Quiz 2: Corporate Strategy I & II

Corporate Strategy

Decisions and actions determining where a firm competes across product markets, industry value-chain stages, and geographic markets.

Three Dimensions of Corporate Strategy

Product/service diversification, vertical integration along the industry value chain, and geographic scope.

Industry Value Chain

The sequence of stages through which inputs are transformed into finished products and services, including design, raw materials, manufacturing, sales, and support.

Product/Service Diversification

The range of product and service markets in which a corporation operates.

Single Business

More than 95% of a firm's revenue comes from one business.

Dominant Business

70–95% of a firm's revenue comes from one business.

Related Diversification

Less than 70% of revenue comes from one business, and businesses leverage similar core competencies.

Unrelated Diversification

Less than 70% of revenue comes from one business, with few or no shared core competencies.

Diversification and Firm Performance

An inverted U-shaped relationship: performance can improve with related diversification but decline with excessive unrelated diversification. Benefits arise from economies of scope or scale, lower costs, and increased value.

Effective Diversification Strategy

Diversification creates value when businesses can share resources or capabilities to achieve economies of scope or scale, lower costs, or increase customer value.

Core Competencies

Unique internal strengths that allow a firm to differentiate its offerings from competitors or provide comparable value at lower cost.

Economies of Scope

Cost savings from producing two or more products or services together rather than separately.

Transaction Costs

All costs associated with economic exchange, whether within a firm or through the market.

Internal vs. External Transaction Costs

Internal costs involve administration, coordination, and supervision within a firm; external costs involve searching, negotiating, monitoring, and enforcing contracts.

Vertical Integration

Ownership of activities at different stages of an industry value chain; it can improve coordination and value creation but increase administrative costs and reduce flexibility.

Vertical Disintegration

Reducing ownership of value-chain activities by transferring them to external firms.

Backward Vertical Integration

Moving upstream to own activities or inputs previously provided by suppliers.

Forward Vertical Integration

Moving downstream toward distribution, sales, or end customers.

Make-or-Buy Decision

Choosing between performing an activity internally and obtaining it from the market, considering internal and external transaction costs.

Make-or-Buy Continuum

A range from arm's-length market transactions to short-term contracts, strategic alliances, parent–subsidiary relationships, and in-house activities.

Taper Integration

Performing part of an activity internally while purchasing the remainder from external suppliers.

Vehicles for Corporate Scope

Internal development, strategic alliances, mergers, and acquisitions used to expand where a firm competes.

Build–Borrow–Buy Framework

A framework for closing strategic resource gaps through internal development, strategic alliances, or acquisitions.

Build (Internal Development)

Developing resources and capabilities internally when existing firm resources are sufficiently relevant.

Borrow (Strategic Alliance)

Accessing external resources through contracts or partnerships without fully acquiring the partner.

Buy (Acquisition)

Purchasing another firm to obtain its resources and capabilities when close integration is needed and feasible.

Build–Borrow–Buy Decision Factors

Evaluate internal resource relevance, external resource tradability, required closeness with the partner, and ability to integrate the target firm.

Strategic Alliance

A voluntary arrangement between firms to share knowledge, resources, and capabilities to develop products, processes, or services.

Reasons for Strategic Alliances

Strengthen competitive position, enter new markets, hedge against uncertainty, access complementary assets, and learn new capabilities.

Non-Equity Alliance

A contract-based alliance that primarily exchanges explicit knowledge; flexible and easy to initiate but generally has weaker trust and commitment.

Equity Alliance

An alliance in which at least one firm takes partial ownership of another; stronger ties and potential knowledge sharing but less flexibility.

Joint Venture (JV)

A standalone organization jointly owned by two or more firms; allows sharing of explicit and tacit knowledge but requires significant commitment.

Explicit vs. Tacit Knowledge

Explicit knowledge can be codified in documents or instructions; tacit knowledge is learned through experience and active participation.

Corporate Venture Capital (CVC)

Equity investments by established firms in entrepreneurial ventures, often to gain access to new technologies and strategic opportunities.

Complementary Assets

Resources such as manufacturing, marketing, distribution, and after-sales support needed to commercialize innovations.

Co-opetition and Learning Races

Competitors may cooperate through alliances while competing to learn new capabilities; the faster learner may gain an advantage.

Real Options

The right, but not the obligation, to make further investments as new information becomes available.

Merger

The joining of two independent companies into a combined entity, generally through a friendly agreement.

Acquisition

The purchase or takeover of one company by another, which can be friendly or hostile.

Hostile Takeover

An acquisition attempt that is opposed by the target company's management.

Horizontal Integration

Merging with or acquiring competitors to consolidate an industry, potentially reducing rivalry, lowering costs, or increasing differentiation.

Reasons for Acquisitions

Access new markets or distribution channels, acquire capabilities or competencies, and strategically preempt competitors.

M&A Performance

Many mergers and acquisitions destroy shareholder value; when gains occur, they often accrue to target shareholders because acquirers pay premiums.

Acquisition Premium

The amount an acquirer pays above a target firm's pre-acquisition market value.

Principal–Agent Problems and Managerial Hubris in M&A

Managers may pursue acquisitions for personal benefits, while managerial hubris leads them to overestimate their ability to create value.

Relational Capability

A firm's skill in developing and managing alliances, mergers, and acquisitions; it can become a core competency.

Three Facets of Relational Capability

Partner selection and alliance formation, relationship design and governance, and post-formation or integration management.

Partner Selection and Formation

Selecting partners based on compatibility, commitment, and expected strategic benefits.

BCG Growth–Share Matrix

A portfolio planning tool that classifies business units by relative market share and market growth rate.

Stars

High relative market share in a high-growth market; often require substantial investment.

Cash Cows

High relative market share in a low-growth market; typically generate cash to support other businesses.

Question Marks

Low relative market share in a high-growth market; require decisions about investment or divestment.

Dogs

Low relative market share in a low-growth market; often candidates for harvesting or divestment.