Week 5 - Corporate Strategy

Question 1

Grant (2019)

Answer 1

• Objectives of diversification:
  o Growth: especially in declining industries, but it’s only revenue growth
  o risk reduction: diversifying portfolio within the company, but shareholders can do that at lower cost
• Diversification where several independent businesses are just combined does not create shareholder value
• Possible advantage: credit risk
• Diversification creates shareholder value when (Porter):
  o The chosen industry is attractive
  o The cost of entry must not capitalise all future profits
  o The businesses should be better off with synergy
• Possible advantages of diversification:
  o Economies of scope: “using a resource across multiple activities uses less of that resource than when the activities are carried out independently”
   tangible resources – e.g. networks
   administrative teams
   intangible resources – e.g. brand
   organisational capabilities e.g. LMVH (Dior, Louis Vuitton, TAG Heuer) has capabilities of design, market analysis, advertising
   Demand-side scope – e.g. Walmart offering everything
  o Savings form internalising transactions
   Transaction costs to licensing vs acquiring
   Internal capital markets
   Internal labour markets
  o Parenting advantage: a parent should be able to add more value than any other potential parent
• Relationship between diversification and performance:
  o Inverted-U: adds value to a certain point
  o Diversification into related industries is usually more profitable (relatedness meaning strategic similarities instead of operational, e.g. Berkshire Hathaway, Virgin Group)

Question 2

He et al (2020)

Answer 2

• Depends on:
  o The degree of integration between partners
  o The underpinnings of the relationship between partners
• Changes in technology require new approach:
  o Open innovation: knowledge sharing, taking feedback and co-creation add value to a firm, and foster an inclusive environment with customers and competitors alike
  o Blockchain: allows for a decentralised many-to-many integration model – public, open and distributed ledger of transactions, lowering transaction costs and making partnerships easier
• New SAs:
  o More flexible, ad hoc, agile, virtual – old models of performance do not stand
  o As industry barriers become more blurred, alliance partners are often also competitors in certain transactions – constant need to find new suitable partners
  o Digital transformation makes dynamic ad hoc collab possible

Question 3

Schommer et al (2019)

Answer 3

• Related diversification improves firm performance, whereas unrelated diversification has negative effects
• Optimal level of diversification is heterogenous, so there is no universally optimal level

Question 4

Feldman & Hernandez (2022)

Answer 4

• Value[A + T] > Value[A] + Value[T] conditional on paying a price that does not exceed the value created
• Types of synergies:
  o Internal synergies: combining assets of A and B
  o Market power synergies: A gaining power over B (weakening rival)
  o Relational synergies: improved management of individual partnerships after merger (supplier/buyer/alliance partner)
  o Network synergies: structural combination of A and B
  o Nonmarket synergies: A gaining influence over stakeholders to gain legitimacy (governments, NGOs, communities)

Question 5

Zahoor et al (2024)

Answer 5

• Gains from strategic alliances is exploring new ideas together and exploiting complementary capabilities
• Ambidexterity: simultaneously perform inconsistent or paradoxically different activities

Question 6

Bauer & Matzler (2014)

Answer 6

• Though integration during M&A is important, focusing on premerger and post-merger issues is also vital
• Cultural fit lowers the incentives to fully integrate, but this can cause decision-making problems and misalignment in the long run
• No empirical evidence that speed influences the success of M&A

Question 7

Christoffersen (2013)

Answer 7

• Determinants of the outcomes of International Strategic Alliances (ISA)
• Performance measures are often subjective (e.g. stability, goal fulfilment, accounting measures, external evaluation)
• Determinants of performance - Behavioural attributes:
  o Trust: trust that the other has the required abilities, will act benevolently and adheres to moral principles
  o Commitment: calculative commitment (reasoning about the relative costs and benefits), affective commitment (partners’ identification with the alliance)
  o Cooperation: acting together in a cooperated manner to pursue shared goals
  o Conflict: intra-organisational conflict (task and process)
• Dissimilarities influencing the outcome of alliances:
  o Size differences: relating to complexity, structures and styles of managing
  o Cultural differences: organisational and national as well - beliefs, values, practices and behaviours
• Experience as an important factor: alliance ex, international ex, prior relationship with the ally
• Dominance of control is important – sometimes having a dominating partner is beneficial, e.g. investing in a developing country, but it can also be a disadvantage when it is asymmetrical (opportunism)

Question 8

Hoskisson (1987)

Answer 8

Results of the implementation of the M-form in:
- Unrelated-diversified firms: improved returns and reduced risk
- Vertically integrated firms: no obvious improvement
- Related diversified firms: limited profits
Cause: divisional interdependence

Question 9

Porter (1989)

Answer 9

Strategies of diversified company - competitive: on a business unit level – how to gain competitive advantage
corporate (companywide): what businesses the corporation should be in and how the corporate office should manage the array of business units
diversification has costs - adds value when: attractive industry, cost-of-entry low, business unit gains advantage from having the parent company
Ways to enter: portfolio management (keeping leadership), restructuring (transforming the new unit), transferring skills, sharing activities (cost-benefit)