Chapter 9

Question 1

What is the scope of an organization concerned with?

Answer 1

• Diversification in products
• Diversification in markets

Scope is fundamental to corporate strategy and informs decisions about how broad an organization should be.

Question 2

What are the two dimensions of diversification in scope?

Answer 2

• Products
• Markets

These dimensions help identify different growth directions for an organization.

Question 3

What is vertical integration?

Answer 3

• Acting as an internal supplier
• Acting as a customer to oneself

It allows an organization to control more of its supply chain.

Question 4

What is the term for the value-adding effect of head office to individual SBUs?

Answer 4

parenting advantage

This advantage can provide a competitive edge in managing different businesses.

Question 5

What are the four basic directions for organizational growth according to Ansoff’s matrix?

Answer 5

• Market penetration
• Market development
• Product/service development
• Unrelated diversification

These directions help organizations strategize their growth.

Question 6

What does market penetration imply?

Answer 6

• Increasing share of current markets
• Using current products or services

This strategy builds on established capabilities without venturing into new territories.

Question 7

What are the two basic forms of market development?

Answer 7

• New users
• New geographies

Market development often involves offering existing products/services to new markets.

Question 8

What is product and service development?

Answer 8

• Delivering modified or new products to existing markets

This can involve varying degrees of diversification along the product/service axis.

Question 9

What is unrelated diversification?

Answer 9

• Expanding into completely different markets
• Products and services with no operational links to the core business

This strategy may include conglomerate diversification.

Question 10

What are the four potentially value-creating drivers for diversification?

Answer 10

• Exploiting economies of scale
• Sharing resources
• Stretching corporate management capabilities
• Risk diversification

These drivers can lead to more effective diversification strategies.

Question 11

True or false: Growth in organizational size is always a good reason for diversification.

Answer 11

FALSE

Growth can often be a form of ‘empire building’, especially in the public sector.

Question 12

What is the concept of economies of scope in relation to university residence halls?

Answer 12

Utilizing halls of residence for conferencing and tourism during holidays

Economies of scope apply to both tangible and intangible resources.

Question 13

What are corporate parenting skills?

Answer 13

Skills of talented corporate-level managers applied across a portfolio of businesses

These skills can create value even in businesses that do not share operational resources.

Question 14

Name an example of a conglomerate that applies corporate-level competences across diverse businesses.

Answer 14

LVMH

LVMH includes businesses from champagne to fashion, sharing few operational resources.

Question 15

What is the advantage of exploiting superior internal processes in emerging markets?

Answer 15

More efficient than external processes in imperfect markets

Conglomerates can mobilize internal investment and develop managers effectively.

Question 16

How can diversification increase market power?

Answer 16

• Mutual forbearance among competitors
• Ability to cross-subsidize businesses

Diversification can discourage aggressive competition and support market dominance.

Question 17

What does it mean when diversification is described as synergistic?

Answer 17

The combined effect of activities or assets is greater than the sum of the parts

This is often illustrated by the equation 2 + 2 = 5.

Question 18

True or false: Diversification is always beneficial for a company.

Answer 18

FALSE

Diversification can lead to value destruction if not managed properly.

Question 19

What are the two types of vertical integration?

Answer 19

• Backward integration
• Forward integration

Backward integration involves moving into input activities, while forward integration involves output activities.

Question 20

What is outsourcing in the context of vertical integration?

Answer 20

Subcontracting value chain activities to external suppliers

This allows organizations to leverage external capabilities for efficiency.

Question 21

What factors should be considered when deciding to integrate or outsource?

Answer 21

• Superior capabilities of subcontractors
• Risk of opportunism from subcontractors

The balance between these factors influences the decision.

Question 22

What is divestment?

Answer 22

Pulling out of one or more businesses

This often occurs with unrelated diversified businesses or those with poor performance.

Question 23

What is the purpose of divestment in a corporate context?

Answer 23

• Reduce the scope of the portfolio
• Raise overall value of the organization
• Sell-off underperforming SBUs
• Improve contribution through restructuring

Divestment may occur if an SBU is not adding value or if a better corporate parent can be found.

Question 24

What are the two main types of divestment?

Answer 24

• Sell-off
• Spin-off

A sell-off involves selling the SBU to another company, while a spin-off distributes shares to shareholders and lists the SBU on the stock exchange.

Question 25

In a **sell-off**, what is a **leveraged buy-out (LBO)**?

Answer 25

When the acquirer uses a lot of debt to buy the sell-off ## Footnote If the SBU management team raises finance to buy the business, it is termed a management buy-out (MBO).

Question 26

What is an **equity carve-out**?

Answer 26

Selling a portion of SBU shares to the public while retaining significant shares ## Footnote This allows the parent organization to keep control while establishing a market price.

Question 27

What evidence suggests that **corporate parents can add value**?

Answer 27

* Providing a clear vision * Offering central services and resources * Intervening for performance improvement ## Footnote Corporate parents should demonstrate that they create more value than they cost.

Question 28

What are the **three ways** corporate parents can **inadvertently destroy value**?

Answer 28

* Adding management costs * Adding bureaucratic complexity * Obscuring financial performance ## Footnote These issues can lead to a lack of transparency and hinder performance assessment.

Question 29

What is the role of a **portfolio manager** in corporate strategy?

Answer 29

Actively investing in and managing a diverse portfolio of businesses ## Footnote Portfolio managers find and invest in under-performing companies.

Question 30

What does a **synergy manager** focus on?

Answer 30

* Enhancing value through managing synergies * Building a common purpose * Facilitating cooperation across businesses ## Footnote Synergies are particularly rich when new activities are closely related to the core business.

Question 31

What are the **three challenges** in achieving **synergistic benefits**?

Answer 31

* Excessive costs * Overcoming self-interest * Illusory synergies ## Footnote These challenges can hinder the realization of expected synergies.

Question 32

What is the focus of a **parental developer**?

Answer 32

Employing central capabilities to add value to businesses ## Footnote This involves transferring resources or capabilities downwards to enhance business unit potential.

Question 33

What is the **'crown jewel' problem** in corporate strategy?

Answer 33

Excessive attachment to profitable business units that the parent does not add value to ## Footnote These units should be divested if they do not align with the corporate strategy.

Question 34

What are the **three criteria** for determining financial investment and divestment within business portfolios?

Answer 34

* Balance of the portfolio * Attractiveness of business units * Fit for potential synergies ## Footnote These criteria help managers assess the overall strategy for their portfolios.

Question 35

What does the **BCG matrix** use to determine the attractiveness of a business portfolio?

Answer 35

* Market share * Market growth ## Footnote The BCG matrix warns that high growth requires heavy investment, necessitating a balance within the portfolio.

Question 36

What does the **BCG matrix** use to determine the attractiveness and balance of a business portfolio?

Answer 36

* Market share * Market growth ## Footnote The BCG matrix categorizes business units based on their market share and growth potential.

Question 37

What is a **star** in the context of the BCG matrix?

Answer 37

A business unit with high market share in a growing market ## Footnote Stars may require heavy investment to maintain growth but are generally self-sufficient.

Question 38

What is a **question mark** (or problem child) in the BCG matrix?

Answer 38

A business unit in a growing market with low market share ## Footnote Developing question marks into stars requires significant investment.

Question 39

What defines a **cash cow** in the BCG matrix?

Answer 39

A business unit with high market share in a mature market ## Footnote Cash cows generate profits with low investment needs and fund investments in question marks.

Question 40

What are **dogs** in the BCG matrix?

Answer 40

Business units with low market share in static or declining markets ## Footnote Dogs may drain resources and are often recommended for divestment.

Question 41

What is one advantage of the **BCG matrix**?

Answer 41

* Visualizes different needs and potentials of businesses * Warns about financial demands of high-growth businesses * Helps allocate resources effectively ## Footnote The BCG matrix aids corporate parents in managing diverse business portfolios.

Question 42

What is a potential problem with the BCG matrix related to **definitional vagueness**?

Answer 42

Difficulty in defining high and low growth or share ## Footnote Managers may define their market too narrowly, affecting analysis.

Question 43

True or false: The BCG matrix assumes that capital can be raised in external markets.

Answer 43

TRUE ## Footnote This assumption may not hold in under-developed capital markets or private companies.

Question 44

What does the **directional policy matrix** categorize business units by?

Answer 44

* Market attractiveness * Competitive strength ## Footnote Developed by McKinsey & Co., it helps manage business portfolios based on these criteria.

Question 45

What are the two axes of the **directional policy matrix** based on?

Answer 45

* Market attractiveness * Business unit strength ## Footnote These axes consider multiple factors beyond just market share.

Question 46

What is the **parenting matrix** focused on?

Answer 46

Synergy creation from parenting ## Footnote It assesses the fit between business units and the corporate parent's capabilities.

Question 47

What are **heartland businesses** in the parenting matrix?

Answer 47

Businesses the parent understands well and can add value to ## Footnote These should be at the core of future strategy.

Question 48

What should a corporate parent avoid according to the parenting matrix?

Answer 48

Running 'Alien' businesses that it has no feel for ## Footnote Such businesses may not benefit from the parent's capabilities.

Question 49

What are the key considerations for corporate strategy issues in organizations?

Answer 49

* Right scope of activities * Benefits from synergies * Degree of vertical integration * Consideration of divestment and outsourcing ## Footnote These considerations help organizations assess their strategic positioning.