MGMT Quiz #3

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  1. Foster's Case
    Constrained diversification poorly executed
  2. Corporate Level Strategy (Company Wide)
    • - The integrated mix of conscious decisions made by senior management on 'where to play and how to win'
    • - Cuts across business/geographies based on an objective assessment of corporate core competencies vs. competition
    • - Means to grow revenues and profits
  3. Measures of Success
    Sustainable competitive advantage and consistent growth in shareholder value
  4. Require 6 Elements (for success)
    • 1) Projection of "size of prize"
    • 2) Thorough/objective corporate SWOT
    • 3) Assessment of complimentary elements
    • 4) Risk assessment ("what if scenario")
    • 5) Allocation of organizational + financial resources
    • 6) Ongoing communication of strategy w/ stakeholders
  5. Levels of Diversification
    • Low levels: Dingle business. Dominant Business
    • Moderate to
    • High Levels: Related constrained. Related linked.
    • Very high levels: Unrelated
  6. Single-Business Diversification (low)
    Firm generates 95% or more of its sales revenue from its core business area

    Example: (Wrigley gum-Juicy Fruit)
  7. Dominant-Business Diversification (Low)
    • - Generates between 70 and 95% of total revenues from a single business
    • - Example: UPS 83% package business
  8. Related Constrained Diversification (Moderate to high)
    • - Less than 70% of revenues come from dominant business, all business
    • -Share product, technological, and distribution linkages
    • -Example: P&G and Campbell's soup
  9. Related Linked Diversification (Moderate to High)
    • - Less than 70% of revenues come from dominant business, only LIMITED links between businesses
    • -Share fewer resources and assets
    • -Example: General Electric
  10. Unrelated Diversification (Very High)
    • - Less than 70% of revenue comes from the dominant business, NO common link between businesses
    • -Example: HWL (conglomerate)
  11. Economies of Scope
    - Cost savings that the firm creates by successfully sharing some of its resources and capabilities or by transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses
  12. Operational Economies (Two Types)
    • 1) Sharing Activities (operational relatedness)
    • 2) Transferring corporate level core competencies (corporate relatedness)
  13. Operational Relatedness (Sharing Activities)
    - Share either a primary activity (inventory delivery system) or support activity (purchasing practices) --> Goal = Create Value

    - Example: P&G (Paper towel & Paper Business)

    -Example of failure: Fosters (activity sharing)
  14. Corporate level core competencies
    - Complex set of resources and capabilities that link different businesses. Primarily through managerial and technological knowledge, experience, and expertise.
  15. Corporate Relatedness (Transferring of Core Competencies)
    • Sources of value creation:
    • - Easy to transfer core competencies because already created
    • - Resources intangibility

    Example: Honda (transfers managers)
  16. Market Power
    • - Related Diversification
    • -Exists when a firm is able to sell its products above the existing competitive level
    • ...OR
    • - Reduce the costs of its primary and support activities below competitive level
    • ...OR
    • - BOTH
    • Example: Mars acquisition of Wrigley
  17. Multipoint Competition
    • - Exists when two or more diversified firms simultaneously compete in the same product areas or geographic markets.
    • Example: UPS and FedEx
  18. Vertical Integration
    • - Exists when a company produces its own inputs (backward integration) or own its own source of output distribution (forward integration)
    • - Used to gain market power over rivals
    • - Example: CVS merger with Walgreens (forward vertical)
  19. Drawbacks of Vertical Integration
    • 1) Outside suppliers produced cheaper
    • 2) Reduces flexibility
    • 3) Coordination problems
  20. Virtual Integration
    • - Integration via e-commerce
    • - more common source for market power gains
  21. Simultaneous Operational Relatedness and Corporate Relatedness
    • - Sharing activities AND transferring core competencies
    • - Example: Johnson & Johnson, Walt Disney
  22. Value-Neutral Diversification (I+R)
    • 1) Incentives to diversify
    • 2) Resources and diversification
  23. Incentives to Diversify
    • - Internal + External Environment
    • 1) External Incentives
    •      - Antitrust regulations + Tax Law
    • 2) Internal Incentives
    •      -Low Performance
    •      -Uncertain future cash flows
    •      -Pursuit of synergy + reduction of risk
  24. Antitrust Regulation and Tax Laws
    • (External)
    • -Antitrust laws prohibit mergers that create greater market power (vertical or horizontal integration)--> disincentive to diversify
    • -Tax reform act encouraged firms to retain funds --> disincentive
  25. Low Performance
    • (Internal)
    • - Low performance encourages diversification
    • - More broadly diversified = low performance
    • Performance is highest at related constrained level of diversification
  26. Incertain Future Cash Flows
    • (Internal)
    • - Diversification is a good defensive strategy
    • - Diversifying into other product markets increases uncertainty about future cash flows
  27. Synergy and Firm Risk Reduction
    • (Internal)
    • - Synergy = Exists when the value created by business units working together exceeds the same value that those same units create working independently
  28. Resources and Diversification
    • - Must have the types of resources to diversify
    • - Tangible resources are less flexible (excess capacity) - Sales force=Easier diversification
    • - Intangible resources are more flexible and encourage diversification
  29. Merger
    • - Strategy through which two firms agree to integrate their operations on a relatively coequal basis
    • -Example: Towers + Watson Merger
    • -Few true mergers take place (usually one dominant party)
  30. Acquisition
    -Strategy which one firm buys a controlling or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio
  31. Takeover
    • -Special type of acquisition
    • -Target firm does not solicit the acquiring
    •      - Firm's Bid
    • -Unfriendly acquisition
  32. Types of Acquisitions
    • 1) Horizontal
    • 2) Vertical
    • 3) Related
    • 4) Cross Border
  33. Horizontal Acquisition
    • - Acquisition of a company competing in the same industry as you
    • - Example: Toys R Us acquiring FAO Schwartz
    • - Results in higher performance when strategies are similar
  34. Vertical Acquisition
    - Firm acquiring a supplier or distributor of one or more of its goods

    -*Controls additional parts of value chain*

    • - Example: CVS acquiring caremark
    • - Example: P&G acquiring Gilette
  35. Related Acquisitions
    • - Acquiring a firm in a highly related industry
    • - Create value through synergy
    • - Example: Boeing acquiring exmeritus Inc.
  36. Cross-Border Acquisitions
    • Acquisitions between companies with headquarters in different countries
    • Example: UK carmaker 'Range Rover' acquired by India's JAJA Motors
  37. Reasons for Acquisitions (7 Reasons)
    • 1) Increased market power
    • 2) Overcoming entry barriers
    • 3) Cost of product development and increased speed to market
    • 4) Low risk in comparison to developing new products
    • 5) Increased diversification
    • 6) Reshape competitive scope
    • 7) Learn/develop new capabilities
  38. Increased Market Power
    • Acquisitions are designed to achieve greater market power (buy a competitor or supplier)
    • Example: Acer acquired gateway
  39. Overcoming Entry Barriers
    • Established competitors have economies of scale
    • Higher barriers = higher likelihood of acquisition
    • Gain immediate access to market
  40. Cost of new product development and increased speed to market
    • Acquisitions allow a firm to get instant access to new and current products of a firm
    • Example: Pharmaceutical companies because cost of product development
  41. Lower risk compared to developing new products
    Acquisitions can be somewhat less risky sometimes
  42. Increased Diversification
    Difficult to develop new products internally to diversify in product lines --> Leads to acquisition
  43. Reshaping the firm's competitive scope
    • Use acquisitions to lessen dependance on one or more products or markets
    • Example: P&G acquiring gillette by giving P&G a stronger presence in men's products
  44. Learning and developing new capabilities
    • Gain access to capabilities previously lacked
    • Example:Acquiring a special technological capability
  45. Problems in achieving acquisition success (7 reasons)
    • 1) Integration difficulties
    • 2) Inadequate evaluation of target
    • 3) Large/Huge Debt
    • 4) Inability to achieve synergy
    • 5) Too much diversification
    • 6) Overly focused on acquisition (Managers)
    • 7) Too large
  46. Integration Difficulties
    • Why?
    • Two different cultures
    • Differing financial systems
    • Difficulty building working relationships
  47. Inadequate evaluation of target
    • Failure completing due diligence process
    •      - Process of evaluating target firm
  48. Large or huge debt
    • Result of 'Junk Bends'
    • Higher chance of bankruptcy and bad credit with debt
  49. Inability to achieve synergy
    • Competitive advantage is only achieved if private synergy is generated
    •      -Assets yield capabilities and core competencies that could not be achieved through another
  50. Too much diversification
    Lead to declines in performance
  51. Managers over focused on acquisitions
    • Too preoccupied with making deals
    • Example: Liz Claiborne --> Didn't realize change in market and consumer preferences
  52. Too Large
    • Can result in bureaucratic controls
    •      -Formalized and behavior rules designed to ensure consistency of decisions and actions
  53. International Strategy
    • Strategy through which the firm sells its goods or services outside its domestic market
    • Yields new opportunities, increases product demand, secure needed resources
  54. Identify international opportunities (4 types of benefits)
    • 1) Increased market size
    • 2) Return on investment
    • 3) Economies of scale and learning
    • 4) Location advantages
  55. Increased market size
    • Drastically increase size of market
    • Firms competing in domestic markets see international as a better strategy
    • Example: Soda companies going international because pepsi and coke dominate domestically
  56. Return on investment
    • Large markets crucial for ROI
    • Specifically R&D
  57. Economies of scale and learning
    • Enjoy economies of scale in manufacturing operations
    • Example: Critical in global auto industry
  58. Location Advantages
    • Can find places internationally that have lower basic costs of goods and services.
    • Provides: Low cost labor and energy
    • Influenced by production and transportation requirements
  59. Two Types of International Strategies
    • International business level strategy
    • International corporate level strategy
  60. International Business-Level Strategy
    • Home country of operation is most important source of competitive advantage
    • Determinants of advantage
    • 1) Factors of production
    • 2) Demand conditions
    • 3) Related and supporting industries
    • 4) Firm strategy, structure, and rivalry
  61. International Corporate-Level Strategy
    • Focuses on the scope of a firm's operations through both product and geographic differentiation
    • Required when firm operates in multiple industries and countries/regions
    • 3 types: Multidomestic, global, and transnational
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MGMT Quiz #3
MGMT Quiz #3
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