Corporate Strategy

Question 1

What are the two levels of strategy for a diversified company?

Answer 1

Business-level & corporate strategy.

Question 2

What is business strategy?

Answer 2

The way in which a company can create a competitive advantage in each of the businesses in which it competes. Competition occurs at the business unit level – Diversified companies do not compete; only their business units do.

Question 3

What does diversification add to business units?

Answer 3

Inevitably, costs & constraints.

Question 4

What is corporate strategy?

Answer 4

It determines the portfolio of businesses. It is company-wide. Concerns two questions: what businesses the corporation should be in and how the corporate office should manage the array of business units.

Question 5

What are key decisions of corporate strategy?

Answer 5

How should the firm diversify? (THRU ACQUISITION, JOINT VENTURE, ALLIANCE, OR DEVELOP INTERNALLY)
What structure and administrative systems will lead to value creation for a multi-divisional firm?

Question 6

What does successful corporate strategy need to contain?

Answer 6

It must grow out of and reinforce COMPETITIVE STRATEGY. Corporate strategy cannot succeed unless it truly adds value to business units by providing tangible benefits that offset the inherent costs of lost independence.

Question 7

What are the 3 conditions under which diversification will truly create shareholder value?

Answer 7

The attractiveness test, better-off test, and cost of entry test.

Question 8

What is the attractiveness test?

Answer 8

The industries chosen for diversification must be structurally attractive or capable of being made attractive.

Question 9

What is the better off test?

Answer 9

Either the new unit must gain competitive advantage from its link with the corporation or vice versa.

Question 10

what is the cost of entry test?

Answer 10

The cost of entry must not capitalize all the future profits.

Question 11

Low levels of diversification

Answer 11

Single business: More than 95% of revenue comes from a single business.

Dominant business: Between 70% and 95% of revenue comes from a single business.

Question 12

Moderate to high levels of diversification

Answer 12

Related constrained: Less than 70% of revenue comes from the dominant business, and all businesses share product, technological, and distribution linkages.

Related linked (mixed related & unrelated): Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses.

Question 13

What are three reasons firms diversify?

Answer 13

1. Economies of scope (related diversification)
2. Market power (related diversification)
3. Financial economies (unrelated diversification)

Question 14

What are economies of scope?

Answer 14

1. Operational relatedness in sharing activities.
2. Corporate relatedness in transferring skills or corporate core competencies among units.

Question 15

What is market power?

Answer 15

1. Blocking competitors through multipoint competition
2. Vertical integration

Question 16

What are financial economies?

Answer 16

1. Efficient internal capital allocation
2. Business restructuring

Question 17

A firm must have to diversify…

Answer 17

1. Incentives to diversify :

Resources required to create value through diversification

Cash

Tangible resources (e.g., plant and equipment)

Intangible resources (e.g., knowledge)

2. Value creation is determined more by appropriate use of resources than by incentives to diversify.

Question 18

What is economies of scale?

Answer 18

when average unit costs decline as a good or service is produced or sold in larger volume.

Fixed costs spread over higher volumes

Question 19

What is economies of scope?

Answer 19

when cost of producing and selling multiple products together is lower than the cost of producing and selling the same quantity of goods individually.

Synergies&raquo_space; 1 + 1 = 3

Question 20

What is learning curve?

Answer 20

when average unit costs decline as cumulative volume increases.

Bonus Question: What’s the difference between scale and experience effects?

Scale can be replicated by building a large plant

Experience must be built over time - path dependence

Question 21

WHat is market power?

Answer 21

when one buyer or seller in a market has the ability to exert significant influence over the quantity of goods and services traded or the price at which they are sold.

does not exist when there is perfect competition.

Question 22

What are examples of risk?

Answer 22

Risk – Unique & Market
The risk that can potentially be eliminated by diversification is called unique risk. Unique risk stems from the fact that many of the perils that surround an individual company are peculiar to that company and perhaps its immediate competitors. But there is also some risk that you can’t avoid however much you diversify. This risk is generally known as market risk. Market risk stems from the fact that there are other economy-wide perils which threaten all businesses. That is why stocks have a tendency to ‘move together.’ And that is why investors are exposed to ‘market uncertainties’ no matter how many stocks they hold.