Corporate strategy- shareholder perspective

Question 1

shareholder model (Friedmen)

Answer 1

• all other stakeholders needs are secondary to investors.
• its up to other organisations to deliver social value

Question 2

Total Shareholder Risk

Answer 2

• achieving TSR is the focus of corporate strategy
• TSR= change in stock value + dividends

Question 3

3 questions of corporate strategy when considering relationship between centre and SBU

Answer 3

1. Value: is the business worth more under ownership?
2. Composition: What business should we be in?
3. Co-ordination: How should the business be managed?

Question 4

Intergration- vertical scope

Answer 4

• forward integration is diversification down value chain
• backwards integration is diversification up value chain

Question 5

integration- horizontal scope

Answer 5

diversification to increase product scope

Question 6

Reasons for diversification

Answer 6

• growth
• spread risk
  -value creation

Question 7

limitations of diversification

Answer 7

• growth needs to come with profitability to create value
• spread of risk may reduce variability in cash flows
• you need to be able to exploit synergy Eg. through economies of scope

Question 8

Porter - Essential diversification tests

Answer 8

1. Market attractiveness
2. the cost of entry test (lower than all future profits )
3. the better off test (can parent add value?)

Question 9

Costs of parental controls

Answer 9

• HQ expenses
• standard internal processes
• speed and flexibility
• business unit manager if another parent could add more value

Question 10

3 thing parents must be able to do

Answer 10

• parent must create more value
• continuously add more value
• minimal opportunity cost risk for shareholder if another parent could add more value (otherwise destruction of shareholder value)

Question 11

Astride parting Model

Answer 11

• Heartland - high potential
• Ballast - good fit but minimal value
• Value trap - high value but low fit
• Alien territory - adds no value

Question 12

Fit is determined by…

Answer 12

• management systems
• extent of delegation
• degree of formalisation
• culture/shared mental models
• style and skills of managers

Question 13

Portfolio manager

Answer 13

• BCG portfolio growth share matrix
• drawbacks: is simplistic and doesn’t look at interactions

Question 14

Synergy manager

Answer 14

• facilitate sharing of resources; value creation at SBU level
• identifies synergy between SBU
• horizontally adds value

Question 15

Parental developers

Answer 15

• central competes
• autonomy of SBU varies
• vertically adds value

Question 16

Criticisms

Answer 16

• does model recognise linkages between businesses in group?
• is assumption correct?
• does focus on shareholders value match the responsibilities of the firm?