Corporate Strategy

Question 1

What is Corporate Strategy? What is it Concerned with?

Answer 1

Corporate Strategy is concerned with “Where” a business operates

Question 2

What is Business Strategy? What is it Concerned with?

Answer 2

Business Strategy is concerned with “How” a business operates

Question 3

What is the goal of Corporate Strategy?

Answer 3

To build Corporate advantage and earn above normal returns

Question 4

How does a company create value in Corporate Strategy?

Answer 4

Through configuration and coordination of its multi market activities

Question 5

How is corporate strategy embedded in the organization?

Answer 5

Question 6

What does the ownership test postulate?

Answer 6

It assesses whether “ownerwhip of the business” craetes more value than other configurrations/ (Think McDonalds and franchising or Starbucks and Ownership)

Question 7

What are the 3 dimensions of corporate strategy?

Answer 7

1. Horizontal = Specialization, Product Business Diversification
2. Vertaical Diversification
3. Geographic Diversification

Question 8

How are the 3 diversification strategies exemplified?

Answer 8

Question 9

What is the “Ownership Test of Corporate Strategy?”

Answer 9

Add value to shareholders in a way that shareholders could not replicate by themselves

Think McDonalds vs Starbucks

Question 10

What does the “Better Off” Test postulate?

Answer 10

Does the presence of the corporation in a given market improve the competitive advantage of other business units over and above **what they could achieve on their own? **

Question 11

What are the “costs of markets?”

Answer 11

Markets are NOT costless

“relative cost” “ transaction costs”

Question 12

What are transaction costs?

Answer 12

all the (hidden or visible) costs involved in a transaction (e.g. search, communication, contract, monitoring, coordination etc.).

Question 13

How do you decided whther to engage in “itegration” or “market contracts?”

Answer 13

If transaction costs > administrative costs = integration.

If transaction costs < administrative costs = **market contracts **

Question 14

What does the History of Diversification look like (rough overview not in detail)?

Answer 14

Question 15

Over time, how did horizontal / vrtical or related /unrelated diversification evolve?

Answer 15

Question 16

What are “Economies of Scope?”

Answer 16

Economies of scope are most frequently encountered when a corporation possesses a resource or capability that is not fully utilized in production of a single product

Such assets can be tangible, such as manufacturing plants or distribution channels, or intangible, such as skills or R&D.

Question 17

What is inportant to understand in economies of Scope?

Answer 17

Synergies …

Cost synergis … the compbined cost of the two products need to be less than the single cost of each added up (i.e. sharing manufacturing plant)

Revenues (Cross selling)

The combined revenues need to be creater than the revenues of each product added up as a standalone

Question 18

What is “related diversification?”

Answer 18

Entering into a similar business or product

Question 19

What is unrelated diversification?

Answer 19

Entering into an unfamiliar product, business

Question 20

What is the issue with unrelated diversification

Answer 20

The issue is, whether “synergies” can be achieved (example of producing cars and milk) Possibly there is not synergetic potential

Question 21

What are the advantages of cross selling?

Answer 21

Selling the new product to the existing customers maybe as a bundle i.e. Microsoft and Internet Explorer

Question 22

What are the issues with cross selling when Branding is important?

Answer 22

To make sure that the Brand is not dilutet i.e. BMW and BMW “M” (Motorsport) .. so making sure that a separate entity is created that is detached a bit from the brand without destroying any cross selling synergies

Question 23

What does the concept of “ Transaction cost economics and horizontal diversification “ Postulate?

Answer 23

Economies from Internalizing Transactions

Relative efficiency of transaction costs of market contracts as opposed to the cost of managing directly the economies of scope.

Question 24

How can a company function as an interanl capital market?

Answer 24

by building a balanced portfolio of cash-generating and cash-absorbing businesses, the diversified company may cut the (significant!) cost of using capital markets.

Question 25

What is another benefit of using the firm as an internal capital market?

Answer 25

Internal Capital Market also allows to access more detailed information on the financial prospects of the different businesses than what is typical available from financers, traders and analysts.

Question 26

What is meant by the diversified firm as an interanl “Labour Market”?

Answer 26

Internal Labor Market, diversified companies may lower the cost of hiring/firing of the employees and use employees more efficiently across divisions and over time.

Question 27

How does vertical ( he said horizontal, not sure if he is correct) diversification increase matket power?

Answer 27

Through Predatory Pricing, where a grocery distributer has his own line of cereal for example

By Bundling products and or services (Microsoft and Internet Explorer)

Question 28

How can the GE Matrix be used?

Answer 28

As a tool to decide on corporate diversification and strategy

Question 29

What does the GE matrix look like?

Answer 29