Corporate level strategy

Question 1

What is the most direct way to increase revenue?

Answer 1

Increase their market share in the current segment they are in.

Question 2

Besides from increasing revenues by increasing market share in current segments, what can a firm do to increase revenue?

Answer 2

A firm can develop new products or move into neighboring segments and geographical areas.

We say we have:
- Product development
- Market development

KEY: The product development is regarded as “extending their product range”, so it is products very similar to what they currently make. For instance, if you make cars, you develop a new car model.

A firm can also extend into other businesses. A firm making cars could suddenly start making planes or computers etc. We call such firms “multi business corporations”

Question 3

What are the key questions in this chapter?

Answer 3

How to gain competitive advantage in current line of business that the firm has entered, AND what lines they should be in at all.

it is about choosing an optimal set of businesses and figuring out how to integrate them into corporate as a whole. This is known as corporate configuration.

Question 4

Elaborate on the issue of corporate configuration

Answer 4

All firms have a particular configuration, either intentional or emergent.

Determining the coroporate configuraiton can be regarded as two questions:
1) What businesses should the corporation be active in?
2) How should this group of businesses be managed?

We say this is questions of “corporate composition” and “corporate management”.

Composition refers to the group of businesses, while management refers to how we’re dealing with the composition.

Question 5

How can a firm enter new businesses?

Answer 5

1) Internal growth, allows to start up new activities
2) Acquisitions, buying the another business

Question 6

What do we call it when a firm enters new businesses, either through internal growth or acquisitions?

Answer 6

Diversification

Question 7

Elaborate on diversification

Answer 7

WE usually consider 2 types of diversification. Diversification is also called integration. The two types are:
1) Horizontal
2) Vertical

Vertical refers to moving up or down in the supply chain that the firm is currently active in.
Horizontal refers to moving to another related business at the same tier of the current business - for instance moving from newspaper publishing to educational publishing.

if a firm expands OUTSIDE of its current industry, the term integration is no longer used. We then use only straightforward diversification.

Question 8

How can we divide the task of corporate composition further?

Answer 8

Corporate scope
Corporate distribution

Question 9

Elaborate on corporate scope

Answer 9

The composition of the corporation will obviously depend on the business areas selected. The more acitivities the corpporatiopn is involved in, the broader its scope will be.

Choosing a corporate scope is just as much about figuring out what lines to shut down, as it is to find new ones.

Question 10

Elaborate on corporate distribution

Answer 10

The composition of the corporation also depends on the relative size of the areas of choice. The distribution within the corporation of these business areas, their relative wiehgting, is referred to as the corporate distribution.

Some are symmetrical/uniformly invested, while other have a asymmetrical distribution.

Question 11

Common way to depict the corporate composition?

Answer 11

Portfolio matrix.

we have a 2D grid.
Each activity is represented by a bubble. The size of the bubble represent revenue.

There are different ways to do this. Most common one is the BCG matrix.
GE screen is also a good one.

Question 12

How does Porter decide which portfolio to pursyue?

Answer 12

Porter express the wish to choose a set of activities that make the total sum greater then the sum of individual parts. After all, there should be a benefit in having the extended scope and distribution (composition).

Question 13

elaborate on corporate management

Answer 13

It has become a widespread tendency to organize multi-business firms into strategic business units referred to as SBU. Each SBU has its own management, own strategic management team, own goals etc. Independent work. They are labelled “strategic” because they have their own management team.
This org-form is commonly known as M-form, as in multidimensional-form.

The SBU structure can have its perks, but it also present challenges to the corporation as a whole.
There are challenges related to achieving synergies of all the different activities.

The solution to the problem is integration. However, integration is a difficult and complex subject. The book provide 3 main types of integration:
1) Centralization
2) Coordination
3) Standardization

Question 14

Key issue regarding integration?

Answer 14

Who should be responsible for/take initiative to realize integration? where in the management system is the reponsibility vested to ensure that centralization, coordination and standardization are considered and carried out?
What happens when individual bsuiness unit managers are looking more in their own backyard than in others? Agency problems?

Question 15

On the issues of integration, we have the fact that it can be difficult to make sure that the integration actually happens, and how it should happen. For instance, should we assign someone, etc. What are the ways to “solve” or “handle” the integration prolblem+

Answer 15

Presented with 2 options by the book:

1) Control
2) Cooporation

Control is about assigning the authority to a dude that will make sure that people do things in a way that itnegrates the SBUs together. Control can also be less direct, and take the shape of assigning objectives and discussing initiatives.

Cooperation is best utilized whenever the different SBU find it most beneficial to establish a mutual coop by themselves because of either how it would benefit boht parties, or because of how it would benefit the corporation as a whole. The idea here to make circumstances under which it is easy to leverage other SBUs for mutual benefit.

Question 16

is the primary goal to achieve multi-level synergies?

Answer 16

No necessarily. There is a conflicting interest between multi-level synergies and responsiveness.

Synergies, as achieved through the means of integration (centralization, coordination, standardization) by enforcing them through the use of integration mechanisms (control, cooperation), will also carry blunt centralization, rigid standardization, paralyzing coordination meetings and excessive overhead. all baked in under the term bureaucracy. Can be significant limit in innovation and rapid actions.

This gives rise to the paradox between responsiveness and synergies.

Question 17

What are the 3 categories that can create syenrgies?

Answer 17

1) Leveraging shared resources
2) integrating activities
3) Aligning positions

Question 18

What are Porters test for whether entering into a new business is deemed good becasue of increased shareholder value?

Answer 18

3 essential tests:

1) Attractiveness. each new business area must be judged on whether it is possible to make it attractive. we use the competitive forces here.

2) cost of entry. “The cost of entry must not capitalize all the future profits”. Usually, firms significantyly overpay for acquisitions, making it close to impossible to re-earn the money.

3) The better off test. Either the new SBU must gain a competitive advantage by joining the corporaiton, or the corporation must gain a competitive advantage by acquiring the unit. This is actually a direct synergy thing.

test 3 is most intersting regarding corporate level strategy.

Question 19

Name a key issue regarding synergies

Answer 19

What exactly are synergies?

it has proved to be difficult to understand at a quick glance what relatedness actually means. Many firms find out the hard way after starting on the path of soemthing they beleive provide synergies because of how related they are, only to ewnd up selling one of the parts later on.

Researchers have spent time on this, and found 3 categories that can provide synergies

Question 20

Elaborate on leveraging shared resources

Answer 20

It is espeically the “degree” to which they can be leveraged. Some resources are difficult to share.

Question 21

Elaborate on leveraging aligned market position

Answer 21

two thigns are relevant here:
1) Creating a total package that provide benefit greater than the sum of indiviudal products, essentially creating an ecosystem like Apple have done.

2) Taking control in a way that avoid competitive pricing.

Question 22

Elaborate on leveraging value chain activities

Answer 22

Basically scale perks

Question 23

What is regarded as the potential downside of leveraging resources, activities and market alignments?

Answer 23

Loss of responsiveness

Question 24

What are the usual suspects in regards to problems encountered by multi-business firms?

Answer 24

High governance costs. Layers of management, byråkrati etc.

Slower decision making.

Dysfunctional know-how (little weird, would apply to single-level firms as well).

Dualling incentives, motivation killer.

Question 25

Quickly define the portfolio organization perspective

Answer 25

The portfolio organization perspective refers to the idea that a corporation should consist of units that are independent, and only a very few amounts of synergies should be present. this perspective value responsiveness

Question 26

Quickly define the integrated organization perspective

Answer 26

The integrated organization perspective is all about the synergies. Accoridng to this perspetice, the synergies are more important.

Question 27

Elaborate on the portfolio organization perspective

Answer 27

As explained before, this view is about responsiveness. followers of this perspective argue that each business requires its own set of characteristics and cannot be centrally lead in a good manner.

This high responsiveness requires that the central manageemtn stay the fuck away from it. It is usually limited to a financial control occurring at an arms length.

keywords include: Autonomy, specific own culture.

According to this perspective, the only reason for multiple firms/units to be in one corporaiton is to leverage resources financially. this coins the term financial synergies.

This perspective views the central management as a single investor who has the power to allocate resources (capital) and selecting promising projects. For instance leveraging a current cash cow to invest in stars.

The aim of such a corporaiton is to have a good balance between cash cows (mature companies with steady profits) and projects with high potential for great ROI.

The businsesses does nto need to be linked/releated in any other way than financially.

IMP: this view does not “hate” synergies. They will pursue synergies that emerge, but never the types that comes at the cost of reducing responsiveness.

Question 28

Elaborate on the integrated organization perspective

Answer 28

They argue that a corporation should only go multi-firm if it will provide an advantage over firms operating on single-firm basis. They want that signififcant synergy advantage.

Usually, there will be some sort of nucleus of synergy that is fostered at the center of the corporation. this is the job of the central management. They must make it extremely clear what this synergy is supposed to be, as a way of justifying the multi-firm decision.

It will require (and lead to) a corporation that is very interdependent on the various parts of the corporation, and require a shit load of coordination.

it is much about building core competencies that allow the firm as a whole to grow.

This view mainly base on the fact that apparently, the corporations who have been able to “update” its competencies fastest will win the war. From this view, it is strategic to engage in building core competencies, while it is tactical to engage in firm specific businesses.

Question 29

Reading 5.1 is about portfolio organization perspective. Elaborate on what it talks about

Answer 29

It place great emphasis on labeling businesses into quadrants:
1) Stars
2) Cash cows
3) Dogs
4) Question marks

The quadrants are made based on growth vs relative market share. The article is based on the assumption that higher market share allows for better margins, which means that a business with the largest market share in an industry will operate very well and produce cash.

The article also place great emphasis on the fact that if you want to compete in high growth business, it will require insane amounts of investment. you cannot take dividends in growth firms. You need to fiercely compete until the industry enter low-growth stabilization at which the firm with the greatest relative market share will have significant benefits compared to the others. At this point, it is sound to start reaping the benefits of the cash flow, as it is not needed to be reinvested.

Stars require this funding. Stars become cash cows if maintained properly. If not mainted properly, they become dogs.

Question marks can have two strategies:
1) Take a chance, invest as heavy as needed to compete for market share. QM’s are categorized by high growth but low share. Higher share is paramount if you want it to turn profitable. Therefore, significant investment is required, but it is very risky since you compete with bigger players.
2) The alternative is to dispatch the shit. Probably the best option is either a quick sale, or reap whatever cash it can make without re-investing anything.

Question 29

Key difference between low growth and high growth industries

Answer 29

If you want to achieve growth in a low growth industry, you will most likely have to take market share away from competitors. The competitors will notice this, and are likely to fight fiercely to mitigate this.

High growth industries allow for expansion without necessarily reducing competitors sales.

High growth industry “winners” are those who can expand first. The challenge is that competitors will not see the change as obviously as with low growht businesses, and may be inclined to beleive that things are going well, when competitors are doing much better. This can lead to situations where other competitors become very skilled at what they do, the learning curve effect, and operate on better margins, eventually pricing out the others.