Corporate Level Strategy Flashcards
Single Business strategy
Advantages
- capability is more focused
- top execs can maintain hands-on contact
- less chance resources will be stretched thinly over too many competing activities
Risks
- too many eggs in one basket (econ, shock, technology change, subs)
- limited growth potential
Horizontal Integration
Acquiring or merging with industry competitors.
Benefits:
- Lowers the cost structure
- Increases portfolio of products
- Leverages a competitive advantage
- Increases bargaining power over suppliers and buyers
Problems:
- Difficult to implement:Acquisitions prompt employee turnovers, Difficulties with merging company cultures
- Cost savings often overestimated
- Conflict with the Federal Trade Commission (FTC) in US or Canadian Competition Bureau in Canada
- Will be blocked if merger concentrates the industry too much
Vertical Integration
When a company expands its operations either backward or forward into an industry.
Benefits:
◦ Facilitates investments in specialized assets.
◦ Protects product quality.
◦ Results in improved scheduling.
Risks:
◦ Increasing cost structure
◦ Disadvantages that arise when technology is changing fast
◦ Disadvantages that arise when demand is unpredictable
Outsourcing
Decision to allow one or more of a company’s value-chain activities to be performed by independent companies. Benefits: ◦ Lower cost structure ◦ Enhanced differentiation ◦ Focus on core business
Risks of Outsourcing
- Holdup
◦ Risk that a contract will be renegotiated under threat
- Increased competition
◦ Building of an industry-wide resource that lowers the barriers to entry in that industry
- Loss of information
Diversification
The process of entering new industries, distinct from a company’s core or original industry. Main methods that diversification can increase profits ◦ Sharing resources ◦ Transferring competencies ◦ Bundling Disadvantages - changes in the industry or company - diversification for wrong reasons - bureaucratic costs
Diversification method: Internal New Venture
1) Internal new venture
Transferring resources and creating a new business unit in a new industry to innovate new kinds of products
◦ Used by companies that are:
◦ Technology-based and pursue related diversification
◦ Venturing to enter a newly emerging industry
Pitfalls:
◦ Market entry on too small a scale
◦ Poor corporate management of new-venture division
Diversification method: Acquisition
Faster than internal new ventures Less risky than internal new ventures Pitfalls: ◦ Integrating the acquired company ◦ Overestimating economic benefits ◦ Expense of acquisitions ◦ Inadequate pre-acquisition screening
Restructuring
Reorganizing and divesting business units and exiting industries
◦ To refocus upon a company’s core business and rebuild its distinctive competencies
Mature Industry Strategies
- Refine current products
- Emphasize service
- Process innovation (keep costs down):factory, procurement, distribution these are emphasized over product innovation in mature phase
- Entry deterrence: limit pricing (charging a lower price than profit maximizing price to keep new entrants out
- Imitation
Declining Industry Strategies
- Leadership strategy: When a company develops strategies to become the dominant player in a declining industry.
- Niche strategy: When a company focuses on pockets of demand that are declining more slowly than the industry as a whole to maintain profitability.
- Harvest strategy: When a company reduces to a minimum the assets it employs in a business to reduce its cost structure and extract maximum profits from its investment.
- Divestment strategy: When a company decides to exit an industry by selling off its business assets to another company.
First Mover Advantages
- Early investors in technology benefit from learning curves and patents.
- Early investment in strategically valuable assets creates barriers to entry.
- Creation of switching costs keeps customers hostage.
Establishment of Technical Standards
Determined by:
- Government intervention
- Competition among businesses
- Dominant firm
- Network Effects
Format War
Battle to control the source of differentiation and the value it creates for customers Strategies: 1. Ensure a supply of complements 2. Pursue aggressive pricing 3. Advertise to build awareness 4. Cooperate with competitors 5. License the format
Tech firm: First Mover
Advantages: - opportunity to exploit network effects - ability to establish brand loyalty - ability to create switching costs Disadvantages - bear significant pioneering costs - more prone to mistakes - might invest in obsolete technology
Tech Firm: Exploiting First Mover Advantages
- Develop and market the innovation
- Develop and market the innovation jointly with other companies
- License the innovation to others
