Corporate Strategy Flashcards
What are the two levels of strategy for a diversified company?
Business-level & corporate strategy.
What is business strategy?
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.
What does diversification add to business units?
Inevitably, costs & constraints.
What is corporate strategy?
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.
What are key decisions of corporate strategy?
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?
What does successful corporate strategy need to contain?
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.
What are the 3 conditions under which diversification will truly create shareholder value?
The attractiveness test, better-off test, and cost of entry test.
What is the attractiveness test?
The industries chosen for diversification must be structurally attractive or capable of being made attractive.
What is the better off test?
Either the new unit must gain competitive advantage from its link with the corporation or vice versa.
what is the cost of entry test?
The cost of entry must not capitalize all the future profits.
Low levels of diversification
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.
Moderate to high levels of diversification
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.
What are three reasons firms diversify?
- Economies of scope (related diversification)
- Market power (related diversification)
- Financial economies (unrelated diversification)
What are economies of scope?
- Operational relatedness in sharing activities.
- Corporate relatedness in transferring skills or corporate core competencies among units.
What is market power?
- Blocking competitors through multipoint competition
- Vertical integration
What are financial economies?
- Efficient internal capital allocation
- Business restructuring
A firm must have to diversify…
- Incentives to diversify :
Resources required to create value through diversification
Cash
Tangible resources (e.g., plant and equipment)
Intangible resources (e.g., knowledge)
- Value creation is determined more by appropriate use of resources than by incentives to diversify.
What is economies of scale?
when average unit costs decline as a good or service is produced or sold in larger volume.
Fixed costs spread over higher volumes
What is economies of scope?
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»_space; 1 + 1 = 3
What is learning curve?
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
WHat is market power?
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.
What are examples of risk?
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.
