Team 5. Corporate Strategy Foundations of Strategy. The scope of the firm Concepts for analyzing firm scope Diversification Vertical integration Managing the corporate portfolio. Objectives. Range of product/market activities the firm undertakes
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Good for multi-business firms to gain cost-advantage
LicensingEconomies of Scope
Unrelated: takes place when the additional product line is different from the firm’s core business
AKA: Conglomerate Diversification
Related: occurs when a firm expands into a similar field of operation
AKA: Concentric DiversificationDiversification
Vertical: occurs when a firm undertakes successive stages in the production of a good or serviceDiversification
Low-growth, cash flow-rich industries are susceptible to diversification.
Investments in diversification take away from shareholder returns.Growth
Reduce risk by pooling profits from different businesses under one common owner.
Many incomes create stable profit earnings.
The primary beneficiaries tend to be managers because stable profits means job security.Risk Reduction
Value creation occurs through the exploitation of linkages between businesses.
Links can be operational, strategic, technical, etc.
To fully exploit the value creation of diversified activities, administrative costs should be lowValue Creation
Easily traded resources do not require entry into new businesses.Exploiting Economies of Scope
Corporate headquarters will allocate capital through a capital expenditure budget.
avoid costs associated with borrowing cash or issuing equity
Access to better internal financial information than external.Internal Capital Markets
Diversified companies have a pool of employees and can respond to specific labor needs with employee transfers.
Eliminates costs associated with hiring and firing people.
Detailed information on employee competencies can be collected and shared easily between businesses.Internal Labor Markets
Barriers to entry can counteract the attractiveness of an industry.
Acquisition or Corporate Venture are the two ways to enter an industry.The Cost-of-Entry Test
The new unit must gain competitive advantage from its link with the corporation or vice versa.
In most diversification decisions, it is the better-off test that dominates.The Better-Off
Empirical studies associate high levels of diversification with lower profitability.
There are benefits to moderate diversification - “a strategic sweet spot between focus and broader diversification.”
Findings reflect that turbulence of the business environment increase the costs of managing diversified companies.Diversification and Performance
Highly diversified business groups dominate many emerging countries: India, Thailand, Indonesia, Malaysia, etc.
Firms are beginning to acquire “growth options.”Recent Trends in Diversification
Vertical Integration can be backward or forward.
Vertical Integration can be either full or partial.Vertical Integration
Many of the coordination benefits traditionally associated with vertical integration can be achieved through collaboration between vertically related companies.Benefits and Costs of Vertical Integration
The Incentive problem- Vertical Integration changes the incentives between vertically related businesses.
Flexibility- Both vertical integration and market transactions can claim advantage with regard to different types of flexibility.Transactions costs in vertical exchanges