Final (Ch6 - ___)

Question 1

corporate level strategy is interested in what two questions

Answer 1

1. what business or businesses should the firm be in AND

2. How the firm should manage the different business units

Question 2

Define corporate-level stategy

Answer 2

specific actions a firm takes to gain an advantage by selecting and managing a group of different businesses

Question 3

value of corporate level strategy

Answer 3

determined by the degree to which the businesses in the portfolio are worth more under the management of the company than they would be under any other ownership

ex: GE is having to sell off some of there businesses in certain industries (involved in jet engines, locomotives, medical industries, appliances, lighting, turbines/power, etc)
- strategy: if GE was not in first or second place in an industry, they would sell/spin it off
- exemplifies that if you get too diversified, it gets difficult effectively manage all of your divisions

Question 4

diversification

Answer 4

involves using expertise and knowledge gained in one business to diversify into a business where it can be used in a related way

Question 5

decisions diversified companies often make

Answer 5

1. How should we enter other industries
   - internal start up operations (building new business from scratch). Pro - clean slate. Con - start up costs will be high, uncertainty
   - joint venture (forming a new corporate entity owned by two or more companies) (usually necessary for communist countries ie China, Russia). Pro - . Con -
   - Acquisition (of established, troubled, or up and coming company). Pro - . Con - . (Ex: Walmart to acquire Humana)
2. how to develop investment priorities within the company
   - give more money to business units that have potential for higher earnings (ex: Caterpillar - )
   - make poor performing units increase ROE OR… make the decision to divest a business unit and focus resources elsewhere

Question 6

Corporate Level Strategy Example - P & G

Answer 6

Ex. 1: Proctor & Gamble’s Diversification Strategy
Pre-2005: Product mix focused on women and baby care
2005: Acquired Gillette, which focused on consumer health care products geared toward men

Synergy created by combining Gillette’s toothbrush (Oral-B) and P&G’s toothpaste (Crest) businesses to create Pro-Health oral care product line

• Good for retailers (shelf space)
• Strategy had potential but was more difficult to create operational relatedness between the products
• —-Comingle employees requiring actual physical re-location/talent exit
• —-Different ways to make business decisions
• —-Conflicting organizational cultures
• In 2007, Pro-Health overtook Colgate in market share

Question 7

Levels of diversification

Answer 7

1.Low level of diversification
Single-business strategy
Dominant-business strategy
2. Moderate-to-high levels of diversification
Related constrained diversification strategy
Related linked diversification strategy
3. Very high levels of diversification
Unrelated diversification
**see ppt for diagram

Question 8

low level business diversification

Answer 8

Single-business strategy

• Firm generates 95% or more of its sales revenue from its core business area
• Example (pre-2008): Wm. Wrigley Jr. Company—the world’s largest producer of chewing and bubble gums
• —–Post-2008  Acquired by Mars Inc.
• —–Pitfalls of single business strategy (CD’s, Checks)

Dominant-business strategy

• Firm generates 70-95% of total sales revenue within a single business area
• Example: UPS generated 74% of revenue from U.S. package delivery business; 17% from international package business; 9% from non-package business

Question 9

Moderate-to-High Diversification

Answer 9

Related constrained diversification strategy

• < 70% of revenue comes from the dominant business
• There are DIRECT LINKS between the firm’s businesses (e.g., share products, technology; marketing; and distribution linkages)
• Typically considered the best model and most profitable
• Example: Campbell’s (they do more than just soup [ie tomato juice V8, Prego, goldfish, etc.). Most of their products use one common ingredient - tomatoes AND are distributed in the same place - grocery store. Results in economies of scale)

Related linked diversification strategy
Mix between related and unrelated diversification
-Linked firms share fewer resources and assets among their businesses
-Interested in constantly adjusting the mix in their portfolio of businesses and how to manage the businesses
-Example: Rachel Ray

Question 10

Very High Diversification

Answer 10

Unrelated diversification strategy

• Less than 70% of revenue comes from dominant business
• No relationships between businesses
• Often called conglomerates
• Example: Jarden Corporation, Berkshire Hathaway, Bicycle, Crock Pot

Question 11

3 reasons firms diversify

Answer 11

1. Value-creating reasons
Economies of scope
Market power
Vertical Integration
Financial economies

2. Value-neutral reasons
Antitrust regulation
Tax laws
Low performance
Uncertain future cash flows
Risk reduction for firm
Tangible resources
Intangible resources

3. Value-reducing reasons
   Diversifying managerial employment risk
   Increasing managerial compensation

Question 12

Value creating reasons to diversify

Answer 12

Based a desire to develop resources that will enhance strategic competitiveness
Ok, but how?
Two main ways diversification strategies can create value
Operational relatedness: sharing activities between businesses
Ex: P&G’s paper towel business and baby diaper business both use paper products as inputs; the firm’s paper production plant produces inputs for both businesses
Corporate relatedness: transferring core competencies into business
Ex: Honda’s competence in engine design and manufacturing to motorcycles, lawnmowers, cars and trucks
Often achieved via transferring or hiring personnel with competencies

Question 13

Operational and Corporate Relatedness Value

Answer 13

the values these create are referred to as

• Economies of scope
• market power
• financial economics

Question 14

Economies of scope

Answer 14

(for related constrained and related-linked strategies)
Cost savings created by sharing its resources/capabilities or transferring core competencies of one businesses to another of its businesses

Question 15

Market power

Answer 15

(for related constrained and related-linked strategies)
Exists when a firm sells its products above competitive levels and/or reduces the cost of its Value Chain activities below competitive levels
Influenced by a firm’s level of vertical integration

Question 16

Financial Economics

Answer 16

(for unrelated diversification)
Cost savings realized via improved allocations of financial resources based on investments inside or outside the firm—2 main types
Efficient internal capital allocations can reduce risk of the firm’s portfolio
Restructuring of acquired assets

Question 17

Value neutral reasons to diversify

Answer 17

External value-neutral reasons

• Antitrust Regulation and Tax Laws
• —-Deregulation
• —-Changing tax laws

Internal value-neutral reasons

• Low Performance
• Uncertain Future Cash Flows
• Firm Risk Reduction
• Resources and Diversification
• —-Excess tangible resources like plant and equipment, sales force, etc.

Question 18

value reducing reasons to diversify

Answer 18

Managerial Motives
-Diversifying managerial employment risk
—–If one business fails, the whole firm will stay intact
-Increasing managerial compensation
—–Larger firms are more complex
Generally mean larger compensation packages

Question 19

International strategy

Answer 19

A strategy through which the firm sells its goods/services outside of its domestic market.

Question 20

liability of foreigness

Answer 20

Difficulties firms face as they seek to manage complexities involved with international expansions/operations
Example: Disney suffered lawsuits in France because of HR policies when opened Disneyland Paris

Question 21

International strategies examples

Answer 21

Ex. 1: Shanghai Automotive Industry Corp (SAIC)
One of China’s oldest auto companies; top 3 auto firms in China
Sells autos, tractors, motorcycles, trucks, offers car leasing/financing
To grow in Chinese markets pursued joint ventures with GM & VW
Ultimate Goal: Become one of the world’s top 10 auto companies
Note: All major auto firms compete in U.S. market
SAIC learned from JV and licensed technology; launched own branded vehicles
Now competing with GM and VW in China and wants to move in US
Ex. 2: Disney
1992, Disney moved into Europe with Euro Disney in Paris
Plagued with problems, called a “Eurodismal”
Disney suffered from liabilities of foreignness

Question 22

four reasons firms pursue internationa lstrategies

Answer 22

1. increased market size - Help firms maintain growth objectives
   Example: Pharmaceutical firms entering China; soft drinks
2. greater returns on major investments - Larger markets can help firms recoup investments more quickly
3. greater economies of scale and learning - Standardized manufacturing operations can easily capture scale economies
   New learning opportunities are presented to firms
4. competitive advantage via location - Access to low-cost labor, energy, natural resources, supplies, customers
   Example: GM’s expansion to Asia to access customers

Question 23

2 types of intl strategies

Answer 23

1. business level intl strategy

2. coprorate level intl strategy

Question 24

business level intl strategy

Answer 24

Generic strategies applied to business units competing internationally
-partially based on Porter’s “Determinants of National Advantage”

Question 25

corporate level intl strategy

Answer 25

- Focuses on the scope of a firm’s operations through product and geographic diversification - Required when firm operates in multiple countries or regions - Required when firm operates in multiple industries and countries/regions

Question 26

Determinants of National Advantage

Answer 26

- factors of production - demand conditions - firm strategy, structure, and rivalry - related and supporting industriesth ``` Ex: Milan = fashion capital of world -tailors, materials, etc. -many italians care about how they look so demand to be fashionable and look good is high - - ```

Question 27

three corporate level strategies

Answer 27

1. global 2. multidomestic 3. transnational

Question 28

Global Corporate Strategy

Answer 28

Firm offers standardized products across country markets with decision mostly dictated by the home office -products are standardized, made the same across the world Example: Nike; eBay (initially in China and Japan)

Question 29

Multidomestic Corporate Strategy

Answer 29

Decisions are mostly decentralized to the business unit in each country, allowing the unit to tailor products to the local market Example: Fast food; eBay (as a joint venture with Tom Online, Inc.), KFC (in America they sell fried chicken but in China they offer a different taste to cater to different place), Oreo in America is sweeter than oreos in China

Question 30

Transnational Corporate Strategy

Answer 30

Firm seeks both global efficiency and local responsiveness Difficult to use because of conflicting goals Example: P&G uses global product business units and multidomestic market development organizations to appeal to different tastes

Question 31

5 main modes of Intl Entry and Competition

Answer 31

From easiest to hardest ``` Exporting Licensing Strategic Alliances Acquisitions New Wholly-Owned Subsidiary (“Greenfield Venture”) ```

Question 32

licensing

Answer 32

Allows a foreign company to purchase the right to manufacture and sell a firm’s products within host country or set of countries Good for tactical moves and early market entry Example: Disney (US) licensed characters to LEGO (Denmark) to launch product line in US in 2010 Pros Firm authorizes another firm to manufacture and sell its products Licensing firm is paid a royalty on each unit produced and sold Licensee takes risks in manufacturing investments Least risky and costly way to enter a foreign market Cons Licensing firm loses control over product quality and distribution Relatively low profit potential A significant risk is that licensor learns technology and competes when license expires ex: Universities use licensing fees so when other businesses manufacture UD clothing, they have to pay a fee to Dayton

Question 33

Exporting

Answer 33

Many firms begin int’l expansion via exporting goods/services to other countries Good for early-market entry and for small businesses Pros Common way to enter new int’l markets No need to establish operations in other countries Establish distribution channels through contractual relationships with host countries ``` Cons May have high transportation costs May encounter high import tariffs May have less control on marketing & distribution Difficult to customize products ```

Question 34

Strategic alliances

Answer 34

Two or more firms develop a relationship to share their unique resources and capabilities to create an competitive advantage in an int’l location Good in uncertain situations; for tactical moves; early market entry Example: Sony (Japan) and Ericsson (Sweden) created Sony Ericsson Pros Firms to share risks and resources to expand into int’l ventures Most involve a foreign company with a new product or technology and a host company with access to distribution or knowledge of local customs, norms or politics Cons May experience difficulties in merging disparate cultures May not understand the strategic intent of partners or experience divergent goals

Question 35

Acquisitions

Answer 35

Cross-border acquisitions Good for securing stronger presence in int’l markets Example: 1999, Wal-Mart entered the UK by acquiring ASDA Pros Most rapid international expansion Quick access to a new market Cons Can be very costly Legal and regulatory requirements may present barriers to foreign ownership Usually require complex and costly negotiations Potentially disparate corporate cultures

Question 36

New wholly owned subsidiary

Answer 36

Creation of a new venture, called a greenfield venture Good for securing stronger presence in int’l markets Example: 2007, FedEx opened Hangzhou subsidiary in China Pros Achieves greatest degree of control (e.g., full control) Potentially most profitable, if successful Maintain control over technology, marketing and distribution Cons Most costly and complex of entry alternatives May need expertise and knowledge that is relevant to host country May require hiring host country nationals or consultants at high cost Must build/acquire manufacturing facilities, distribution networks, marketing strategies

Question 37

major risks in Intl Environments

Answer 37

1. Political/Legal Forces Government instability - Greece, Venezuela Conflict or war Government regulations Conflicting and diverse legal authorities Potential nationalization of private assets Government corruption Changes in government policies 2. Economic Forces Differences and fluctuations in currency values Investment losses due to political risks