash flows and discount rates of businesses in a portfolio can be modified through joint operation (i.e. collaboration and joint decision-making across them).

> It’s the means through which corporate advantage is created relative to a typical investor who can select the same portfolio investments.

Question 25

When does an operational synergy exist?

Answer 25

If two businesses operated jointly (decisions across the 2 businesses are coordinated with the aim of enhancing joint value) are more valuable than the two businesses operated separately.

Question 26

In what two ways does the synergy test differ from the corporate advantage test?

Answer 26

1. Corporate advantage is defined in terms of jointly OWNING businesses and synergies in terms of jointly OPERATING them.
2. The corporate advantage test is about the portfolio of businesses and the synergy testis about any two businesses.

Question 27

Why is synergy important for corporate strategy?

Answer 27

It’s the basis for meeting the corporate advantage test when:
- Investors can diversify unsystematic risks
- Potential value capture from synergies brings partners to the table to negotiate strategy alliances or acquisitions
- It enables acquirers to pay a premium and still make money
- It allows CEOs of publicly listed firms to justify their acquisitions and alliances to their shareholders.

Question 28

What is a value chain?

Answer 28

The set of activities that must be performed to produce a product/service and bring it to the customer.

Two types according to Porter:
1. Primary activities: scale of activity varies directly with the level of production (logistics, production, marketing, sales, service).
2. Secondary activities: scale doesn’t depend directly on level of production (infrastructure, HR management, technology development, procurement).

Question 29

There are four basic operators that can be used on value chains in order to extract synergies. What do they entail (recap)?

Answer 29

• Consolidation: similar resources - high modification required.
  > Involves creating value by rationalization across similar resources by eliminating redundancies (e.g. reduction in headcount by merging departments).
• Combination: similar resources- low modification required.
  > Creating value by pooling similar resources.

The difference between the above-two is whether the merged value chain activity is smaller than (consolidation) or the same (combination) as the combined size of the formerly independent activities and whether modification of resources is necessary (consolidation) or not (combination); e.g. volume discounts form increased procurement volume resulting in increased bargaining power with suppliers).

• Customization: dissimilar resources - high modification required.
  > Involves creating value by co-specializing dissimilar resources in order to create greater joint value. Customization involves modification of resources. E.g. creating a customized bundle of products/services to meet the needs of particular clients.
• Connection: dissimilar resources - low modification required.
  > Generate value by simply pooling the outputs of dissimilar value chain activities with little modification. In effect the product development of 1 business is being connected to the distribution channel of another. E.g. cross-selling products to each other’s customers like banks selling insurance products to its customers.

Question 30

Synergy analysis starts with the 4Cs, but when is it compelete?

Answer 30

Only when a financial forecast of synergy realization has been made. Quantification of synergy impact is critical! Why?
- It forces you to make your assumptions explicit.
- It guides you towards synergies that are really value enhancing
- It provides a ranking if which synergies to prioritize.

Question 31

Synergies can be one-sided or two-sided. What does that mean?

Answer 31

• A synergy is two-sided if both businesses benefit
• A synergy is one-sided if 1 business gains more than the other business loses.

Question 32

Negative synergies also exist. What are they?

Answer 32

Negative synergies arise in situations in which the value of 2 businesses under coordinated decision-making may actually be lower than the sum of their values when they operate independently.

Example include:
- Brand dilution
- Organizational complexity: actions have to be coordinated across businesses to extract operational synergies which implies some loss of initiative, independence, and speed in decision-making.

Question 33

Corporate strategy functions along two important mechanisms:

Answer 33

1. Selection mechanism: corporate strategy involves deciding in which businesses and hence in which markets/industries an organization is active.
2. Synergy mechanism: more contemporary. Corporate strategy focuses on boosting the competitiveness of businesses by considering how business units could add to, strengthen, and enhance other business units

Question 34

Each mechanism (selection and synergy) is mainly relevant for two key areas of attention. Which two areas are that for the selection mechanism?

Answer 34

As a selection mechanism, corporate strategy mainly shapes:

1. The boundaries of the firms: By selecting in which businesses and organization is active, they also have to decide which business units to won and which not: wat do we do internally and what not?
   > This will also shape the (in)organic growth decisions and make-or-buy decisions.
2. The level of diversification: because corporate strategist consider what activities need to be done in each business. Diversification can be assessed at multiple levels of analysis. What matters is the extent to which businesses in a portfolio are related. Any business acquired or collaborated with should be considered in light of how it will change the level of diversification and relatedness among businesses.

Question 35

Each mechanism (selection and synergy) is mainly relevant for two key areas of attention. Which two areas are that for the synergy mechanism?

Answer 35

As a synergy mechanism, corporate strategy focuses on:

1. The synergies between businesses and units: looking for synergy advantage, corporate strategists consider the resources used by each business. Specifically, they would consider the complementarity of the resources deployed in each business. Diversification decisions inform opportunities for synergy creation. Relatedness between business activities shapes the complementarity of the resources used. Acquisitions and alliance are done because organizations experience resource gaps.
2. Innovation: innovations are often being pursued within businesses but many innovations are the result from integration knowledge form different domains: much potential for innovation also exist across business’ as organizations seek to integrate knowledge available in different units –> innovation is also a form of synergy.