week 5- corporate level strategy

Question 1

corporate level strategy

Answer 1

specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets

Question 2

synergy

Answer 2

exists when the value created by business units working together exceeds the value that those same units create working independently. Want to make sure we have synergy between the businesses so we can maximize sales

Question 3

The value of corporate-level strategy

Answer 3

is determined by the degree to which the businesses in the portfolio are worth more under the management of the company than they would be under any other ownership.

Question 4

A firm can create a corporate advantage

Answer 4

when its businesses work together in a synergistic way.–>

Question 5

A successful corporate strategy

Answer 5

is not a random collection of building blocks→ it a carefully selected group that can build synergies

Question 6

If we become too diversified,

Answer 6

our performance will eventually decrease, cant get synergies and lose our corporate advantage

Question 7

Value creating diversification allows to:

Answer 7

Develop and exploit economies of scope among businesses through horizontal diversification (Bell’s phone, Internet, TV & Mobile phones use joint marketing, billing, distribution, brand)
Bell offers a bundle → if you buy multiple services from us, we will bundle for you and give you a discount
Economies of scope: using same resources, saving money on multiple things
Pursue multipoint competition by diversifying horizontally
Two or more diversified firms simultaneously compete in the same product or geographic markets. (Videotron vs. Bell)
Bell has a competitor that is videotron. Videtron matched bell on their services but didnt have the mobile service so videotron fell short
Videotron decided to diversify and introduced a mobile service too so they could match bell in multipoint comp
Multipoint comp→ compete in multiple markets
Gain market power through vertical integration (Delta Airlines buying an oil refinery)
Delta is vulnerable to oil prices, so they bought an oil refinery to conserve profits, this is vertical integration because they are adding a new business to their portfolio (this is our supplier integration), horizontal is new types of products/product markets
Create value through financial economies (increased borrowing power and preferential interest rates from financial institutions)
Benefit→ can realize financial economies
Reduce risk of local economic uncertainties through geographic diversification and create corporate synergies by capitalizing on local advantages. (CEMEX)
Ikea does this, they have different stores in different countries
Cemex is a mexican producer of cement but they are geographically diversified , demand for cement depends on the economy, can balance risks, cement is also expensive to transport so they dont want everything located in mexico
Ikea also has economies of scope and scale→ produce in india but sell products in germany

Question 8

Value neutral or value reducing diversification

Answer 8

creates a multibusiness company that is just a sum of its parts and nothing more (i.e. little or no added value from managing these businesses under the same roof). Such companies are known as conglomerates (Google Alphabet, Tata Group).

Question 9

What causes companies to diversify in value-reducing or value-neutral ways:

Answer 9

Poor performance in existing business(es)
diversification neither solves problems in existing business(es) nor do these firms possess resources and capabilities to succeed in new areas.
Uncertain future cash flows due to external conditions entice firms to diversify to reduce risk
resulting high upfront investment, neutralizing expected cost savings, with zero-sum results in the long-term
Wrongly estimating potential synergies and firms’ capabilities to achieve them
May look on paper that there are synergies but when actually getting into the businesses, there isnt
Diversifying to copy competitors, benchmarking against them, without proper analysis of own capabilities
Top level executives’ desire to reduce their own employment risk, pursue their personal ambitious goals or increase their compensation
Some companies dont diversify for good reasons, we get only the sum of their parts, not very useful
Conglomerates aka holding companies: they have unrealted businesses, the only thing that units them is the brand itself, no synergies, holds dif companies, risk reduction but also why would investors invest in conglomerates why not just choose specific ones

Poor performance in existing businesses: Trying to diversify without solving current problems.
Uncertain future cash flows: Firms diversify to reduce risk, but high upfront investments may cancel out long-term gains.
Overestimating synergies: They expect synergies that don’t materialize in practice.
Copying competitors: Diversifying without assessing their own capabilities.
Executive ambitions: Diversifying to reduce employment risk or increase personal compensation.
Conglomerates: Holding companies with unrelated businesses often don’t achieve synergy, raising questions about their value to investors.