Corporate Strategy: General & Diversification Flashcards
What is a corporate strategy?
Business level strategy concerns on how to compete in a single product market
It is required for expansion out of a single product
It comprises of decisions made by management to drive competitive advantage in several industries and markets simultaneously
Where to compete?
Vertical integration: along value chain
- In what stages of industry value chain should company participate - level involvement along the value chain from input to output
Diversification: of products and services
- Range of products and services to be offered by company
Geographical scope: regional, national, local
- Geographically, the region company should compete in
What underpins the corporate strategy?
Implicit desire for growth
- Increasing profits
- Decreasing costs
- Increase market power
- Reduce risks
- Motivate management
What are the underlying concepts that guide the three different groups of corporate strategy?
Core competencies
Economies of scale
Economies of scope (efficiencies by variety not by volume)
Transaction costs
What questions does DIVERSIFICATION answer?
What range of products and services should the firm offer?
Degree of diversification
- Either through product diversification (multiple products in one market), or geographical diversification (single product in numerous markets)
What are the justifications for diversification?
Economies of scope
- Cost economies
- Revenue enhancements
- Management synergies
- Innovation
Market Power
- Control of complementary assets
- Mutual deterrence
How to add value from diversification?
Linkage Influence:
- Synergies from linking two businesses
- Sharing of common resources, cross selling and sharing of distribution channels
Stand-alone influence:
- Synergies just by belonging to a corporate group
- ie. affiliation to brands such as Virgin Brand, Apple and other notable ones
Corporate development:
- Investing in new things that public cannot directly participate in
What are the types of diversification?
Anchor:
- % of revenue from primary business
- R/s of core competencies across business units
Single Business:
- 95% of revenue from primary
Dominant Business:
- 70% of revenue from primary
Related Diversification:
- Less than 70%, and strong r/s between business units to drive economies of scale and scope
Related Constrained:
- Able to leverage on existing competencies and resources and enter new business only when there are common resources
Related linked:
- Limited leverage from current resources, thus entering new businesses only when some help from primary businesses
Unrelated diversification (conglomerate):
- On average, related diversification performed better than unrelated diversification
- Benefits of conglomerate (mainly in emerging markets)
- act on behalf of governments
- overcome market failure
- governance (good business but poor management)
- security legislation weakness
How to determine whether corporations should diversify?
3 sequential tests to validate acquisitions
- Better off: combining businesses under one firm creates more value than businesses as stand-alone units (1+1)>2
- Best alternative: should corporation consider other forms of collaboration other than combining into one firm:
ie. engaging in JV, alliances, licensing or simply contracting - Best Parent: analyses if the corporation is the best suited company to take in the target firm as its parent
There may another corporation whose portfolio is better suited to acquire the current firm in order to leverage on better synergies and sustain superior performance
