Session 12 Flashcards
What is a corporate level strategy?
The actions a firm must take in order to develop a competitve advantage by managing and selecting groups of businesses which compete in different product markets
What is the reason for having a corporate-level strategy?
- Grow revenues/profits
- diversification
- Expected to help earn above-average returns by creating value
What are the two things corporate level strategy cares about?
- What product markets and businesses and firm should compete in
- How headquarters should manage the businesses
What is a corporate-level strategy in practice?
All fimrs have one even if it is a single-line business, the decision to not operate in any other industries is still important.
CEOs focus on corporate strategy (high level decisions)
Bad corporate strategies (hedge funds, corporate raiders)
Less well understood
What are low levels of diversification for a corporate-level strategy?
Single business: 95%+ comes from single business
Dominant business: 70-95% of revenue comes from a single busines
What are moderate to high levels of diversification in a corporate-level strategy?
Related constrained: <70% from dominant business and all businesses share production, technological and distribution linkage
related linked: <70% from dominant business and limited links between business
What is very high levels of diversification
unrelated: <70% of revenues from dominant business and there are no common links
What is thought about when diversifying?
- Scope of industries and market the firm competes in
- How managers buy, create and sell different businesses to match skills and strengths with opportunities.
What is horizontal integration?
Expansion into multiple businesses that share inputs (tangible or intangible) (E.g. disney has animation, shops and theme parks all operating under DisneyCorp)
What is vertical integration?
Expansion into businesses that make or use the output of other units (can occur in two directions)
Pixal films <– DisneyCorp –> Disney Stores
What is upstream vs downstream integration?
Backward/upstream integration: Manufacturing firm supplies its own raw materials
Forward integration: Manufacturing firm moves into market/distribution function
What is internal expansion?
Expand into multiple geographic markets to leverage investments
What are sharing activities
Firms can create operational relatedness by sharing primary or support activities.
It can:
- Costly to implement/coordinate
- create unequal benefits for divisions
- lead to fewer managerial risk-taking behaviors
What are corporate-level core competencies?
Set of resources and capabilities that link different businesses. Normally through managerial/technology knowledge, experience and expertise.
How can the related linked diversification strategy create value?
- Because the expense of developing a core competency has already been incurred so there is no need to allocate resources to develop it in a second business
- Because intangible assets are difficult to understand/imitate, the unit receiving the corporate-level competence gains an immediate competitive advantage over rivals
What are economies of scope?
Cost savings generating by sharing resources/capabilities or transferring one or more corporate-level competency that were developed in one business to another
Reason to use related diversification strategy
How can firms foster market power?
Multipoint competition and vertical integration
What is multipoint competition
When two+ diversified firms compete in the same product areas or geographical markets
How is vertical integration related to market power (benefits)
- Save on operations
- Avoid sourcing/market costs
- improve quality
- protect technology from imitation by rivals
- Exploit underlying capabilities in the marketplace
What is a downside of unrelated diversification corporate-level-strategy?
Cannot seek operational or corporate relatedness, therefore dont get the advantages which are harder to replicate.
Works best in emerging economies
What are financial economies
Cost savings from improved allocation of financial resources based on investments inside or outside of firm.
How can unrelated diversification strategy firms create value
Efficient internal capital market allocation and asset restructuring
What are the incentives to diversify?
- Antitrust laws (prevent mergers that increased market power, more of concern since early 2000s)
- Used to be tax benefit by it has since been changed
- Defensive strategy and reduces uncertainty of future cash flows (if product line is threatened, financial downtown, mature industries, etc)
- Synergy
- Managerial motives
BUT Research shows low returns are related to greater levels of diversification
What is synergy as an incentive to diversify?
Synergy: When value created by business working together exceeds the value that the same units create working independently
Creates interdependence –> risk averse or uninterested in pursuing new product lines
Whether the product lines are pursued or not, it will lead to diversification either way.
1. Operate in environment that is more certain: related-diversification into industries lacking potential
2. Constrain level of activity sharing may produce additional, but unrelated diversification where the firm lacks expertise
What are managerial motives as an incentive to diversify?
Reason to diversify beyong value-creating or value-neutral levels are: desire for increased compensation or reducing managerial risk.
Research shows diversification is correlated to firm size (firm grows –> more compensation and social status)
What is a downside of managerial motives?
overdiversification and reduction in ability to create value.
Managerial tendencies to overdiversify can be prevented with: governance mechanisms (BoD), monitoring by owners, executive compensation, market for corporate control.
Evidence suggests that many top-level executives do not seek to diversify the firm in a way that destroys value
