Corporate-level strategy

Question 1

What are the three market dimensions of corporate strategy?

Answer 1

1. Business diversification (horizontal integration)
2. Vertical integration
3. Geographic/international expansion

Question 2

What are the five levels of diversification of CL strategy?

Answer 2

Low levels:
- Single business: >95% revenues from single business
- Dominant business: 70-95% revenues from single business

Moderate to high levels:
- Related constrained: <70% revenues from dominant business; all businesses share product, technological, and distribution linkages
- Related linked: <70% revenues from dominant business; only limited links between businesses

Very high levels:
- Unrelated: <70% revenues from dominant business; no common links between businesses

Question 3

What are the three categories of motives for diversification?

Answer 3

• value-creating diversification
• value-neutral diversification
• value-reducing diversification

Question 4

What are the value-creating motives for diversification?

Answer 4

• economies of scope (related diversification)
• market power (related diversification)
• financial economies (unrelated diversification)

Question 5

What are the value-neutral motives for diversification?

Answer 5

• antitrust laws
• tax laws
• low performance
• uncertain future cash flows
• tangible and intangible resources

Question 6

Value-reducing diversification

Answer 6

• diversifying managerial employment risk
• increasing managerial compensation

Question 7

How do we assess when to vertically integrate?

Answer 7

Transaction Cost Theory (TCT)

Question 8

What is the TCT?

Answer 8

If costs of performing the activity in-house are lower than the costs of obtaining it in the market, we should vertically integrate:
- own production of the input
or
- own output distribution channels

Question 9

What are the factors determining transaction costs?

Answer 9

Behavioral assumptions:
- bounded rationality
- opportunism

Transaction characteristics:
- frequency
- uncertainty
- asset specificity
- appropriability

Question 10

How to grow firm?

Answer 10

Build, Borrow, Buy (BBB)

Question 11

How to choose between BBB?

Answer 11

1. Should we build? Internal resource revelance:
   - high: yes
   - low: no, continue
2. Should we borrow via contract? Resource tradeability:
   - high: yes, contract/licensing
   - low: no, continue
3. Should we borrow via alliance? Desired closeness with resource partner:
   - high: yes
   - low: no, continue
4. Should we buy? Feasibility of target firm integration:
   - high: yes
   - low: no, revisit options or redefine strategy