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45 terms

Chapter 6

STUDY
PLAY
Corporate Level Strategy
1) what businesses should a corporation competes in 2) how can these businsesses be managed so they create "synergy"
synergy
more value by working together than if they were freestanding units
related diversification
a firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power
economies of scope
cost savings from leveraging core competencies or sharing related activities among businesses in a corporation
Core competencies
a firms strategic resources that reflect the collective learning in the organization--how to coordinate diverse production skills, integrate multiple streams of technologies, and market and merchandise diverse products and services
Three criteria for Core competencies
1) the core competence must enhance competitive advantages by creating superior customer value 2) different businesses in the corporation must be similar in at least one important way related to the core competence 3) the core competencies must be difficult for competitors to imitate or find substitutes for
sharing activities
having activities of two or more businesses value chains done by one of the businesses
market power
firms' abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment
Pooled negotiating power
similar businesses working together or the affiliation of a business with a strong parent can strengthen an organization's bargaining position relative to suppliers and customers and enhance its position vis-a-vis competitors
vertical integration
(backwards or forwards) an expansion or extension of the firm by integrating preceding or successive production processes (occurs when a firm becomes its own supplier or distributor)
backward integration
the firm incorporates more processes toward the original source of raw materials
forward integration
the fimr incorporates more processes toward the ultimate consumer
Benefits of Vertical integration
1) a secure supply of raw materials or distribution channels that cannot be "held hostage" to external markets where consts can fluctuate over time 2) protection and control over assets and services required to produce and deliver valuable products and services 3) access to new business opportunities and new forms of technologies 4) simplified procurement and administrative procedures since key activities are brought inside the firm, eliminating the need to deal wiht a wide variety of suppliers and distributors
risks of vertical integration
1) costs and expenses associated wiht increased overhead and capital expenditures 2) loss of flexibility resulting from large investments 3) problems associated wiht unbalanced capacities along the value chain 4) additional administrative costs associated wih managing amore complex set of activities
transaction cost perspective
a perspective that the choice of a transactions governance structure, such as vertical integration or market transaction, is influenced by transaction costs including search, negotiating, contracting, monitoring, and enforcement costs, associated with each choice
transaction-specific investments
when a company needs an input specifically designed for a particular product, the supplier may be unwilling to make the investments in plant and machinery necessary to produce that component for two reasons 1) no guarantee that the company will continue to buy from them when their contract expires 2) once the investment in is made, the supplier has no bargaining power
administrative costs
coordinating different stages of the value chain now internalized within the firm cuases administrative costs to go up
vertical relationships
the creation of synergies from the interaction of the corporate office with the individual business units
hierarchical sources of synergy
value created "wtihin" business units as a result of the expertise and support provided by the corporate office
parenting advantage
the positive contributions of the corporate office to a new business as a result of expertise and support provided and nots as a result of substantial changes in assets, capital structure, or management
restructuring
the intervention of the corporate office in a new business that substantially changes the assets, capital structure, and/or management including selling off parts of the business, changing the management, reducing payroll and unnecessary sources of expenses, changing strategies, and infusing the new business with new technologies, processes, and reward systems
asset restructuring
involves the sale of unproductive assets, or even whole lines of businesses, that are peripheral.
capital restructuring
involves changing the debt-equity mix, or the mix between different classes of debt or equity
management restructuring
typically involves changes in the composition of the top management team, organizational structure, and reporting relationships
portfolio management
a method of a) assessing the competitive position of a portfolio of businesses within a corporation, b) suggesting strategic alternatives for each business, and c) to identify priorities for the allocation of resources across the businesses
Key purpose of portfolio models
to assist a firm in achieving a balanced portfolio of businesses (consists of businesses whose profitability, growth, and cash flow characterisitcs complements each other and adds up to a satisfactory overall corporate performance
stars
sbus competing in high-growth industries with relatively high market shares (have high growth potential and should continue to receive investment funding)
question marks
sbus competing in high-growth industries but having relatively weak market shares (resources should be invested in them to enhance their competitive positions)
cash cows
sbus with high market shares in low-growth industries (limited long-run portential, but represent a source of current cash flows to fund investments in "stars" and "question marks")
dogs
sbus with weak market shares in low-growth industries (most of the time should be divested)
limitations of portfolio models
1) they compare sbus on only two dimensions 2) the approach views each sbu as a stand-alone entity, ignoring common core business practices and value creating activities that may hold promise for synergies across business units
acquisitions
the incorporation of one frim into another through purchase (one firm buys another either through a stock purchase, cash, or the issuance of debt)
mergers
the combining of two or more firms into one new legal entitiy (entail a combination or consolidation of two firms to form a new legal entitiy)
Three basic synergies
1) leveraging core competencies 2) sharing activities 3) building market power
Benefits of M&A
1) means of obtaining valuable resources that can help an organization expand its product offerings and services 2) provide the opportunity for firms to attain the three bases of synergy 3) can lead to consolidation within and industry and can force other players to merge 4) firms can enter new market segments by way of aquisition
Potential Limitations of M&A
1) the takeover premium that is paid fo an acquisition is very high 2) competing firms often can imitate any advantages realized or copy synergies that result from the M & A 3) managers credibility and ego can sometimes get in the way of sound business decisions 4) there can be many cultural issues that may doom the intended benefits from M & A endeavors
divestment
the exit of a business from a firm's portfolio
objectives of divestments
1) enabling managers to focus their efforts more directly on the firms core business 2) providing the firm with more resources to spend on more attractive alternatives, 3) raising cash to help fund existing businesses
strategic alliances
a cooperative relationship between two or more firms (formal, or informal ie: involving a written contract)
joint ventures
new entities formed within a strategic alliance in which two or more firms, the parents, contribute equity to form the new legal entity
potential advantages of JV's and SA's
1) entering new markets 2) reducing manufacturing costs in the value chain 3) developing and diffusing new technologies
Management Motives that erode value creation
1) Growth for growths sake 2) egotism 3) antitakeover tactics
greenmail
is an effort by the target firm to prevent an impending takeover
golden parachute
a prearranged contract with managers specifying that, in the event of a hostile takeover, the target firms managers will be paid a significant severance package
poison pills
are means by which a company can give shareholders certain rights in the event of a takeover by another fimr