Capstone Quiz
Describe and evaluate different types of corporate diversification.
A single-business firm derives 95 percent or more of its revenues from one business. ▪ A dominant-business firm derives between 70 and 95 percent of its revenues from a single business, but pursues at least one other business activity. ▪ A firm follows a related diversification strategy when it derives less than 70 percent of its revenues from a single business activity, but obtains revenues from other lines of business that are linked to the primary business activity. Choices within a related diversification strategy can be related-constrained or related-linked. ▪ A firm follows an unrelated diversification strategy when less than 70 percent of its revenues come from a single business, and there are few, if any, linkages among its businesses.
Describe three alliance governance mechanisms and evaluate their pros and cons.
Alliances can be governed by the following mechanisms: contractual agreements for non-equity alliances, equity alliances, and joint ventures. There are pros and cons of each alliance governance mechanism, shown in detail in Exhibit 9.2 with highlights as follows: ▪Non-equity alliance's pros: flexible, fast, easy to get in and out; cons: weak ties, lack of trust/commitment. Equity alliance's pros: stronger ties, potential for trust/commitment, window into new technology (option value); cons: less flexible, slower, can entail significant investment. Joint venture pros: strongest tie, trust/commitment most likely, may be required by institutional setting; cons: potentially long negotiations and significant investments, long-term solution, managers may have two reporting lines (two bosses).
Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.
An alliance management capability consists of a firm's ability to effectively manage alliancerelated tasks through three phases: (1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management. ▪An alliance management capability can be a source of competitive advantage as better management of alliances leads to more likely superior performance. ▪Firms build a superior alliance management capability through "learning by doing" and by establishing a dedicated alliance function.
Identify and evaluate benefits and risks of vertical integration.
Benefits of vertical integration include securing critical supplies and distribution channels, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets. ▪ Risks of vertical integration include increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions.
Explain why firms need to grow, and evaluate different growth motives.
Firm growth is motivated by the following: increasing profits, lowering costs, increasing market power, reducing risk, and managerial motives.
Explain why firms engage in acquisitions.
Firms engage in acquisitions to (1) access new markets and distributions channels, (2) gain access to a new capability or competency, and (3) preempt rivals.
Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy.
Horizontal integration is the process of merging with competitors, leading to industry consolidation. ▪As a corporate strategy, firms use horizontal integration to (1) reduce competitive intensity, (2) lower costs, and (3) increase differentiation.
Evaluate whether mergers and acquisitions lead to competitive advantage.
Most mergers and acquisitions destroy shareholder value because anticipated synergies never materialize. ▪If there is any value creation in M&A, it generally accrues to the shareholders of the firm that is taken over (the acquiree), because acquirers often pay a premium when buying the target company.Page 318 ▪Mergers and acquisitions are a popular vehicle for corporate-level strategy implementation for three reasons: (1) because of principal-agent problems, (2) the desire to overcome competitive disadvantage, and (3) the quest for superior acquisition and integration capability.
Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them.
Strategic alliances have the goal of sharing knowledge, resources, and capabilities to develop processes, products, or services. ▪An alliance qualifies as strategic if it has the potential to affect a firm's competitive advantage by increasing value and/or lowering costs. ▪The most common reasons firms enter alliances are to (1) strengthen competitive position, (2) enter new markets, (3) hedge against uncertainty, (4) access critical complementary resources, and (5) learn new capabilities. LO 9-3 / Describe three alliance governance mechanisms and evaluate their pros and cons. ▪Alliances can be governed by the following mechanisms: contractual agreements for non-equity alliances, equity alliances, and joint ventures. There are pros and cons of each alliance governance mechanism, shown in detail in Exhibit 9.2 with highlights as follows: ▪Non-equity alliance's pros: flexible, fast, easy to get in and out; cons: weak ties, lack of trust/commitment. Equity alliance's pros: stronger ties, potential for trust/commitment, window into new technology (option value); cons: less flexible, slower, can entail significant investment. Joint venture pros: strongest tie, trust/commitment most likely, may be required by institutional setting; cons: potentially long negotiations and significant investments, long-term solution, managers may have two reporting lines (two bosses). LO 9-4 / Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage. ▪An alliance management capability consists of a firm's ability to effectively manage alliancerelated tasks through three phases: (1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management. ▪An alliance management capability can be a source of competitive advantage as better management of alliances leads to more likely superior performance. ▪Firms build a superior alliance management capability through "learning by doing" and by establishing a dedicated alliance function. LO 9-5 / Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy. ▪A merger describes the joining of two independent companies to form a combined entity. ▪An acquisition describes the purchase or takeover of one company by another. It can be friendly or hostile. Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term mergers and acquisitions, or M&A. ▪Firms can use M&A activity for competitive advantage when they possess a superior relational capability, which is often built on superior alliance management capability. LO 9-6 / Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy. ▪Horizontal integration is the process of merging with competitors, leading to industry consolidation. ▪As a corporate strategy, firms use horizontal integration to (1) reduce competitive intensity, (2) lower costs, and (3) increase differentiation. LO 9-7 / Explain why firms engage in acquisitions. ▪Firms engage in acquisitions to (1) access new markets and distributions channels, (2) gain access to a new capability or competency, and (3) preempt rivals. LO 9-8 / Evaluate whether mergers and acquisitions lead to competitive advantage. ▪Most mergers and acquisitions destroy shareholder value because anticipated synergies never materialize. ▪If there is any value creation in M&A, it generally accrues to the shareholders of the firm that is taken over (the acquiree), because acquirers often pay a premium when buying the target company.Page 318 ▪Mergers and acquisitions are a popular vehicle for corporate-level strategy implementation for three reasons: (1) because of principal-agent problems, (2) the desire to overcome competitive disadvantage, and (3) the quest for superior acquisition and integration capability. Bookmark
Describe and examine alternatives to vertical integration.
Taper integration is a strategy in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies, and/or is forwardly integrated but also relies on outside-market firms for some if its distribution. ▪ Strategic outsourcing involves moving one or more value chain activities outside the firm's boundaries to other firms in the industry value chain. Offshoring is the outsourcing of activities outside the home country.
Apply the build-borrow-or-buy framework to guide corporate strategy.
The build-borrow-or-buy framework provides a conceptual model that aids strategists in deciding whether to pursue internal development (build), enter a contract arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies
Explain when a diversification strategy creates a competitive advantage and when it does not.
The diversification-performance relationship is a function of the underlying type of diversification. ▪ The relationship between the type of diversification and overall firm performance takes on the shape of an inverted U (see Exhibit 8.10). ▪ Unrelated diversification often results in a diversification discount: The stock price of such highly diversified firms is valued at less than the sum of their individual business units. ▪ Related diversification often results in a diversification premium: The stock price of related-diversification firms is valued at greater than the sum of their individual business units. ▪ In the BCG matrix, the corporation is viewed as a portfolio of businesses, much like a portfolio of stocks in finance (see Exhibit 8.12). The individual SBUs are evaluated according to relative market share and the speed of market growth, and are plotted using one of four categories: dog, cash cow, star, and question mark. Each category warrants a different investment strategy. ▪ Both low levels and high levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance.
Describe and evaluate different options firms have to organize economic activity.
Transaction cost economics help managers decide what activities to do in-house ("make") versus what services and products to obtain from the external market ("buy"). ▪ When the costs to pursue an activity in-house are less than the costs of transacting in the market (Cin-house < Cmarket), then the firm should vertically integrate.Page 285 ▪ Principal-agent problems and information asymmetries can lead to market failures, and thus situations where internalizing the activity is preferred. ▪ A principal-agent problem arises when an agent, performing activities on behalf of a principal, pursues his or her own interests. ▪ Information asymmetries arise when one party is more informed than another because of the possession of private information. ▪ Moving from less integrated to more fully integrated forms of transacting, alternatives include short-term contracts, strategic alliances (including long-term contracts, equity alliances, and joint ventures), and parent-subsidiary relationships.
Describe the two types of vertical integration along the industry value chain: backward and forward vertical integration.
Vertical integration denotes a firm's addition of value—what percentage of a firm's sales is generated by the firm within its boundaries. ▪ Industry value chains (vertical value chains) depict the transformation of raw materials into finished goods and services. Each stage typically represents a distinct industry in which a number of different firms compete. ▪ Backward vertical integration involves moving ownership of activities upstream nearer to the originating (inputs) point of the industry value chain. ▪ Forward vertical integration involves moving ownership of activities closer to the end (customer) point of the value chain.
Apply the core competence-market matrix to derive different diversification strategies.
When applying an existing/new dimension to core competencies and markets, four quadrants emerge, as depicted in Exhibit 8.9. ▪ The lower-left quadrant combines existing core competencies with existing markets. Here, managers need to come up with ideas of how to leverage existing core competencies to improve their current market position. ▪ The lower-right quadrant combines existing core competencies with new market opportunities. Here, managers need to think about how to redeploy and recombine existing core competencies to compete in future markets.Page 286 ▪ The upper-left quadrant combines new core competencies with existing market opportunities. Here, managers must come up with strategic initiatives of how to build new core competencies to protect and extend the firm's current market position. ▪ The upper-right quadrant combines new core competencies with new market opportunities. This is likely the most challenging diversification strategy because it requires
Define corporate strategy and describe the three dimensions along which it is assessed.
orporate strategy concerns the boundaries of the firm along three dimensions: (1) industry value chain, (2) products and services, and (3) geography (regional, national, or global markets).
Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy.
▪A merger describes the joining of two independent companies to form a combined entity. ▪An acquisition describes the purchase or takeover of one company by another. It can be friendly or hostile. Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term mergers and acquisitions, or M&A. ▪Firms can use M&A activity for competitive advantage when they possess a superior relational capability, which is often built on superior alliance management capability.