Ch 6: Corporate Level Strategy

Corporate level strategy

a strategy that focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses

Ex: Apple - is in the PC, smartphone, and tablet industry

Diversification

The process of firms expanding their operations by entering new businesses

Ex: Louis Vuitton

Related diversification

firm entering a different business in which it can benefit from leveraging core competencies, sharing activites, or building market power

Ex: Maybelline and Loreal (their products are related)

Economies of scope

cost savings from leveraging core competencies or sharing related activities among businesses in a corporation

• Leveraging core competencies: firm’s strategic resources that reflect the collective learning in the organization

• Sharing activities: having activities in 2 or more business value chains done by one of the businesses

Market power

firms’ abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investments

Pooled negotiating power

the improvement in bargaining position relative to suppliers and customers (results in market power)

• If you provide multiple services all together you increase your bargaining power → gives u some control over the pricing

Vertical integration

an expansion or extension of the firm by integrating preceding or successive production processes (organization is involved in the production process) → ALLOWS BUILDING MARKET POWER

• Low vertical integration: BMW (dealers are nnot owned by BMW)

• High vertical integration: Tesla owns the entire business (makes and sells them)

Transaction cost perspective

Vertical integration is better than market transactions when transaction costs are high

• Transaction costs: hidden costs associated with the cost itself (e.g., search, negotiating, contracting, monitoring and enforcement costs)

Benefits of vertical integration

• Secure source of raw material or distribution channels

• Control of valuable assets

Risks of vertical integration

• Higher overhead costs and capital expenditures

• Loss of flexibility

Unrelated diversification

a firm entering a different business that has little horizontal interactions with other businesses in a firm

Horizontal interactions

relationships among 2 business units

• Core competencies, sharing activies, market power

Vertical interactions

relationships between business units and corporate office

• Corporate parenting, restructuring, and portfolio management

Corporate parenting

The positive contributions of the corporate office to a new business as a result of expertise and support provided and not as a result of substantial changes in assets, capital structure, or management

Restructuring

The intervention of a corporate office in a new business that substantially changes assets, capital structure and or management (selling parts of business, changing management, downsizing, reducing costs, etc…)

Protfolio management

A method for (a) assessing the competitive position of a portfolio of businesses within a corporation, (b) suggesting strategic alternatives for each business, and (c) identifying priorities for the allocation of resources across the businesses

BCG Matrix

*Companies make the most moeny when their portfolio follows the triangle of love (Cash cow invests $ in the Question Mark to become a Star which overtime will become a Cash Cow)

*Star is expensive so does not make the most profit

Star

High industry growth rate and High relative market share

• Long-term growth potential and should continue to receive funding

Question mark

High industry growth rate and Low relative market share

• Resources should be invested in them to enhance their competitive position

Cash cow

Low industry growth rate and High relative market share

• Limited long-run potential but a source of cash flow to invest in stars and question marks

Dog

Low industry growth rate and low relative market share

• should be divested

Merger

Combining two or more firms into one new legal entity

Ex: Exxon and Mobil → ExxonMobil

Acquistion

The incorporation of one firm into another through purchase

Ex: Disney bought Pixar

• In 60% of cases, acquistion leads to value desctruction instead of value creation

Strategic alliance

a cooperative relationship between two or more firms

• 50% of strategic alliances fail

Joint venture

New entities formed within a strategic alliance in which two or more firms (the parents) contribute equity to form the new legal entity

Internal development

Entering a new business through investment in new facilities, often called corporate entrepreneurship and new venture development

• Pros:

  • Do not share wealth generated

  • No difficulties for combining activities

Growth for growth’s sake

Managers’ actions to grow the size of the firms and not to increase long-term profitability to serve managerial self-interest

Egotism

Managers’ actions to shape their firms’ strategies to serve their selfish interest rather than to maximize long-term shareholder value