Week 3 - Corporate-Level Strategy and Mergers & Acquisitions Flashcards
What is corporate-level strategy?
Corporate-level strategy specifies actions a firm takes to gain a competitive advantage by managing a group of businesses competing in different product markets.
What does diversification mean in corporate strategy?
Diversification is the strategy of expanding into new markets or product lines to reduce risk and increase growth opportunities.
What are the two types of strategies formed by diversified firms?
Corporate-level (company-wide) and business-level (competitive) strategies.
What is the focus of corporate-level strategy?
Deciding in which product markets and businesses the firm should compete and how corporate headquarters should manage those businesses.
What does business-level strategy aim to achieve?
To help the firm earn above-average returns by creating value.
When is a firm considered to be related through diversification?
When its businesses share links in product markets, technologies, or distribution channels.
What is a single-business diversification strategy?
A strategy where a firm generates 95% or more of its revenue from its core business area.
What is a dominant-business diversification strategy?
A strategy where a firm generates 70-95% of its revenue from a single business area.
What is related diversification?
A strategy where a firm generates more than 30% of its revenue outside its dominant business, and the businesses are related in some way.
What is an unrelated diversification strategy?
A strategy used by firms that have no relationships between their businesses.
What are value-neutral reasons for diversification?
reducing risk, tax or regulation benefits, managerial interests, etc
What is economies of scope?
Cost savings created by sharing resources and capabilities or transferring core competencies between businesses.
What is operational relatedness in diversification?
Sharing activities like inventory systems or purchasing practices between businesses to create value.
What are corporate-level core competencies?
Complex sets of resources and capabilities, such as managerial and technological knowledge, that link different businesses.
What is market power in corporate strategy?
The ability of a firm to sell products above competitive levels or reduce costs below competitive levels.
What is multipoint competition?
When two or more diversified firms simultaneously compete in the same product areas or geographical markets.
What is vertical integration?
A strategy where a company produces its own inputs (backward integration) or owns its output distribution (forward integration).
What are some limitations of vertical integration?
Higher costs, bureaucratic expenses, reduced flexibility, and capacity balance issues.
What is unrelated diversification in terms of financial economies? (How does the company benefit finanically when using unrelated diversification)
Unrelated diversification is when a company expands into areas that have little to no connection with its current business.
The company can benefit financially in two main ways:
**Internal capital allocation: **The company can take profits from one business (that’s doing well) and invest them in another part of the business that needs funding or has more growth potential. This way, they don’t need to rely on external investors or loans.
**Asset restructuring: **The company may buy struggling businesses at a low price, improve their operations, and then sell them for a profit.
What are the two ways financial economies create value in unrelated diversification? (repeat question)
**internal capital allocations **and asset restructuring to improve profitability.
Why is unrelated diversification commonly used in emerging markets?
Competitors find it easier to imitate financial economies in developed markets, making unrelated diversification more beneficial in emerging markets.
How do firms create value through asset restructuring?
By acquiring companies, restructuring assets to improve profitability, and then selling them for a profit.
What is the ideal strategy for restructuring service-based and intangible assets?
Buy during economic downturns and sell during expansions (e.g., Warren Buffett’s approach).
What are external incentives to diversify?
External incentives include antitrust regulations and tax laws.
What internal incentives may drive a firm to diversify?
Low performance, uncertain future cash flows, the pursuit of synergy, and reduction of risk.
How did government policies in the 1960s and 1970s influence diversification?
Antitrust policies encouraged diversification while prohibiting mergers that increased market power.
What effect did the 1986 Tax Reform Act have on diversification?
It reduced individual tax rates, encouraging divestitures of unrelated business units post-1984.
How does low performance relate to diversification?
Low returns can incentivize diversification; overly diversified firms may perform worse.
What is synergy in the context of diversification?
When the combined value of business units working together exceeds their individual values.
What challenges do diversified firms face in achieving synergy?
Inflexibility, interdependence, and risk-averse behavior can limit synergy benefits.
What are tangible and intangible resources in diversification?
<div>Tangible resources are visible and less flexible, while intangible resources (like tacit knowledge) are more adaptable and beneficial.</div>
What are managerial motives for diversification?
Increased compensation and reduced risk due to firm complexity.
How does corporate governance relate to diversification?
Governance mechanisms can limit over-diversification and help maintain firm performance.
What trend is observed in diversification strategies?
A cautious approach emphasizing related diversification while reducing unrelated diversification.
What is the primary reason for using a corporate-level strategy?
<div>To create additional value.</div>
What is corporate-level strategy and why is it important?
Corporate-level strategy specifies actions to gain competitive advantage by managing a group of different businesses.
It’s important for creating value and achieving market power.
What are the different levels of diversification firms can pursue?
Firms can pursue single-business, dominant-business, related diversification, and unrelated diversification strategies.
What are three reasons firms choose to diversify their operations?
1) Low performance; 2) Uncertain future cash flows; 3) Pursuit of synergy and risk reduction.
How do firms create value when using a related diversification strategy?
By sharing activities or transferring competencies between different businesses, leveraging economies of scope.
What are the two ways to obtain financial economies when using an unrelated diversification strategy?
1) Efficient internal capital allocations; 2) Asset restructuring to improve profitability.
What incentives and resources encourage diversification?
<div>External incentives (antitrust regulations, tax laws) and internal incentives (low performance, uncertainty about future cash flows).</div>
What are merger and acquisition strategies used for?
To create stakeholder value and competitive advantages.
What challenges do firms face when implementing merger and acquisition strategies?
- Acquired firms’ shareholders may see above-average returns.
- Acquiring firms usually earn little to no returns.
- Stock prices of acquiring firms often drop after deals are announced.
- Investors doubt the acquirer can justify the high purchase price.
What is a merger?
A strategy where two firms agree to integrate their operations on a usally friendly basis, and it often results in a shared name.
What is an acquisition?
A strategy where one firm buys another smaller firm, making it a subsidiary.
What is a takeover?
An acquisition where the target firm does want to be taken over, making it an unfriendly acquisition.
What is market power in the context of acquisitions?
The ability to sell goods or services above competitive levels or reduce costs compared to competitors.
What types of acquisitions can increase market power?
- Horizontal Acquisitions: Buy competitors in the same industry.
- Vertical Acquisitions: Acquire suppliers or distributors.
- Related Acquisitions: Buy firms in highly related industries.
- Cross-border Acquisitions: Between companies in different countries.
What are common problems in achieving acquisition success?
- Integration difficulties.
- Inadequate evaluation of the target.Large debt loads.
- Inability to achieve synergy.
- Over-diversification.
- Managers overly focused on acquisitions.
- Excessive size of the combined firm.
What characteristics make acquisitions more effective?
- Complementary assets between acquiring and target firms.
- Friendly acquisitions.
- Thorough due diligence.
- Adequate financial slack.
- Experience in adapting to change.
- Emphasis on R&D and innovation.
What is restructuring, and what are its types?
Restructuring is changing a firm’s business structure or financial structure, focusing on fewer products/markets.
Types include:
* Downsizing: Reducing employees or units.
* Downscoping: Divesting unrelated businesses.
* Leveraged Buyouts: Purchasing all assets to take a firm private.
Why are merger and acquisition strategies popular in many firms competing in the global economy?
Firms seek to create value and outperform rivals, driven by globalization and deregulation.
What reasons account for firms’ decisions to use acquisition strategies as a means to achieving strategic competitiveness?
Increase market power, overcome entry barriers, speed up market entry, reduce risk, diversify, reshape competitive scope, and enhance learning.
What are the seven primary problems that affect a firm’s efforts to successfully use an acquisition strategy?
Integration difficulties, inadequate evaluation of the target, large debt, inability to achieve synergy, over-diversification, managerial focus on acquisitions, and excessive size.
<div><strong>What are the attributes associated with a successful acquisition strategy?</strong></div>
Complementary resources, friendly acquisitions, thorough due diligence, financial slack, experience in change management, and emphasis on innovation.
What is the restructuring strategy, and what are its common forms?
A strategy to change a firm’s business structure or financial structure; common forms include downsizing, downscoping, and leveraged buyouts.
What are the short- and long-term outcomes associated with the different restructuring strategies?
Short-term outcomes may include immediate cost reductions, while long-term outcomes can lead to improved focus on core businesses and enhanced performance.
What is corporate-level strategy?
Specific actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets.
What are the two key questions in corporate-level strategy?
1) In what product markets and businesses should the firm compete?
2) How should corporate headquarters manage those businesses?
What is the ultimate goal of corporate-level strategy?
To create value for the firm and help it retain above-average returns.
What does related linked diversification mean?
It refers to indirect links between different businesses.
Name a good reason for value-creating diversification.
Economies of scope—cost savings achieved by sharing resources and capabilities across businesses.
What is market power?
The ability of a firm to sell its products above competitive levels or reduce costs below competitive levels.
How can firms achieve market power?
Through multimarket competition (horizontal integration) or vertical integration (backward or forward).
What are financial economies in the context of diversification?
Diversifying to better allocate financial resources across various businesses.
What is value-neutral diversification?
When firms diversify even if it doesn’t create value or may destroy value.
What can lead to value-reducing diversification?
Low performance, regulation, risk reduction, and excess
What is the ultimate purpose of diversification?
To achieve synergies where two businesses create more value together than they would independently.
What are the two main ways to realize corporate-level strategy?
Through mergers and acquisitions.
How does an acquisition differ from a merger?
In an acquisition, one firm buys another firm entirely, with no equal basis, usually involving a larger firm acquiring a smaller one.
What characterizes a takeover?
A takeover is an unsolicited and unfriendly acquisition that surprises the target firm.
What are some benefits of acquisitions?
1) Obtaining market power
2) Overcoming entry barriers
3) New product development
4) Cost reduction
5) 5) Risk reduction
6) Increased speed to market.
7) Developing new capabilities
What are horizontal acquisitions?
Acquisitions where a firm operates in the same product market as the target firm.
What are vertical acquisitions?
Acquisitions that involve firms at different stages of the supply chain.
What are the challenges in successfully completing acquisitions?
1) Integration difficulties
2) Inadequate due diligence
3) Excessive use of debt
4) Inability to achieve synergy
5) Too much diversification
What is inadequate due diligence?
Failing to thoroughly assess the financial and operational aspects of the target firm before an acquisition.
Why is integration a challenge in acquisitions?
Merging different corporate cultures and operations can be complex and lead to difficulties.
