Chapter 9 - Corporate Strategy Flashcards
(44 cards)
Business strategy
For creative advantage in specific individual markets —> focus on single industry: 1) which customers to serve? -> who - segmentation 2) which customers needs to satisfy? ->what - differentiation 3) Resources + value chain activities necessary to satisfy customers needs How - core differentiation
Corporate strategy
For competing advantage for the whole company
—> focus on multiple industries + a set of business strategies:
1) what businesses should we be in?
2) how should these be managed?
3) how to create value for the creation as a whole?
Diversification = corporate strategy to create corporate advantage
Evaluation criterions
1) Conglomerate Premium
2) Parenting advantage
Evaluation criterion no. 1
Conglomerate Premium
-> what makes the corporate whole add up to more than the sum of its business parts
Evaluation criterion no. 1 - key questions
- which strategic business units to strategically select?
- how to coordinate the SBUs operatively, culturally, spatially?
- how can the SBUs be complementary?
=> strategic thinking driven by pursuit of value
Evaluation criterion no. 2
Parenting advantage
- multi-business companies create value by influencing/ parenting the businesses they own
- best parent companies create more value than any of their rivals would if they owned the business
Failure in corporate strategy
Conglomerate discount
Firms lose market value despite successful business strategies
Diversification general + motives
Possible recipe for long-term success Motives: growth Strategic renewal Efficiency gains Responding to declining markets Spreading risks Meeting stakeholder expectations
Types of diversification
- into related businesses
- into unrelated businesses
- into both
Diversification into related businesses
Build shareholder value by capturing cross-business strategic fits:
- transfer skills + capabilities
- share facilities/ resources to reduce costs
- leverage use of a common brand name
- combine resources to create new strength + capabilities
Diversification into unrelated businesses
> to grow revenue + earnings as a whole
- involves diversification without meaningful strategic fit
- spread risks across completely different businesses
- build shareholder value by superior choice of businesses to diversify + portfolio management of collection of the company’s businesses
Diversification into related business concepts
- strategic fit
- joint economies of scope
- similar value chain
- unifying strategic theme
Strategic fit (diversification related businesses concept)
-> when activities in value chains of different business are sufficiently similar
>present opportunities for..
- transferring expertise/technological know-how from one business to another
- cross-business collaboration to create competitively valuable Ressource strengths + capabilities
- combining common value chain activities => lower costs
- joint use a well-known brand name
Economies of scope (diversification into related businesses concept)
- cost reduction —> from operating i. Multiple businesses
- from strategic fit efficiencies along value chains of related businesses
- sources of economies of scope:
> use of common inputs in the generation of several outputs
> spreading fix costs over more products
> application of knowledge + core capabilities => generation of several outputs
Types of cross-business strategic fit along value chain
- R+D technology fits
- Supply chain fits
- manufacturing fits
- distribution fits
- sales and marketing fits
- managerial support fit
Supply chain fits (cross-business strategic fit)
- skill transfer and/or cost reduction
> joint procurement of materials
> greater bargaining power over common suppliers
> greater volume discounts
> Benefits of added collaboration with supply chain partners
Manufacturing fits (cross-business strategic fit)
Transfer of a diversifier’s expertise to another business:
- Quality manufacture
- cost efficient
- consolidation of production/ assembly activities to significantly reduce overall production cost
Distribution fits (cross-business strategic fit)
Cost saving opportunities via:
- sharing same distribution facilities
- sharing of whole sale distributors and retail dealers to access customers
Diversification into unrelated businesses criteria
- profitability targets
- size targets (sustainable contribution)
- capital requirements
- union + labor situation
- industry grow potential
- industry vulnerability to recession, inflation, interest rates, government regulations, other potential negative factors
Diversification into unrelated businesses advantages
- risk spread over different industries
- financial resources can be directed to SBUs offering best profit aspects
- purchase of bargaining-prices firms with big profit potential-> enhance share holder wealth
- stability of profits -> hard times on one industry => offset by good times in another
Diversification into unrelated businesses Disadvantages
> managerial requirements
- discerning good acquisition
- selecting capable managers
- judging strategies of business units
- restructuring/ divestment if units stumble
> lack of cross-business strategy fit=> no potential for competitive advantage
- consolidated performance of unrelated mostly not better than individual business
- promise of greater profit stability over business cycles seldom realized
Strategic action of diversification + performance models
- value-enhancing model
- inverted-U model
- value-destroying mode
Value enhancing model
1) market power advantages
2) economies of scale and scope due to multiple resources use
3) capital market advantages + more efficient allocation
4) reduction of risk + profit volatility
Inverted U-Model
1) Synergy + parenting advantages only to a certain degree of diversification
2) competitive advantages restricted to related diversification
3) the less related the diversification, the more costs outlast benefits
