Mgt 4335- Chapter 7

Question 1

What are 3 key issues facing the corporation that corporate strategy deals with?

Answer 1

Directional strategy (orientation toward growth), portfolio analysis(coordination of CF among units), parenting strategy(building of corporate synergies through resource sharing and development).

Question 2

What are 3 important questions that every corporation must decide its orientation toward growth ?

Answer 2

1. Should we expand, cut back, or continue our operations unchanged?
2. Should we concentrate our activities within our current industry, or should we diversify into other industries?
3. If we want to grow and expand nationally and/or globally, should we do so through internal development or through external acquisitions, mergers, or strategic alliances?

Question 3

T-Directional strategy is composed of three general orientations (grand strategies):

Answer 3

Growth strategies expand the company’s activities.
Stability strategies make no change to the company’s current activities.
Retrenchment strategies reduce the company’s level of activities.

Question 4

What is vertical growth meant?

Answer 4

Vertical growth can be achieved by taking over a function previously provided by a supplier or by a distributor.

Question 5

T-What are 4 ways to vertically integrate?

Answer 5

1. Backward: going backward in the industry’s value chain. For example, the purchase of Carroll’s Foods for its hog-growing facilities by Smithfield Foods, the world’s largest pork processor.
   Forward: moving upstream toward the end product of service. For example, FedEx used forward integration when it purchased Kinko’s in order to provide store-front package drop-off and delivery services for the small-business market.
   Balanced: doing both forward and backward at the same time(including taper)
   Full: owning the entire .value/supply chain. For example, British Petroleum and Royal Dutch Shell are fully integrated. They own the oil rigs that pump the oil out of the ground, the ships and pipelines that transport the oil, the refineries that convert the oil to gasoline, and trucks that deliver the gasoline to franchised gas stations.

Question 6

T-What are the advantages and disadvantages of vertical Integration?

Answer 6

Advantages: Better control + mgt of production; reduction of inventory costs; strategic independence; can create barriers to entry; reduction in transaction costs; secure source of materials; protection&control of assets.
Disadvantage: increased coordination costs; weak inactivation to be efficient; company is very vulnerable to changes in demand.

Question 7

TT-What is diversification meant ?

Answer 7

Expanding across multiple different businesses outside of its current business.
Encompasses mergers & acquisitions.

Question 8

TT-What are 5 reasons for horizontal integration ?

Answer 8

1. Creating a more cost efficient of meaner, more competitive, larger org.
2. Expanding geographically: banks, airlines.
3. Expanding into new product categories.
4. Gaining access to new technologies.
5. Leading the convergence of industries where boundaries are blurred by changing technologies. “hedging”, “market response”

Question 9

T-What is concentric diversification ?

Answer 9

Growth through concentric diversification into a related industry may be a very appropriate corporate strategy when a firm has a strong competitive position but industry attractiveness is low.
The search is for synergy.
The point of commonality may be similar technology, customer usage, distribution, managerial skills, or product similarity.
1. All products sold at same place.
2. Same communication channels along supply chain.
3. Same skills needed to do the business of all products.
4. All products have same distribution channel.

Question 10

T-What is conglomerate diversification?

Answer 10

When management realizes that the current industry is unattractive and that the firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries. General Electric and Berkshire Hathaway used conglomerate diversification that managed by Warren Buffet.

Question 11

T-What are advantages of concentric and advantages of conglomerate?

Answer 11

Advantages of concentric (related):
Economies of scope can save $ by sharing fixed costs; transfer distinctive competencies to new businesses; flip poor performers ( Bauer Hockey, Cole Haan, Umbro)
Advantages of conglomerate:
All eggs not in one basket; can turn around poor performers.

Question 12

T-What are disadvantages of diversification?

Answer 12

Possible lack of knowledge/expertise (departure from core competence) coordination costs-management efforts too much “stuff” makes it hard to be really good at anything, hard to compete against firms who specialize. For example, Pepsi and Coca Cola.

Question 13

When do you pursue diversification? Ask 3 questions:

Answer 13

1. Is the anticipated return high? Do we think we’ll make it?
2. Cost of entry what will it cost to get in? Is this price higher or lower than anticipated returns?
3. Are we better off than going with another option?

Question 14

T-What are 3 types of one core business/stability?

Answer 14

1. Proceed with caution: uncertain time incremental improvements-spending some money.
2. No Change: do nothing modestly competitive market position-no money.
3. Profit strategy: conditions in market are worsening situation but instead to act as through the company’s problems are only temporary (reduce investments and short term expenditures).

Question 15

what is the author trying to convey about this strategy?

Answer 15

A corporation may choose stability over growth by continuing its current activities without any significant change in direction.

Question 16

TT-What is retrenchment meant?

Answer 16

When a company has a weak competitive position in some or all of its product lines resulting in poor performance.

Question 17

TT-What are 4 types of retrenchment strategies?

Answer 17

1. Turnaround Strategy: emphasis on improving efficiency.
   2 Basic phases of turnaround strategy: contraction - across the board cutback in size and costs to stop bleeding; consolidation - implement programs to stabilize the new leaner corporation.
2. Captive company strategy: give up independence in exchange for security, offer management of company to bridge customer.
3. Sell out/divestment:
   Sell out: selling to a larger firm to pay off shareholders.
   Divestment: when a corporation has multiple lines of business and they sell off the one with the lowest growth potential.
4. Bankruptcy: giving up control to the courts to hopefully perpetuate the co liquidation - termination of the firm.

Question 18

T-What are advantages of Strategic Alliances?

Answer 18

Share risks, losses shared, easy to pin off from failure, more flexibility, build new expertise in new markets and new technology, allow access to knowledge.

Question 19

T-What are disadvantages of strategic alliances?

Answer 19

Issues-trust, power, cooperation, delegation.
Mutual trust- accountability can be difficult.
Must share benefit (can’t exactly maximize value).
Risk to intellectual property(trade servers).
Poor/overly optimistic views: poor fit in term of resources & capabilities.