Chapter 6: Corporate Strategy (Barb)

Question 1

Business unit strategy

Answer 1

The search for competitive advantage
within a single industry, market, or
line of business.

Question 2

Corporate strategy

Answer 2

The search for value and competitive
advantages through participation
in several different industries
and markets.

Question 3

Vertical integration

Answer 3

Movement
into adjacent markets by a
firm along its own value chain.
Movement in the direction of raw
materials is backward integration.
Movement in the direction
of sales, service, or warranty
operations is forward integration

Question 4

Horizontal diversification (aka diversification)

Answer 4

The movement into an adjacent
market, one that is not along a
firm’s current value chain.

Question 5

Managers diversify their firms through one of three methods:

Answer 5

1) greenfield or organic entry,
2) alliance,
3) acquisition

Question 6

Single business

Answer 6

A firm earning
more than 95 percent of revenues
from a single line of business

Measured in terms of the four-digit NAICS code

Question 7

Dominant vertical business

Answer 7

A firm that earns more than
70 percent of revenues from its
main line of business and the rest
from businesses located along the
value chain.

Question 8

Dominant business

Answer 8

A firm that
earns more than 70 percent of
revenue from its main line of
business and the remainder
from other lines across different
value chains.

Question 9

Related-constrained diversification

Answer 9

A firm that earns
less than 70 percent of its revenue
from its main line of business,
and its other lines of business
share product, technological,
and distribution linkages with the
main business.

Question 10

Related-linked diversification

Answer 10

A firm that operates in related
markets, but fewer linkages exist
between the new and existing
markets than the elements create
separately.

Question 11

Unrelated diversified firm

Answer 11

Competes in product
categories and markets with
few, if any, commonalities
between them.

Examples: 3M and General Electric (GE)

Question 12

For diversification to add value in the real world, managers must answer the following acid
test questions:

Answer 12

(1) Why will the existing businesses be more valuable because we’ve entered an adjacent business? and
(2) Why will the new business activity be more valuable inside our corporation than operating alone?

Question 13

Diversification adds value when expansion into an adjacent business either ______ the firm’s
valuable resources and capabilities or diversification _______ and grows the resource base

Answer 13

exploits

enhances

Question 14

To provide more clarity to the notion of exploiting and expanding, you can divide a firm’s resources
and capabilities into two broad categories:

Answer 14

“front end,”: or customer-facing resources and
capabilities

“back end.”: technological and operational

Question 15

“front end,” example

Answer 15

Procter & Gamble’s resources
such as brands, product lines, distribution channels, and capabilities in uncovering deep customer
needs represent the customer-facing part of the business

Question 16

“back end.” example

Answer 16

Walmart’s resources in terms
of regional distribution centers and information systems and its capabilities in global supply
chain management and cost reduction belong in the “back-end” group.

Question 17

_______ allows companies to exploit their existing customer-facing resources by
adding new operational resources and capabilities

Answer 17

Diversification

Question 18

Adjacent market

Answer 18

A market or industry that is closely related
to markets or industries a firm
currently competes in.

Question 19

Figure 6.1 Adding value though Diversification

Answer 19

Shows value from front-end, back-end, exploiting resources, and expanding resources

Question 20

The Eight Ss

Answer 20

1) Employing Slack
2) creating synergy
3) leveraging shared knowledge
4) utilizing similar models for success
5) spreading human and financial capital to its best use
6) providing a stepping stone for the company to a completely new business sector
7) stopping or slowing competitors
8) staying even with technological change

Question 21

Slack

Answer 21

Unused resource capacity.

Question 22

1) Employing Slack

Answer 22

the ability of managers to handle more work
effectively over time

Employing slack usually creates value through
exploitation, although sometimes during an acquisition a company may acquire redundant
resources that expand slack

Question 23

Management skill

Answer 23

The individual and collective abilities of a firm’s

management team to engage in value-creating activities.

Question 24

Management skill

Answer 24

The individual and collective abilities of a firm’s

management team to engage in value-creating activities.

Question 25

2) Creating Synergy

Answer 25

Disney competes in two adjacent entertainment markets, films and theme parks. The two businesses create more brand value for Disney together than either would separately Synergy also increases the number and ways a company interacts with its customers, and that can expand its capabilities to meet customer needs in the future.

Question 26

Synergy

Answer 26

Action between different elements of a system that creates more value together than the elements create separately.

Question 27

3) Shared Knowledge

Answer 27

Diversification allows valuable knowledge and skill to be shared between business units Think of a diversified company as a tree: the leaves, twigs, and branches represent different product markets and industries, but the competitive advantage comes from the common roots, processes, or knowledge.

Question 28

Core competencies (aka shared knowledge)

Answer 28

Collective knowledge that can be distributed throughout the organization to create value.

Question 29

4) Similar Business Models

Answer 29

when business unit success depends on common characteristics, such as knowledge management, or scale economies eBay’s business model is to provide an electronic venue, or market, where buyers and sellers can come together. General Motors’ business model involves transforming raw materials such as steel, rubber, and plastic into automobiles, all done at very large scale

Question 30

Business model

Answer 30

A method to enable the creation and exchange of value between companies and their customers.

Question 31

Dominant logic

Answer 31

A conceptualization of a business, or a set of rules for competition, that applies to seemingly unrelated product markets or industries.

Question 32

5) Spreading Capital

Answer 32

the headquarters of the corporation quickly allocates capital and other resources to their best use among business units Rather than leaving resources within a business unit for its own growth, these strategic investments work to increase the corporate value by investing in business units with greater potential growth in the future.

Question 33

Internal capital market

Answer 33

The movement of funds, talent, or knowledge from unit to unit directed by the leaders of the firm.

Question 34

Adjacent markets have two characteristics:

Answer 34

(1) They allow the firm to exploit some of its resources and capabilities to create value, and (2) they allow the firm to acquire related resources and capabilities to prepare for the next step.

Question 35

5) Stepping stone to new markets | 6) Stopping Competitors

Answer 35

where a firm moves to a new industry through a set of small jumps and each jump allows the acquisition of key resources and skills In markets with fierce competition and evenly matched competitors, strategic managers might choose to diversify to forestall a competitor from entering, rather than to clearly exploit or expand a current resource or capability. pre–emptively moving into a new market space, or acquiring another firm, to deny a competitor access to that space

Question 36

7) Staying Ahead of Technology

Answer 36

If a company competes in an industry where technology changes rapidly, then diversification, primarily through acquisition, can shorten lead times and reduce the overall costs of technology development.

Question 37

Corporate venture capital (CVC)

Answer 37

A venture capital fund owned and managed by a corporation instead of independent investors.

Question 38

Why the 8 Ss?

Answer 38

The eight Ss show how and where managers can create value for shareholders of a diversified firm; however, one relatively robust finding from scholars in corporate finance is that diversified firms often trade at a discount versus undiversified rivals and that increasing diversification (entering additional new lines of business) tends to destroy shareholder value

Question 39

Value usually gets destroyed in one of five ways:

Answer 39

1) excessive pride, 2) sunk cost fallacy, 3) imitative diversification, 4) poor governance 5) incentives, or the lack of resource commonality between the lines of business.

Question 40

Hubris

Answer 40

Excessive pride, arrogance, or overconfidence. ancient Greek word Managers act with hubris when they diversify or make acquisitions based on their own experience or their “gut feelings” rather than on solid data and research

Question 41

Sunk Cost Fallacy

Answer 41

The belief of managers that investment in a failed acquisition must continue because significant amounts have already been invested. Executives are often reluctant to abandon a project in which they have already invested so much time and capital; they often move forward under the assumption that “things will turn around with a little more investment.”

Question 42

Imitation

Answer 42

choosing to copy a competitor’s moves rather than having a compelling strategic logic Managers sometimes feel pressure to diversify their corporation when a competitor diversifies first. Caught offguard, a firm might quickly look for a similar acquisition target or hurry to create a similar line of business. In their rush to respond, managers fail to consider how attractive the target really is, or if they have the resources and capabilities that make the new market a value adding adjacency

Question 43

Poor Governance and Incentives

Answer 43

simply running the new business poorly or failing to incentivize managers to attend to the business When they become part of a diversified corporation, however, those managers sometimes move to salary-based compensation that divorces their pay from their performance

Question 44

Poor Management

Answer 44

The Boston Consulting Group’s growth share matrix represents one such tool. Figure 6.2 illustrates the growth share matrix

Question 45

The Boston Consulting Group’s growth share matrix

Answer 45

units contribute to corporate value creation in one of two ways; they either serve as engines of revenue growth or they generate cash flows for the firm to reinvest or distribute to shareholders

Question 46

Cash cows

Answer 46

have high share but low growth and can generate large cash flows that can be used to fund growth businesses. -Companies typically like to minimize investments in cash cows because the goal is to milk the cow

Question 47

Stars

Answer 47

combine high share with high growth, and smart managers should invest heavily in these units to maintain or improve their position over time -These businesses typically represent the future of the company

Question 48

Question marks

Answer 48

present a conundrum for management because they require significant investment and effective strategic management if they are to become stars -Can either become a star or a dog depending on how you manage it

Question 49

Dogs

Answer 49

have low share and low growth and add little profitability to a company’s overall portfolio businesses. The general rule is to divest the dogs.

Question 50

Greenfield entry

Answer 50

Entry into an adjacent market by a firm that opens its own operation. (opposed to acquiring another company)

Question 51

When to choose greenfield

Answer 51

-when companies have the front-end and backend resources and capabilities they can immediately exploit to create value. -when companies can afford to enter new arenas slowly and at small to moderate investment

Question 52

When to choose acquisition

Answer 52

the preferred mode of entry when the firm needs to quickly expand its own resources and capabilities to effectively compete. Acquisitions make sense when delay proves costly makes sense if the industry favors competitors with large scale or is characterized by a steep learning or experience curve.

Question 53

Acquisition

Answer 53

The purchase of another company, or its assets.

Question 54

Table 6.1 Greenfield Entry Versus Acquisition

Answer 54

Table 6.1 Greenfield Entry Versus Acquisition

Question 55

The Acquisition and Integration Process

Answer 55

1) List potential targets / identifying potential targets 2) Due diligence / selecting which to purchase 3) Doing the deal / how much will to pay 4) Integrating the acquisition after the deal closes

Question 56

Poor reasons for acquisitions

Answer 56

-simply adding top line revenue growth or doing a deal just because a competitor recently did one -

Question 57

Due diligence

Answer 57

The process whereby managers closely | examine the target firm to understand its core processes, strengths, and weaknesses.

Question 58

The acquisition premium creates two challenges for the acquiring firm

Answer 58

First, the larger the premium, the more value they must actually create to justify the acquisition. Second, given the time value of money, the larger the premium, the quicker the acquirer must create that value.

Question 59

Figure 6.3 Determining the Proper Degree of Integration

Answer 59

Figure 6.3 Determining the Proper Degree of Integration

Question 60

Firms may follow one of four general integration strategies

Answer 60

They can bury the target through complete integration Build a brand new entity with the combined entities through tight integration Blend in the target to the corporation using best practices from each, Bolt on the target to the existing company only where it makes sense

Question 61

Bury / Takeover

Answer 61

An acquisition where the acquiring firm absorbs the | target firm. The target firm ceases to exist.

Question 62

Build / Merger

Answer 62

An acquisition with the goal of creating a new firm from | the components of the two pre-acquisition firms.

Question 63

Blend

Answer 63

retaining and combining the best elements of both companies to compete more effectively A blended acquisition results in a moderate degree of integration. The target firm retains its own identity, brand, and much of its culture and operating autonomy

Question 64

Bolt On

Answer 64

The metaphor of bolting on an acquisition implies two separate entities joined at a single point through a very strong link. In a bolt-on acquisition, the two entities remain deliberately separate in order to monitor the performance of each unit

Question 65

Integration team

Answer 65

A group of individuals from different functional areas of an acquiring firm that coordinate and manage the integration of the target company after the acquisition has closed.