Corporate diversification (Klaus edition) Flashcards
Explain corporate vs. business strategy
- Business Strategy is concerned with HOW a firm competes within a particular market.
- Corporate strategy is concerned with WHERE a firm competes.
What is the goal of corporate strategy?
The goal of corporate strategy is to build corporate advantage so as to earn above normal returns.
What is corporate strategy?
Corporate Strategy is the way a company creates value through the configuration and coordination of its multi-market activities.
What are the three dimensions of corporate strategy?
- Horizontal = specialization (Coca Cola) vs. product/business diversification (Yamaha)
- Vertical = make (Disney) or buy (Dell)?
- Geographical = national (Waitrose), multinational (Auchan), glocal (P&G)?
Illustrate the three dimensions of corporate strategy
What are the two fundemental tests in corporate strategy?
Corporate Strategy cannot succeed unless it truly adds value to business units:
–> By providing tangible benefits that offset costs of lost independence (BETTER OFF TEST)
- Does the presence of the corporation in a given market improve the competitive advantage of other business units over and above what they could achieve on their own?
–> Add value to shareholders in a way that shareholders could not replicate by themselves (Ownership test)
- Does ownership of the business unit produce greater competitive advantage than an alternative arrangement would produce?
What are the costs of markets
Markets are not costless
- Relative costs
- Transactions costs
Describe transaction costs
Transaction costs: all the (hidden or visible) costs involved in a transaction (e.g. search, communication, contract, monitoring, coordination etc.).
What can you deduce based on transaction costs?
If transaction costs > administrative costs = integration.
If transaction costs < administrative costs = market contracts.
Explain economics of scope
Economies of scope are most frequently encountered when a corporation possesses a resource or capability that is not fully utilized in production of a single product
Two examples of industries where horisontal diversification makes sence, one where it doesnt.
(economics of scope - production facilities)
Does:
pasta + bakery
cars + trucks
Doesnt:
milk + cars
Come up with examples of companies that suceed in cross selling advantages (economics of scale)
In one-stop-shop situations (the body shop, BM, apple, gucci)
Why does econimics of scope not provide an adequate rationale for diversification in itself?
And what should it be supported with?
1) For instance, economies of scope in resources and capabilities can be exploited simply by selling or licensing the use of the resource or capability to another company.
2) they must be supported by the presence of transactions costs.
* Relative efficiency of transaction costs of market contracts as opposed to the cost of managing directly the economies of scope. (are the costs of managing bigger or lower than the transaction costs of market contracts).
What is no economics of scope is present, are there then no reason to diversify?
1) The presence of transaction costs in any non specialized resource can offer efficiency gains from diversification, even where no economies of scope are present.
–> The Diversified Firm as an Internal Market
Internal Capital Market, by building a balanced portfolio of cash-generating and cash-absorbing businesses, the diversified company may cut the (significant!) cost of using capital markets (Ferrari).
2) Internal Labor Market, diversified companies may lower the cost of hiring/firing of the employees and use employees more efficiently across divisions and over time.
–> The Diversified Firm as Internal labor market
What decision can the GE/McKinsey matrix help a company take?
decide on corporate diversification
What is on the axes of GE/McKinsey matrix ?
1) Industry Attractiveness Criteria (Market size and growth etc.)
2) Business Unit comp. adv (Competitive position etc.)
