Corporate-Level Strategy

Ansoff's Product/Market Mix consists of what?

market penetration, product development, market development, diversification

What is corporate level strategy?

actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets.

A diversified firm employs what two strategies?

corporate-level (or company-wide) strategies as well as business-level strategies (for each business in which it competes).

What two key issues is corporate level strategy concerned with?

1. In what product markets and businesses the firm should compete and

2. How corporate headquarters should manage those businesses

What is corporate level strategy expected to help a firm do?

it is expected to help the firm earn above-average returns by creating value

Some suggest that few corporate-level strategies actually create value

true

A corporate-level strategy's value is ultimately determined by what?

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

Successful product diversification is expected to do what?

reduce variability in the firm's profitability as earnings are generated from different businesses.

Diversification can provide what to firms?

flexibility to shift their investments to markets where the greatest returns are possible.

it is important that firms balance diversification's benefits with its costs.

true

the more links among the businesses,

the more constrained is the level of diversification

An absence of direct links between businesses does what?

makes them unrelated.

How do firms vary in corporate level strategy?

according to their level of diversification and the connections between and among their businesses

What are reasons for diversification that create value?

•Economies of scope (related diversification)

- Sharing activities

- Transferring core competencies

•Market power (related diversification)

- Pooled negotiating power

- Vertical Integration

•Financial economies (unrelated diversification)

- Efficient internal Capital allocation

- Business restructuring

What are reasons for diversification that are value neutral?

•Antitrust regulation

•Tax laws

•Low performance

•Uncertain future cash flows

•Risk reduction for firm

•Tangible resources

•Intangible resources

What are reasons for diversification that are value reducing?

•Diversifying managerial employment risk

•Increasing managerial compensation

What are the 4 Value-Creating Diversification Strategies?

related constrained diversification

both operational & corporate relatedness

unrelated diversification

related linked diversification

high operational relatedness and low corporate relatedness?

related constrained diversification

high operational relatedness and high corporate relatedness?

both operational and corporate relatedness

low operational relatedness and high corporate relatedness?

related linked diversification

low operational relatedness and low corporate relatedness?

unrelated diversification

What is operational relatedness?

Sharing Activities between Businesses

What is corporate relatedness?

Transferring Corporate-level Core Competencies into Businesses

In related constrained and related linked diversification, what does corporate relatedness involve?

involves the transfer of corporate-level core competencies between separate activities

In related constrained and related linked diversification, what does operational relatedness involve?

involves the sharing of physical (e.g. plant/equipment) or intangible (manufacturing know-how) resources

In related constrained and related linked diversification, what does economies of scope mean?

they are cost savings that the firm creates by successfully sharing some of its resources and capabilities (operational relatedness) or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses (corporate relatedness)

What are examples of operational relatedness?

•Sharing a primary activity (such as inventory delivery systems)

•Sharing a support activity (such as purchasing practices)

Provide me two examples of companies who employ sharing activities (operational relatedness):

•Proctor & Gamble: technological capability sharing

•Sany, marketing capability sharing

Why is operational relatedness and activity sharing risky?

can be risky because shared resources could result in either underutilization of the resource (if one product's demand wanes) or unavailability of the resource during critical times.

What are Corporate-level core competencies in terms of corporate relatedness?

are complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise.

In what two ways does related linked diversification strategy help firms create value?

•First, the elimination of the need to allocate resources to an existing core competence that has already been developed in another business

•Resource intangibility - which makes it difficult for competitors to understand and imitate

Resource intangibility -

makes it difficult for competitors to understand and imitate

What is market power?

exists when a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level, or both

In addition to gaining scale as a means of increasing power, how else can firms create market power?

through pooled negotiating power and vertical integration

Pooled negotiating power -

gaining greater bargaining power with suppliers & customers

Vertical integration -

when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration).

What are reasons or rationale for vertical integration?

•Save on operational costs

•Avoid market costs

•Improve product quality

•Protect technology from imitation by rivals

•Exploit underlying capabilities in the marketplace

•Access to more information and knowledge that are complementary

•Especially valuable when no market prices exist for connected assets (high search / transaction costs)

What are drawbacks of vertical integration?

•Outside suppliers may produce product at lower cost

•Bureaucratic costs can affect success of vertical integration

•Requires substantial investments in specific technologies, so may reduce firm's flexibility, esp. when new technology arrives

•Changes in demand create capacity balance and coordination problems

•Due to the challenges of Vertical Integration, many manufacturing firms at the turn of the 21st century focused on de-integration, to divest non-core businesses, outsource production processes and develop an independent supplier network.

•Recently, however, some firms are beginning to reintegrate to gain better control over the quality and timing of their supplies

What would be the ideal position for a company to achieve?

simultaneous Operational Relatedness and Corporate Relatedness so they can create economies of scope.

Why is simultaneous Operational Relatedness and Corporate Relatedness difficult to achieve?

because the cost of transferring core competencies, or sharing operational processes among businesses may be difficult

Give an example of a company who uses both operational and corporate relatedness:

Disney : Production and knowledge-sharing, as well as cross-selling, among its related businesses is extensive.

In unrelated diversification, what are financial economies?

are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm.

Firms can create value using unrelated diversification through which two types of financial economies?

•Efficient internal capital allocation

•Restructuring of Assets

In Efficient internal capital allocation, Unrelated businesses will often have ____?

different risk profiles

Through the use of efficient internal capital allocation, the overall risk profile of the firm can be reduced by doing what?

allocating capital to businesses whose risk profiles offset each other, and by funding high-potential projects.

In Efficient internal Capital Allocation, the management of a business often has better (internal) information necessary to make capital distribution decisions than what?

the external market.

Why is internal information better than external information in Efficient internal Capital Allocation?

because externally-provided information (e.g. through Annual reports) will often not contain enough information on which to make decisions, and in addition are available to competitors who might try to duplicate a firm's strategy.

Why do stock market analysts often assign a "conglomerate discount" when valuing the firms?

Because of the high degree of complexity involved in large, highly diversified firms, and the difficulty in understanding the businesses' interactions

The "conglomerate discount" does what? Give an example.

This discount values the company at less than the sum of its (diversified business) parts. So a 15% conglomerate discount would value the company at 85% of the sum of their parts.

The "conglomerate discount" is much stronger where?

in developed countries.

The "conglomerate discount" may create what?

may create an incentive to divest unrelated businesses to appease investors.

When else are financial economies created?

when firms learn how to create value by buying, restructuring, and then selling the restructured companies' assets in the external market.

Restructuring assets is most effective when?

when companies are bought at low prices, e.g. in the midst of a recession, and sold during a time of market expansion.

What two industries is restructuring assets (a form of financial economy) considered difficult to perform?

1. in the technology industry - where new innovations are making processes and products obsolete in short time periods.

and

2. service industry - due to the lack of tangible assets and value created by intangibles (like human capital).

What are some incentives to diversify?

1. antitrust regulation

2. tax laws

3. low performance

4. uncertain future cash flows

5. synergy and firm risk reduction

Incentives to diversify come from both the external environment and a firm's internal environment

true

What is an external incentive to diversify?

antitrust regulation

What did antitrust laws prohibit during the 1960's and 1970's that created increased market power (either through vertical or horizontal integration)?

mergers; anti trust laws were stringently enforced.

Due to strong enforcement of anti trust laws, what happened ?

Many of the mergers during this time period, as a result, were to combine unrelated, diversified businesses.

What happened in the 1980s and 1990s in regards to antitrust laws?

antitrust enforcement lessened, and takeovers in similar lines of business increased.

What happened in the 2000's, in regards to antitrust laws?

mergers have again attracted more scrutiny than they had during the previous two decades, although this has not decreased the pace of deal-making.

What happened in the 1960s and 1970s in regards to tax laws?

dividends were taxed more heavily than were capital gains.

This created an incentive by shareholders for their firms to use free cash flow to acquire businesses in high-performance industries, which would be a better use of their return than through distribution through dividends.

What did the 1986 Tax Reform Act?

it changed capital gains taxes to count as ordinary income, which took away shareholders' incentive for the firms to reinvest their returns in another business

What happened after the 1986 Tax Reform Act?

The acceleration of divestitures of unrelated businesses after this time period reflected the move away from unrelated diversification.

How does the increase in depreciable assets through acquisitions also produces an incentive for firms to diversify ?

by lowering a company's taxable income

Changes in accounting standards to eliminate this incentive have since affected firms' use of acquisitions for this purpose (and similar eliminations of the write-offs for R&D).

true

Low performance is sometimes an incentive for ___

a firm to diversify

Evidence suggests that diversification that does not strengthen the value proposition of your core business (i.e.unrelated diversification) will not ____

improve performance

Maturing product lines may also create an incentive for diversification as ___

a defensive strategy, in order to survive for the long term

Diversification into new product markets or other businesses can reduce ____

the uncertainty about a firm's future cash flows.

What is the synergy model?

it exists when value created by business units working together exceeds the value that those same units create working independently.

Why do synergies increase the risk of corporate failure?

because the joint interdependence that is created between businesses can constrain a firm's flexibility.

What must a firm have to successfully use a corporate level diversification strategy?

A firm must have the types and levels of resources and capabilities needed to successfully use a corporate-level diversification strategy.

What 4 things influences a firm's ability to create value through diversification?

The degree to which resources are valuable, rare, costly to imitate, and nonsubstitutable (core competencies)

For ex: financial resources used to diversify the firm are easily visible (and imitable) by competitors and less likely to create value on a long-term basis than ones based on intangible resources.

Excess capacity in both ____ and _____ resources can be used to diversify more easily.

tangible and intangible

What is a value-reducing reason to diversify?

Managerial Motives to Diversify

Why do top-level executives have an incentive to diversify ?

because if a firm diversifies, it also diversifies their own employment risk.

How does diversifying benefit managers but not shareholders?

This benefit to the managers can come at the detriment of shareholders, since the increase in complexity (and compensation to managers) may not add to the value of the overall enterprise.

How can we limit the managerial tendency to over diversify?

Using Governance mechanisms such as the board of directors, executive compensation practices, and corporate policy

Corporate-level strategy deals with the management of ___

a group of different businesses operating in different markets.

As the discussion of diversification benefits and obstacles has shown, it is important that firms diversify cautiously, focusing on ___

relatively few, rather than many, businesses.

Although unrelated diversification can have benefits in certain cases, it is also clear that related diversification, especially where ___

operational relatedness can be employed, can most increase the value of a firm.

Firms should pursue diversification that is appropriate for their resources (including financial resources) and can improve their ___

strategic competitiveness when the diversification can serve to enhance the value proposition of their core competencies.