Corporate Strategy Flashcards
Corporate levle strtategy
How to create value:
- Scope: choosing what businesses to be in or not to be in, where synergies can or cannot be realized
- Organizational design and coordination: how should the portfolio be coordinates and which processes are needed to create value
- Ownership and how to obtain necessary resources: in-house vs. External activities and full vs. Partial ownership
5 types of diversification strategies
- Single business (low) - leverage existing core competencies
- Dominant business (low) - dominant and minor businesses share competencies
- Related diversification: related constrained (medium/high) - all businesses share operational activities
- Relates diversification (related linked (medium/high) - only some activities share corporate competencies
- Unrelated diversification (conglomerate) (very high) - no businesses share activities/competencies
Value Creating diversification
Related diversification
Horizontal Diversification – cost and revenue synergies- sharing operational activities, corporate resources/competencies
Vertical integration- dealing better w/ bargaining power , implement policies in bundling, cross-selling, increase willingness to pay, and ease brand management
Market power exists when a firm can
Additional: quality, technology, knowledge, information, data Limitations: outsourcing, admin costs, flexibility, coordination
Unrelated diversification
-Conglomerates- Diversification itself is no the problem - the problem is when companies diversify without a solid strategic reasoning
-Efficient allocations of internal capital
- Business Restructuring
Value Neutral diversification
- Antitrust regulation
- Tax laws
- Low performance
- Uncertain future cash flows
- Risk reduction for firm
- Tangible resources
- Intangible resources0
Value Reducing diversification
- Diversifying managerial employment risk
- Increasing managerial compensation
Downsides of diversification
Often driven by managerial motives for growth and personal risk diversification
Lack of managerial experience in all areas at the top management team
Coordination cost
Distraction from the core business or most promising business
Vertical Integration
Benefits
- Potentially lowers costs
- Control over quality
- Facilitates investments in specialized assets
- Facilitates planning
- Improves bargaining power
- Secures critical supplies and distribution channels
Vertical integration
Risks:
- Can increase costs
- Can reduce quality
- Can reduce flexibility
o In responding to demand fluctuations
o In responding to market changes (tech, customer preferences, etc.) - Lack of incentives for business to operate in the most efficient way
Outsourcing
Benefits and risks
Benefits:
* Focus on core capacities and where you can really create value
* Increased flexibility (not always)
* Easier to release partners when they are external than vertically integrated suppliers/distributors
Risks of outsourcing:
* Reputation risks
* Contract enforceability could create a competitor
* Hold up situation in case supplier has high bargaining power
Transaction cost theory
Used to assess when Vertical Integration makes sense
- Market Costs: Transactions outside (between) firms (Eg. Search costs; Negotiation costs; costs of enforcing and monitoring contracts)
- Hierarchies Costs: Transactions within a firm (Eg. Administrative and organizing costs; Costs of monitoring and creating incentives)
𝑪𝒊𝒏−𝒉𝒐𝒖𝒔𝒆< 𝑪𝒎𝒂𝒓𝒌𝒆𝒕⟹ Vertically Integrate
Build
When?
- Similar to the resources the firm needs
- Superior to those of the competitors in the focal area.
Excessive building
* Managers are subject to hubris: overestimate inhouse skills in comparison to competitors´ ones
* Misalignment of stakeholders’ incentives: Department Managers (R&D and Marketing) have an incentive to keep investing in their areas to make sure it is not considered to be obsolete instead of turning to external resources when necessary.
* Limited horizon: failing to look ahead or outside of the immediate environment for opportunities and needs to source external resources
* Lack of outsourcing skills needed to search for and exploit external resources.
Borrow
