Week 5 - Corporate Strategy Flashcards
What are the three levels of strategy?
Corporate level strategy: Decisions made by top management that affect the entire organization.
Business level strategy: Decisions made by business unit managers that affect how their unit operates.
Functional level strategy: Decisions made by individual departments or teams that affect how they contribute to the overall success of the organization.
What is the difference between a related and an unrelated diversification strategy?
Related diversification means expanding into businesses related to the company’s existing ones, like a shoe company producing socks.
Unrelated diversification means expanding into businesses not related to the company’s existing ones, like a shoe company investing in real estate.
What is a vertical integration strategy?
A vertical integration, movement into similar markets by a firm along its own value chain, example, a car manufacturer may acquire a tire manufacturer or a steel mill to ensure a reliable supply of mat
What is a horizontal integration strategy?
A horizontal integration strategy involves expanding into businesses that are similar or complementary to the company’s existing business.
For example, a car manufacturer may acquire a competitor or a company that produces automotive parts.
What is a single business?
More than 95% of revenue comes from a single line of business
Dominant vertical business
More than 70% of revenue comes from a single line of business and the rest of the businesses located along its value chain, through forward or backward integration
A related constrained diversification (lines of business)
It earns less than 70% of their revenue from their main line of business
Its other lines of business share product, technological and distribution linkages with the main business
Market place uses same ups, amazon website, sells similar product (used books instead of new)
Unrelated diversified firm
Is a business that competes in product categories and markets with few, if any, commonalities between them. Also known as conglomerates.
Less than 70% revenue from a dominant business, no common links between businesses
What are two questions should a manager must answer before diversifying?
Why it would be more valuable to the existing business
Why will a new business activity within the existing organization bring value than it operating on its own
Why is it valuable to diversify
Adjacent businesses can exploit the firm’s resources and capabilities
Or enhances and grows the resource base
Lower costs of production of goods and services
Greater utility or value to new or existing customers
***Technically, exploiting resources or expanding resources
What are the eight ways in which a company may create value through diversification?
what happens if you are partnered up with someone else in a business
- Employing Slack: handle more work efficiently over time
- Creating synergy: two companies together creates more value than individually
- Leveraging shared knowledge: allows valuable knowledge and skill to be shared between units
- Utilizing similar models for success: when business unit success depends on a common characteristic
- Spreading human and financial capital: the headquarters of the corporation quickly allocates capital and other resources to their best use among business units
- Providing a steppingstone for a company or to a completely new business sector: firm moves into a new industry, small jumps gaining new skills and resources
- Stopping or slowing competitors: denying access to competitors by moving into a new marketplace
- Staying even with of technological change: expanding new technology or buying a company in that arena, in order to learn about new technologies
4 Ways of destroying Value through diversification
- Hubris: excessive pride, arrogance, or overconfidence
- Sunk cost fallacy: the belief of managers that investment in a failed acquisition must continue because significant amounts have already been invested
- Poor governance and incentives: no incentives for managers to continue working at the company, running a new business poorly
- Lack of resources - commonality between the lines of business, moving into lines of business that fail to create value based on any of the eight
Methods of diversification
Greenfield entry
Acquisition
Alliance
How a firm should integrate an acquisition? Bbbb
Bury - completely absorb the acquired company
Blend - retaining and combining the best elements of both companies to compete more effectively
Build - craft an entirely new organization
Bolt on - run the acquired company independently of the acquiring company
What is diversification strategy?
A company’s decision to enter one or more new industries (that are distinct from its established operations) to take advantage of its existing distinctive competencies and business model
