Exam 2

Topic 4, 5, 6 Chapter 4, 6, 7

Chapter 4

Chapter 4

chapter 4 understanding levels of strategy

Reach

refers to a firms access to customers, so that extended reach = access to more customers

Richness

pertains to the depth and detail of the two-way flow of information between a firm and its customers

Affiliation

concerned with facilitating useful interactions with customers, which can reduce customer complaints. Companies recognizing that “high touch” interactions can improve customer opinion, which leads to more purchases

Market segmentation

dividing customers into groups based on differences in their needs

After a firm decides who it will serve, it then must identify the needs that its products can satisfy

True

purpose of a business level strategy

create differences between that firms position and the positions of its competitors

• to position itself differently, the firm must decide if it is going to perform activities differently or perform different activities

Business model

describes what a firm does to create, deliver, and capture value for its stakeholders

Integrated strategy

pursues both cost leadership and differentiation and can target broad and narrow markets

two types of potential competitive advantages

lower costs than rivals

or the ability to differentiate and command

cost leadership strategy

is an integrated set of actions taken to produce products with features that are acceptable to customers at the lowest cost, relative to that of competitors

differentiation parity

selling standardized products or services to the industry’s most typical customer, but with competitive levels of differentiation

Fives forces

Rivalry

Power of Buyers

Power of Suppliers

New Entrants

Substitutes

The Risks

Differentiation strategy

formulated to produce products at an acceptable costs that customers perceive as being different in ways that they value and for which they are willing to pay a premium price

Cost Parity

customers will not purchase products or services that are priced above what they are willing to pay

Focus strategy

an integrated set of actions taken to produce products that meet the needs of a particular segment of customers

Integrated cost leadership/ differentiation strategy

when they attempt to achieve a low-cost position while pursuing significant product differentiation at the same time

Flexible Mfgring systems

Eliminates the low cost vs product variety

Information Networks

CRM links firms with their suppliers, customers

TQM

Increase customer satisfaction, cut costs, reduce product development time

different levels

Corporate-level strategy

Business-level strategy

Functional-level strategy

operational-level strategy

enterprise level - interface with external publics

Business-level strategy options

Cost-leadership strategy

Differentiation Strategy

Focus Strategy (NICHE MARKET)

-Cost leadership/Differentiation Option

Cost Leadership : Products Aimed at the Mainstream

Definable Market Segments , Mainstream product sells across multiple segments

Requirements for Cost Leadership

Constant effort to reduce costs through:

Building scale-efficient facilities

Tight control of production costs and overhead

Minimizing costs of sales, R&D and service

State of the art manufacturing facilities

Monitoring costs of activities provided by outsiders

Simplification of processes (e.g., Value Chain Analysis)

Differentiation: Products aimed at Specific Market Segments

Definable Market Segments, Products designed for specific segments

Requirements for Differentiation

Developing new systems and process

Shaping perceptions through advertising

Quality focus

Capability in R&D

Maximize Human Resource contributions through low turnover and high innovation

Examples of Differentiation Business-Level strategy

Apple - Design and Innovation

Steinway pianos - Raw materials & Workmanship

Mercedes Benz - Technology and Workmanship

Intel microprocessors - Technological superiority

Caterpillar tractors - Service buyers’ needs quickly anywhere in the world

Examples of Integrated Low Cost and Differentiation Strategy

Low Cost + Differentiation

Going back to differentiation for a final excercise

To be successful with a differentiation strategy, the firm must deliver products or services that are unique in ways that are perceived by and valued by customers.

Perceptions should not be assumed, and they can definitely be shaped

Do not leave this to chance

What is the point ?

Its not enough to have a product or service that is demonstrably unique in a way that would be valued by your customers. If they don’t perceive the benefit in what you have to offer, then all the cost of coming up with, producing, and trying sell that product or service is wasted. You need to make sure the customers actually see what you have to offer.

Chapter 6

Chapter 6 Corporate Level Strategy

Corporate level strategy

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

Two key questions for a corporate-level strategy?

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

2. How should the firm’s leadership manage those businesses?

Fore the diversified firm a business level strategy must be selected for each of the businesses in which the firm has decided to compete

True

Product Diversification

concerns the scope of the markets and industries in which a firm competes

Low Levels

Compete by developing capabilities useful for one or a few markets; provide superior service by focusing

Moderate to High levels

Lean on interrelationships between businesses or linked activities to make these strategies work

Very high levels

Unrelated diversification involves many businesses that are not related to one another, and the firm makes no effort to share activities or core competencies between them. Each competes on its own unique strengths.

Related Diversification

corporate-level strategy, the firm builds upon or extends its resources and capabilities to build a competitive advantage by creating value for its customers

Economies of Scope

are cost savings a firm creates by successfully sharing resources or capabilities one or more corporate-level core competencies that were developed in one of its business to another of its business

Operational Relatedness: Sharing Activities

This form of relatedness involves the sharing of primary or support activities in the Value Chain

Corporate Relatedness: Transferring Core Competencies

Firm can create value by sharing the expense of creating a core competence across multiple units

Market Power

Firms can use related diversification strategies to gain Market Power, which exists when a firm is able to sell its products above a competitive level, reduce its costs below the competitive level, or both.

Multipoint Competition

Defined as situations where two or more diversified firms compete in the same product areas or geographic markets at the same time.

Vertical Integration

exists when a company produces its own inputs or owns its own source of output distribution. This can boost a firm’s market power.

Unrelated Diversification

Firms do not seek operational relatedness or corporate relatedness when they use

Financial Economies

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

Two types of financial synergies

Efficient Internal Capital Market Allocations

Asset Restructuring

Efficient Internal Capital Market Allocation

Because of firms managers have access to more information about its businesses than external investors do

Restructuring of Assets

Financial economies can also be created when firms learn how to create value by buying, restructuring, and then selling the company’s assets in the external market

Antitrust Regulations

Antitrust sentiment changes according to shifting political winds

Tax Laws

Corporate tax laws can also have significant impact.

Low Performance

Research has found a curvilinear relationship between levels of diversification and returns

Uncertain cash flows

Firms can use these strategies to diversify away from stagnating businesses or businesses with uncertain futures

Benefits from Synergy

Synergy exists when the value created by business units working together exceeds that created when they operate independently.

Tacit knowledge

are more flexible than tangible physical assets in facilitating diversification and can provide a better foundation for value creation.

Managerial Motives

as would seem logical research has shown that levels of diversification and firm size are highly correlated

Executive Compensation and Status

It follows that as a firms size increases so does the compensation and social status of its executives

Wrong Motives

diversification is often pursued for reasons other than to create value through the firms strategy

The Role of Governance Mechanisms

Governance mechanisms, like boards of directors and monitoring by shareholders, are intended to reduce firm performance risks from managerial opportunism, but sometimes they are too weak to control it.

Simultaneous Operational Relatedness and Corporate Relatedness

Some firms like Amazon have been been able to create economies of scope by sharing activities

Key Questions of Corporate Strategy

What Businesses should the corporation be in ?

How should the corporate office manage the array of business units

Corporate Strategy

adds value by making the whole add up to more than the sum of its business parts

Many diversification efforts fail because managers do not consider crucial question’s before they decide to diversify

True

Question 1

What can our company do better than any of its competitors in its current markets?

It is critical for firms to Identify “Strategic Assets” - unique and unassailable competitive strengths

Question 2

What strategic assets do we need in order to succeed in the new market ?

Many firms assume that because they have some of the strategic assets required that their diversification strategy will succeed, but the firm usually must have all of them.

Question 3

Can we catch up or leapfrog competitors at their own game ?

If we lack one or more critical factors for success in the new market, can we purchase them, develop them, or render then unnecessary by changing the rules of the industry? Can we do that at a reasonable cost ?

Question 4

Will diversification separate strategic assets that need to be kept together?

Companies sometimes assume they can break up clusters of competencies or skills that can only work together. (i.e., they reinforce one another in a particular competitive context.

Question #5

Will we be simply a player in the new market or will we emerge a winner?

Remember the acid test: If a firm is to achieve a sustainable competitive advantage, its strategic assets must be (1) valuable (2) rare, (3) costly to imitate, (4) nonsubstitutable

Question #6

What can our company learn by diversifying, and are we sufficiently organized to learn it?

• what will we learn that will lead to other new business opportunities?

• What will we learn that can be applied to our existing lines of business?

• Are we organized to transfer learning across different functions and divisions?

Chapter 7

Chapter 7 Problems Achieving Success with Merger and Acquisition Strategies

Merger

A strategy through which two firms agree to integrate their operations on a relatively coequal basis

Aquisition

A strategy through which one form buys a controlling, or 100%, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

Takeover

is a special type of acquisition where the target firm does not solicit the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions

Unsolicited bids

seen by target firms as attempted “hostile” takeovers

Market Power

exist when a firm is able to sell its good or services above competitive price levels or when the costs of its primary or support activities are lower than those of its competitors

Horizontal acquisition

an acquisition of a company competing in the same industry as the acquiring firm

Vertical acquisitions

refers to a firm acquiring a supplier or distributor of one or more of its products

Related acquisition

Acquiring a firm in a highly related industry

Cross-border acquisitions

acquisitions made between companies with headquarters in different countries

Restructuring

a strategy through which a firm changes its set of businesses or its financial structure

Problem 1 of M&A

Integration Difficulties

Some believe that the integration process is the strongest determinant of whether a merger or an acquisition will be successful. This belief highlights the fact that post-acquisition integration is often a complex set of organizational processes that is difficult and challenging to navigate.

Among the challenges associated with integration processes are the need to:

•Meld two or more unique corporate cultures

•Link different financial and information control systems

•Build effective working relationships (esp. when management styles differ)

•Determine the leadership structure and those who will fill it for the integrated firm

Problem 2 of M&A

Inadequate Evaluation of Target

Due Diligence is a process through which a potential acquirer evaluates a target firm for acquisition.

In an effective due-diligence process, hundreds of items are examined in areas as diverse as the financing for the intended transactions, difference in cultures between the acquiring and target firm, tax consequence of the transaction, and actions that would be necessary to successfully meld the two workforces.

Due diligence is commonly performed by investment bankers, as well as accountants, lawyers, and management consultants specializing in that activity, although firms actively pursuing acquisitions may form their own internal due-diligence team.

Even in instances when a company does its own due diligence, companies almost always work with intermediaries such as large investment banks to facilitate their due-diligence efforts.

Although due diligence often focuses on evaluating the accuracy of the financial position and accounting standards used (a financial audit), due diligence also needs to examine the quality of the strategic fit and the ability of the acquiring firm to effectively integrate the target to realize potential gains from the deal.

True

Problem 3 of M&A

Large or Extraordinary Debt

Those evaluating acquisitions need to be aware of the problem that possible taking on too much debt can create.

A financial innovation called junk bonds supported firms’ earlier efforts to take on large amounts of debt from acquisitions.

Junk Bonds, now more commonly called high-yield bonds, are an option for financing risky acquisitions with money (debt) that provides a large potential return to lenders (bondholders).

Problem 4 of M&A

Inability to Achieve Synergy

Synergy exists when the value created by units working together exceeds the value that those units could create working independently. That is, synergy exists when assets are worth more when used in conjunction with each other than when they are used separately

For Shareholders, synergy leads to gains in their wealth that they could not duplicate or exceed through their own portfolio diversification decisions

Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources across the business in the newly created firm’s portfolio.

A firm develops a competitive advantage through an acquisition strategy only when a transaction generates private synergy.

True

Private Synergy

is created when combining and integrating the acquiring and acquired firms’ assets yield capabilities and core competencies that could not be developed by combining and integrating either firm’s assets with another company.

is possible when firms’ assets are complementary in unique ways; that is, the unique type of asset complementarity is not always possible simply by combining two companies’ sets of assets with each other.

Although difficult to create, blank is attractive because of its uniqueness, which is difficult for competitors to understand and imitate; therefore, this synergy can lead to a competitive advantage for firms that are able to create it.

Problem 5 : of M&A

Too Much diversification

In general, related diversification strategies outperform unrelated diversification strategies

Conglomerates formed by using an unrelated diversification strategy also can be successful, but at some points, firms can be over-diversified

The level at which this happens varies across companies because each firm has different capabilities to manage diversification

Even when a firm is not overdiversified, a high level of diversification can have a negative effect on its long-term performance. For example, the scope created by increased diversification can cause managers to rely on financial controls rather than strategic controls to evaluate business unit performance.

Top-level executives often rely on financial controls to assess the performance of business units when they do not have a rich understanding of business units’ objectives and strategies.

Using financial controls, such as return on investment (ROI), causes individual business-unit managers to focus on short-term outcomes at the expense of long-term investments.

Reducing long-term investments to generate short-term profits can negatively affect a firm’s overall performance ability.

True

Problem 6 of M&A

Managers overly focused on Acquisitions

A considerable amount of managerial time and energy is required for acquisition strategies to be used successfully. Activities with which managers become involved include the following.

Searching for viable acquisition candidates

Completing effective due-diligence processes

Preparing for negotiations

Managing the integration process after completing the acquisition

Top-level managers do not personally gather all of the information and data required to make acquisitions. However, these executives do make critical decisions regarding the targeted firms, the nature of the negotiations, and so forth.

Participating in and overseeing activities required for making acquisitions can divert attention from other matters that are necessary for long-term competitive success, such as identifying and taking advantage of other opportunities and interacting with important external stakeholders.

True

Problem 7 of M&A

Too large

Most acquisitions result in a large firm, which should create or enhance economies of scale that can result in more efficient operations.

However, size can also increase the complexity of the managerial challenge and create diseconomies of scope – that is, not enough economic benefit to outweigh the costs of managing the more complex organization created through acquisitions.

Complexities generated by the larger size often lead managers to implement more bureaucratic controls to manage the combined firm’s operations.

However, over, time, formalized controls often lead to relatively rigid and standardized managerial behavior. Certainly, in the long run, the diminished flexibility that accompanies rigid and standardized managerial behavior may produce less innovation.

Bureaucratic controls

can best be described as formalized supervisory and behavioral rules and policies.

Restructuring In Practice

Restructuring strategies are generally used to deal with acquisitions that are not performing up to expectations.

Two of the three types of restructuring strategies are:

– the use of divestiture, spin-off, or some means of eliminating businesses unrelated to a firm’s core businesses.

Downsizing

– a reduction in the number of a firm’s employees and, sometimes, in the number of its operating units, though not always a change in the composition of businesses in the company’s portfolio.

Downscoping

the use of divestiture, spin-off, or some means of eliminating businesses unrelated to a firm’s core businesses.

Leveraged Buyout (LBO)

a restructuring strategy whereby a party (typically a private equity firm) buys all of a firm’s assets in order to take the firm private