Week 9 & 10

Question 1

Forward vertical integration

Answer 1

Move to the customer in the value chain

Question 1

Backwards vertical integration

Answer 1

Move to the raw material in the value chain

Question 2

Horizontal integration

Answer 2

Remain within the boundaries of an industry but expands via, for instance geographical expansion or versions of products

Question 3

Product diversification

Answer 3

 A compamy operates in multiple industries at the same time
 Can be related or unrelated

Question 4

Advantages of Horizontal expansion

Answer 4

• Economies of scale: The per unit cost of products decreases with higher production levels
• Reduction of competition: Larger firm within an industry  industry concentration is increased  Competition is reduced  Higher expected profitability

Question 5

Disadvantages of product diversification:

Answer 5

By focusing on industy x, opportunities in y might be overlooked.

Question 6

Can Vertical integration and product diversification overlap?

Answer 6

Yes! The overlap will generate outside sales and sits in a different stage in same value chain

If the vertical integration is focussed only internal sales, and sits in a different stage in the same value chain & Product diversification is part of a different value chain and generate outside sales

Question 7

Why is Disney a great example of both vertical integration and product diversification?

Answer 7

Theme parks: Different value chain wich generates outside sales (product diversification)

ICT System: Different stage in same value chain
Generates no outside sales (vertical integration)

Overlapping area: Script preparation
- Different stage in same value chain
- Generates outside sales

Question 8

What means economies of scope

Answer 8

Costs of P1 and P2 within a firm is lower compared than producing both in different firms

Question 9

Advantages product diversification: What means Economies of scope

Answer 9

Economies of scope:
-Costs of performing research on both “oncology” and “immunoscience” might be cheaper that two firms researching seperately

Question 10

Advantages product diversification: Internal capital market (volksbank)

Answer 10

• More information
• More control and monitoring possible

Question 11

Advantages product diversification. Competition reduction: predatory pricing/ deep pockets

Answer 11

Transferring funds from another market to start offering products in another market to make prices low, and let competitors fall out

Question 12

Advantages product diversification: Competition reduction: Mutual forbearance

Answer 12

Refraining from competition in a market because of retaliation of competitor in another market

Question 13

Explain the advantages product diversification: Risk reductions

Answer 13

It can reduce overall risk, depending on the correlation of the cash flows of different businesses. (core has to be -1 or so, why?)

Question 14

Risk reduction- portfolio management

Answer 14

Maximize expected return for a given level of risk

Question 15

Disadvantages of product diversification

Answer 15

Increased management cost
Monitoring costs
Losing focus on the firm’s core competence(s)

Question 16

Advantages and disadvantages of the product diversification

Answer 16

Depends on Related or Unrelated diversification

Question 17

How to kwantitative determine the relatedness between business units

Answer 17

Resources and Capabilities
Dominant logic
Corporate coherence
Multimarket contact
Industry codes

Question 18

What means “resources and capabilities?” in the relatedness between firms?

Answer 18

Does a firm use the same resource for two or more of its businesses? (Yes? Related)

Question 19

What means Dominant logic in the relatedness between firms?

Answer 19

Do businesses have common strategic characteristics? (Yes? Related)

Question 20

What means Corporate coherence in the relatedness between firms?

Answer 20

Because competitors have created similar portfolios, we conclude that the businesses somehow must be related.

Question 21

What means Multimarket contact in the relatedness between firms?

Answer 21

We are active in businesses A and B, but so is our competitor. A strategic move in A can have consequences in business B

Question 22

Industry codes (SIC)

Answer 22

First two digits of the SIC codes are identical.

Question 23

How to categorize businesses Wrigley/Rumelt

Answer 23

Single Businesses > 95% revenue of one business
Dominant Businesses: 70-95% revenues from one business
Related Business < 70% of revenues from one business
Unrelated Business: < 70% of revenues from one business without relationships between the businesses. (active or passive role)

Question 24

Measure Product Count (Varadarajan & Ramanujam)

Answer 24

BSD = Number of unique codes (first two numbers)
MNSD = Total of companies in the list
MNSD/BSD=…(look at the plot)

Question 25

Measure: Weighted product count (Palepu). Explain

Answer 25

Takes into account the relative size of each of the businesses
Entropy measure
Aims at the share of the certain business (i) in the total sales of the firm.

ln(1/revenue%)*revenue%+ idem.

Question 26

Advantage of product diversification of: Economies of scope

Answer 26

Related: Large
Unrelated: Small

Question 27

Give the advantage of product diversification in the Internal capital market when related and/or unrelated

Answer 27

Related: Large
Unrelated: Large

Question 28

How high is the advantage of product diversification to reduce competition when related or not

Answer 28

Related: Large
Unrelated: Medium

Question 29

Advantage of product diversification to reduce Risk when related/unrelated

Answer 29

Related: Small
Unrelated: Large

Question 30

Disadvantages of product diversification: Management costs

Answer 30

Related: Large
Unrelated: Small

Question 31

Disadvantages of product diversification: Lost focus

Answer 31

Related: Small
Unrelated: Large

Question 32

Performance of Corporate- level strategies. Paluch, Cardinal and Miller. Explain their research.

Answer 32

> Researched the relationship between level of diversification between businesses, and overall firm performance.
Diversification is measured in different ways.

Question 33

Should we diversify (porters 3 test)

Answer 33

> The attractiveness test: we expect to make a healthy profit in that market
The cost of entry test ( Cost of entry 100m, profit 50m, don’t do it)
The better off test (new business must be able to gain a competitive advantage for the firm or visa versa

Question 34

How to rate a portfolio of businesses?

Answer 34

> Market Growth Rate
Relative Market Share
Dogs, ?, Star, Cash Cow

Question 35

Why are family firms often more diversified than non-family firms?

Answer 35

Conglomerate discount (Shareholders will punish diversified behaviour of firms, because they can do it themselves.)
In a family firm, the family is the shareholder.

Question 36

Organisational form (M-form) Explain and give the pro’s and cons

Answer 36

> Activities aimed at either product or geographic regions are grouped in divisions
Pro’s:
- Clear focus on specific areas
-Reduced overload top management
Cons:
-Loss of efficiency and synergie

Question 37

Management controls in an M-form organisation. Give 3 questions.

Answer 37

How to evaluate divisional performance
How to allocate corporate capital
How to transfer intermediate products

Question 38

Compensation between firms. Give 2 difficulties

Answer 38

> Managers (agents) may not act in the best interest
Same rationale applies to product diversification
- Equity holders: make sense if it increases the performance of the firm
- Managers: Compensation packages are often tied to firm size, so might make individual sense for managers to expand. at the expense of equity holders