Corporate Strategy and Diversification: Key Concepts and Strategies, Exams of Business Economics

Download Corporate Strategy and Diversification: Key Concepts and Strategies and more Exams Business Economics in PDF only on Docsity! Bus 401 Vanderkelen Midterm 2 Corporate Strategy - Search for value and competitive advantages through participation in several markets. Vertical Integration - Movement into adjacent markets by a firm along its own value chain. Buying buyers/suppliers. moving backwards towards raw materials = backwards integration. Moving forwards towards sales= forward integration. Horizontal Diversification - Movement into unrelated or adjacent market not in a firm's value chain. Ex: selling products to new customer groups, new products/services to existing customers, or new products to new customers. single business - A firm earning more than 95 percent of revenues from a single line of business. dominant vertical business - A firm that earns more than 70 percent of revenues from its main line of business and the rest from businesses located along the value chain. dominant business - A firm that earns more than 70 percent of revenue from its main line of business and the remainder from other lines across different value chains. related-constrained diversification - A firm that earns less than 70 percent of its revenue from its main line of business, and its other lines of business share product, technological, and distribution linkages with the main business. related-linked diversification - A firm that operates in related markets, but fewer linkages exist between the new and existing markets than the elements create separately. Unrelated Diversified Firm - Competes in product categories and markets with few or no links between them. Adjacent Market - Market/Industry that's closely related to market/industries that it currently competes in. Slack - Unused resource capacity Core Competencies (Shared Knowledge) - Collective Knowledge that can be shared throughout an organization to create value. Synergy - Action between different elements of a system that creates more value together than separate. The whole exceeds sum of parts. Ex: Disney's movies related to parks, adds more value together. Business Model - A method to enable creation and exchange of value between companies and their customers. The plan and set of activities implemented by a company to offer unique value and generate revenue and make profit from operations. Economy of Scope - Average total cost of production decreases as a result of increasing the number of different goods produced. Ex: Delta in freight bus, loads freight items in unused cargo space of passenger planes. Economies of Scale - A reduction in costs per unit due to increases in efficiency of production as the number of goods being produced increases. Why Economies of Scale Lower Costs - Ability to Spread Fixed Costs: -Production: Property, plant and equipment. -Non-production: R&D, advertising, distribution, finance, G&A. Specialization: -Specialization of machines and equipment. -Specialization of tasks and people. Scale Curve - A graphic representation of the relationship between cost per unit and scale (volume) of production in a given time period. Minimum Efficient Scale - The smallest level of output (unit volume) that a plant or firm can produce to minimize its long-run average costs. Diseconomies of Scale - An increase in marginal cost when output is increased. Cost Advantage Strategy - A strategy in which the unique value offered to customers is lower-priced products or services. sources of cost advantage - The search for competitive advantage within a single industry, market, or line of business. Corporate Strategy - The search for value and competitive advantages through participation in several different industries and markets. Management Skill - The individual and collective abilities of a firm's management team to engage in value- creating activities. Dominant Logic - A conceptualization of a business or a set of rules for competition, that applies to seemingly unrelated product markets or industries. Internal Capital market - The movement of funds, talent, or knowledge from unit to unit directed by the leaders of the firm. Sunk Costs Fallacy - The belief of managers that investment in a failed acquisition must continue because significant amounts have already been invested. Greenfield Entry - Entry into an adjacent market by a firm that opens its own operation. Existing resources move from existing to new business - Brand - Customer knowledge - Technology overlap • Speed not essential Acquisition - The purchase of another company or its assets. • Resources don't move from existing to new business - No brand equity - New customers - New technology • Speed essential Due Diligence - The process whereby managers closely examine the target firm to understand its core processes, strengths, and weaknesses. Takeover - An acquisition where the acquiring firm absorbs the target firm, the target firm ceases to exist. Merger - An acquisition with the goal of creating a new firm from the components of the two pre acquisition firms. Integration Team - A group of individuals from different functional areas of an acquiring firm that coordinate and manage the integration of the target company after the acquisition has closed. For diversification to add value, managers must answer what questions? - Why will the existing business be more valuable because we have entered an adjacent business? Why will the new business activity be more valuable inside our corporation than operating alone? 2 Ways to get into the market - Greenfield Entry (make when you have time) or Acquisition (buy) Primary Activities of the Value Chain - Outbound logistics Inbound logistics Marketing and Sales After sales service Operations Support Activities of the Value Chain - Human Resources Technology Development Procurement General Administration What do the value chain activities lead to? - Margin, the difference between cost to produce/sell and the amount it's sold for. Adds value through exploiting resources at the customer part of business. - Expand customer base, better serve existing markets through better products. Exploiting Resources through the operational parts of the business. - Create economies of scope on an increased scale. Broaden existing production capacity. Adopt new technology platforms. Enhancing resources at the customer part of business - Gain new market knowledge. Add new brands. Identify new trends earlier. Enhancing resources at the operational part of business - Improve quality, productivity, or other best practices. Access innovative process or product technologies. Enhance research and development capabilities or outputs. The two ways diversification can add value when expanding into adjacent business. - Through *exploiting* the firm's core and valuable resource and capabilities or it *enhances* and grows the resource base. 6 S , Mechanisms that Create Value - Slack, Synergy, Shared Knowledge, Similar Business Models, Spreading Capital (internal financing), Stepping Stone (enhance capabilities, buy bus to get into new industry). 4 Acquisition Strategies - Bury (absorb target) Build (the best) Blend (loose coupling, leverage target) Bolt-on (2 companies 1 owner) Question Marks - High market growth, low market share. Unknown opporuntites Stars - High market growth, high market share. Dogs - Low market growth, low market share. Weak/ first to go. Cash Cow - Low market growth, high market share. 4 Primary Ways companies differentiate their products from competitors: - Superior Product Features Better Reliability Convenience Brand/Image Different Ways to Segment the Market - Product Attributes, Customer Demographics, job-to-be done Porter's Five Forces - Buyer Power Supplier Power Barriers to Entry Substitutes Rivalry Differentiation: Improving Competitive Position vis-à-vis the Five Forces - Rivalry: brand loyalty lowers customer sensitivity to price and raises customer switching costs