Week 6

Question 1

Corporate-level strategy:

Answer 1

Composed by the balance and mix of businesses, it focuses on the product, partners, and geographic scope.

Question 2

Product scope:

Answer 2

Focused companies - few business lines, focus on a single industry (Tesla, Zara).

Diversified companies - broad line of businesses and span their activities across multiple industries.

Question 3

Diversification discount:

Answer 3

Markets often assign lower values to conglomerates that engage in many different activities compared to focused firms. This is called diversification discount.

That is why investors often invest in focused companies, as they understand the industry better and can allocate resources more effectively.

Another reason is that it is more difficult to evaluate a diversified company.

Question 4

Related diversification:

Answer 4

A growth strategy offering firms to expand their business into new products/markets which are in synergy/closely related to their current business operations.

Usually this strategy provides “parenting advantage” - as parent company gets the larger benefit.

Question 5

Investors invest if the parenting effect is present which is:

Answer 5

Related diversification, skills and capabilities transferable, the parent company should have a long-term vision clearly articulated, and cultural integration as shared values. Finally, the alignment must be visible by an organisational form.

Question 6

Motives for diversification:

Answer 6

Economies of scope, growth, risk reduction, strategic control, and parenting advantage.

Question 7

Economies of scope:

Answer 7

Cost saving and efficiencies business may achieve by producing and selling multiple products. Usually from joint production allows companies to share resources, capabilities, or processes resulting in cost advantage.

Question 8

Growth:

Answer 8

Use diversification to grow when are in low-growth and cash-flow rich industry with little diversification.

Question 9

Risk reduction:

Answer 9

Not perfectly correlated cash flows, can reduce the variance by combining these cash-flows. Financial risk exposure can be reduced.

Question 10

Strategic control:

Answer 10

Can be gained by moving into businesses that can offer valuable inputs for a diversified company’s other businesses. By doing this the middle man can be cut out, and prevent control issues. For example, Amazon acquiring pharmacy company, getting expertise and infrastructure.

Question 11

Parenting advantage:

Answer 11

Derived from the management skills and resources of the parent company. Knowledge, managers, and expertise can be transferred between different business units. Furthermore, credibility and reputation is passed on.

Question 12

Agency problem:

Answer 12

Principal owns the company, agent is the manager.

Type 1 agency problems: small shareholders fear lazy, incompetent or over-ambitious managers.
Monitoring due to diversification becomes more difficult. Due to this white-collar workers start to rise. Old plants are not destroyed and creation of new fail, thus productivity falls and also profitability.

Type 2 agency problem: small shareholders fear large, controlling owners, as they can pursue their own interests, at the expense of less powerful owners.
Arise due to information asymmetry and variation in decision-making power, divergent goals, complexity in a corporation, different control and cash flow rights, infrastructure for tunnelling, and reluctant courts.

Tunnelling - unethical and illegal practice where most shareholders direct assets or future business to themselves for personal gain.

Question 13

Growth share matrix:

Answer 13

Tool providing insights into the balance of company’s product portfolio. Displays the product portfolio in scatter graph based on firm’s relative market share and their growth rates.

Helps to decide how to prioritise their business to effectively manage capital and talent allocation and make correct divestment decisions.

Relative market share - the market share of a product or brand relative to its largest competitor.
Market growth rate - the annual growth rate in terms of total turnover in a market category:
>10% - invest
0-10% - hold
<0% - divest

Question 14

Stars (growth share matrix):

Answer 14

Products with high market share and high-growth. Require a lot of funding to remain competitive. Products have a tendency to be front runners, with unique selling points.

Question 15

Cash cows:

Answer 15

High market share, low growth. Less cash maintenance, due to waste investments, cash cows should be “milked”.

Question 16

Question marks (growth share matrix):

Answer 16

Products that have a low market share, and are in a fast-growing market. Often a starting point for businesses. Careful investments need to be made, escalating investment is risky, as the question mark can turn into a star or pet.

Question 17

Pets (growth share matrix):

Answer 17

Products with low market share and low growth. The best is usually break-even, thus should be divested.

Question 18

Growth share matrix application:

Answer 18

Does not only provide an overview of a multi-product firm, but it is also a dynamic corporate development tool.
Firms can plan success sequence, however, relocation of cash and talent is difficult, by not being careful firms can end up in disaster sequence.

Question 19

Success sequence:

Answer 19

Is a circle where firms try to reinvest from low growth/high market share (cash cows) into high industry growth/low market share (question marks).

Question 20

Disaster sequence:

Answer 20

cash from cash cows to fund pets. Sometimes even from stars, leading to them losing market share to their powerful competitors.

Question 21

Heartland matrix:

Answer 21

Evaluates a portfolio of a company’s business units by assessing how much each business unit fits with the “parenting advantages” of the corporate headquarters.

Look at how businesses can add value to corporations and how corporations add value to businesses. Done by analyzing additional value either created or destroyed based on the fit of a specific business unit with the rest of the company.

Horizontal added value - sibling advantage - does the business unit add value to the parent company?

Vertical added value - parenting advantage - does a particular business benefit from the parent company?

Question 22

Heartland matrix, positions:

Answer 22

Potential for value destruction from misfit between needs of the business and parent’s corporate style/Potential for parent to value added to the business:

Low/Low - Ballast, typical core business position.

High/Low - Alien territory, exit.

High/High - Value trap, potential for adding value is seldom realised because of misfit.

Low->Mid/High->Mid - Edge of Heartland

Low/High - Heartland