Strategic management test 2
Reduce costs
Using horizontal acquisitions to reduce costs Gain scale economies through horizontal acquisitions Increases in productivity Reduce the competition (Absorb competitors)
Vertical Acquisition
is the purchase of a supplier or distributor of one or more of a firm's goods or services. Vertical acquisitions can also be used to increase scale and to gain market power
Firms using unrelated diversification multiproduct strategy
adopt the competitive M-from structure. division operating in competitive M-form compete against one another for the firms resources.
Cost leadership strategy
an action plan the firm develops to produce goods or services at the lowest cost. (usually standardized products) - price its product lower -gain a larger share of the target market firms using this strategy typically have economies of scale bc the large quantities of products produced.
related constrained
With the related constrained multiproduct strategy, the firms' businesses are related to each other. The relatedness between the groups occurs as they share some resources and activities to make and sell products
Manage risk and other financial objectives
- Some firms choose to use acquisitions to diversify their operations, thereby reducing their dependence on performance in an intensely competitive market - At times, firms also make acquisitions to gain access to tax advantages or to reduce business or financial risk
Integration success
Leverage the capabilities of both teams to create value
Reasons for acquisitions
-Reduce costs -Gain Market power -Increase Growth -Learn to build capabilities -Manage risk and other financial objectives
Gain market power
-Use horizontal and vertical acquisitions to gain market power. exists when the firm sells its products above competitive prices or when its costs are lower than those of its primary competitors.
Screening, Selecting, & Negotiating
-screening enables the acquiring party to identify the acquisition opportunities that exist while determining the appropriate price. -key issues requiring careful analysis should be identified early in the negotiating process
Define business-level strategy
A business level strategy is an action plan the firm develops to describe how it will compete in its chosen industry or market segment. (has a clear statement of the value to be created for costumers)
Focused competitive risks
A competitor may learn how to outfocus focusing firm. A broad target firm might find the focusing target market attractive. The needs of the narrow target costumer may change and become similar to those of the broad market.
Single business multiproduct
A firm pursuing low levels of diversification uses the single or dominant strategy. The firm generates at least 95 percent of its sales revenue from a single business. A single business is ne in which the firm makes and sells a single product.
Unrelated Diversification
A firm that does not try to transfer resoures and activities between its businesses or core competencies to its businesses. - commonly called conglomerates
Bargaining power of suppliers
A supplier can excercise power over the cost leader if it provides a significant amount of key input to the cost leaders production process. Firms dependent on natural resources to produce, when sources of supply are limited ay have to pay higher prices.
Takeover
A takeover is a specialized type of acquisition in which the target firm does not solicit the acquiring firms offer
Access to info
Access to information is the main reason internal capital market allocations in firms may be the basis for superior returns to shareholdes. those evaluating can internally dicipline poorly performing units by allocating fewer or different types of resources.
Intergrated Cost Leadership/Differentiation Strategy
An action plan the firm develops to produce goods or services with strong emphasis on both differentiation and low cost. - broad or narrow target - must be flexible to provide service to both kinds of markets
Differentiation strategy
An action plan the firm develops too produce goods or services that are unique.(different from others) -phyiscal sources: product durability, ease of repair -Pschyological: perceptions of quality, courtesy of sales people.
Pitfalls and Prevention
Because combined firms often lose target firm managers through turnover, it is important to retain key executives and other valuable human capital, especially if the acquiring firm wants to gain new skills from the acquired firm. Paying too much over diversifying taking on too much debt
Define and explain the differences among the five business level strategies
Cost leadership, differentiation, focused cost leadership, focused differentiation, integrated cost leadership/differentiation key dimensions: competitive advantage and competitive scope.
Bargaining power of buyers
Costumers exercise power under several conditions -purchasing a large quantity of the cost leaders output -cost leaders' independence occurs by selling to a large number of buyers.
competitive risks2
Differentiated products are usually effectively counterfeited allowing costumers to wonder why they should pay a higher price for the real thing.
operation relatedness and constrained
Economies of scope - are created through operational relatedness when the firm successfully shares primarily tangible resources(such as plant and equipment) or when a primary activity (delivery systems) is used in more than one of its businesses.
Effecient internal capital market allocation
Effeciency - investors take an equity position in firms by purchasing shares of stock in companies they believe have high future cash flow value. Effecient markets allocate capital in the form of debt as shareholders and debt holders seek to improve the value of their investments.
Five forces and differentiation
Firms using differentiation strategies do everything to increase loyalty to reduce costumer sensitivity to price. Costumer loyalty and need to provide costumers with more value is a strong challenge to rivals. Perceived unique value favors substitution.
Moderate to high levels of diversification
Firms using related diversification tend to create economies of scope. With the related constrained the firms businesses are related to each other. In the related linked, only limited links or relationships exist between the firms businesses.
Levels of diversification
Five levels Low levels of diversification -single businesses -dominant businesses Moderate to high levels of diversification -related constraints -related linked Very high levels of diversification -unrelated
Dominant business multiproduct strategy
Generates between 70 and 95 percent of it sales revenue from a single product or group.
Increase growth
If the acquiring firm is the first or one of the first to make such acquisitions in the industry - an advantage in market power and position
Related link strategy
In the related linked diversification strategy, only limited links or relationships exist between the firm's businesses. -gives the ability to price products and services effectively. Creates economies of scope when transferred from business to business.
Potential entrants and product substitutes
Potential entrants: cost leaders ability to continuously drive its costs lower while still satisfying costumers makes it difficult for potential entrants. Product substitute: can replace the focal product. Cost leader responds by reducing purchase price.
Risks of Operational relatedness and related constrained
Risk - the demand for the output of a unit servicing the needs of severla of the firms businesses may fall below units production capacity. Risk - not enough sales revenue is generated to cover fixed costs
explain the structures to best implement each business level strategy
Simple Structure - Functional Structure Multidivisional Structure
Standardized vs unique products
Standardized products: products that are widely available and have large costumer demand. Unique: have features different from or in addition to the standardized product.
Learn to Build Capabilities
Target companies often have unique employee skills, organizational technologies, or superior knowledge that are available to the acquiring firm only through acquisitions Pooling the companies' combined resources and capabilities may enable development of new "centers of excellence" for specialized products in new markets
Implementing multiproduct strategies
The M form is the structure of choice for firms with moderate to high levels of product diversification.
Focused Strategy
an action plan the firm develops to produce goods or services that serve the needs of a specific market segment. Firms using the focus strategy intend to serve the needs of a narrow costumer segment.
Multiproduct strategy
an action plan the firm uses to compete in different product markets. (more diversified) Multiproduct strategies result in performance improvements.
Financial economies
are cost savings or higher returns generated when the firm effectively allocates it financial resources based on investments inside or outside the firm.
competitive scope (broad or narrow)
competitive scope is defined by if the firm decides to take a focused or broad approach of competition.
Rivalry with existing competitors
competitors find it extremely difficult to compete against the cost leader on the basis of price. -reduce profit margins
competitive risks
costumers may decide that the price they are paying for differentiated products is too high. The source may cease to create value.
Unrelated Diversification
does not emphasize operational relatedness or corporate relatedness as a means of creating economies of scope. rely on financial economies
Corporate relatedness and related link
economies of scope are generated through corporate relatedness when the firm successfully transfer corporate level core competencies to its different businesses.
Differentiation
emphasizes innovation. Continuously introduces new and unique products that provide value. The more unique, the more successful.
A leveraged buyout(LBO)
is a restructuring strategy in which a party buys all or part of a firm's assets in order to take the firm or a part of the firm private. After the transaction is completed, the company's stock is no longer traded publicly.
Acquisition
is a transaction in which a firm buys a controlling interest in another firm, with the intention of either making it a subsidiary business or combining it with its current business.
divestiture
is a transaction in which businesses are sold to other firms or spun off as independent enterprises. Some divestitures occur because the firm wants to restructure its set of businesses to take advantage of new opportunities.
Merger
is a transaction in which firms agree to combine their operation on a relatively equal basis
Corporate relatedness
is achieved when corporate-level core competencies are successfully transferred into some of the firms businesses.
Focused Cost Leadership Strategy
is an action plan the firm develops to produce goods or services for a narrow market segment at the lowest cost.
The Focused Differentiation Strategy
is an action plan the firm develops to produce goods or services that a narrow group of costumer perceive as being unique in ways that are important to them.
Define a multiproduct strategy
is an action plan the firm uses to compete in different product markets. Using a multiproduct strategy causes a firm to become more diversified to some degree
The strategic business unit(SBU) M-form
is an organization structure in which corporate headquarters personnel try to transfer corporate level core competencies. -Firms using the related linked multiproduct strategy
functional structure
is an organizational structure consisting of a CEO and a small corporate staff. Here, the managers of major functional are as usually report to the CEO or a member of the corporate staff. This structure is based on functional specialization and facilitates active information sharing within each function.
The cooperative M form
is an organizational structure in which horizontal integration is used so that divisions can share resources and activities -Firms using the related constrained multiproduct strategy
M form
is an organizational structure in which the firm is organized to generate economies of scope or financial economies. Each of the three versions of the M-form is used to support a different multiproduct strategy.
simple structure
is an organizational structure in which the owner/manager makes all of the major decisions and oversees all of the staff's activities. This structure has few rules, depends on informal relationships,and has a limited task specialization
the competitive M form
is an organizational structure in which there is complete independence between the firm'sdivisions. Firms using the unrelated diversification multiproduct strategy adopt the competitive M-form structure
Due dilligence
is the rational process by which acquiring firms evaluate target firms. Due diligence is concerned with verifying that the reason for the proposed transaction is sound strategically and financially.
Corporate and operational relatedness
it is difficult for firms to achieve both simultaneously. Firms able to do so have developed a competitive advantage hard to imitate.
Operational relatedness
operational relatedness - is achieved when the firms businesses sucessfully share resources and activities to produce and sell their products.
Pareto Principle
or the 80/20 rule, can be applied to the analysis of customers targeted and served by a company. At a given time companies find that 80% of the profit is derived from 20% of the customers.
Managerial motives
reducing the risk of losing their job is the frst motive for top level executives. - additional diversification reduces the chance that top level executives will lose their job. -the relationship between firm size and executive compensation is the second managerial diversification motive.
External capital market
relies on information produced by the firm to estimate the organizations ability to generate attractive future revenue and earnings streams.
Firms following a focus strategy
single product line in a single geographic market - use a simple structure A focused cost leadership strategy - centralized functional structure emphasizing effeciency. A focused differentiation strategy - functional decentralized structure creating innovation.
Organizatinal structure
specifies the firm's formal reporting relationships, procedures, controls, and authority anddecision-making processes
Business level strategies
the firm's business-level strategy has two key dimensions: competitive advantage and competitive scope. The business-level strategy the firm chooses is a function of the basis for the competitive advantage (either cost or uniqueness) that it seeks to achieve or maintain (if it already has an advantage over competitors)
Reconstructing
to denote that changes are made regarding assets of a firm by buying some or all of another companies assets. a firm thinks the assets have a value
Horizontal Acquisition
the acquisition of a company competing in the same industry as the acquiring firm
creating loyalty (bargaining power of buyers)
the customers have to be convinced they are paying more for a good reason. Also slows potential entrants and substitutes. ex. Mercedes - people are willing to pay more because they believe it is a better car.
Firms implementing the cost leadership strategy
use a functional structure with highly centralized authority in the corporate staff. jobs are highly specialized and organized into homogenous subgroups and highly formalized rules. operations function is emphasized to ensure the firms product is being produced at low costs.
Firms implementing the differentiation strategy
use the functional structure. - R&D and marketing functions are more important. -Authority is decentralized.
