Corporate Strategy Lecture Notes
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Questions and Answers

What is one of the main reasons companies pursue vertical integration?

  • To enhance employee satisfaction
  • To lower transaction costs (correct)
  • To increase market share
  • To diversify their product offerings

Kodak's diversification strategy primarily aimed to achieve what outcome?

  • To increase profitability in unrelated industries (correct)
  • To improve technology in imaging software
  • To enter the film production market
  • To reduce production costs

What is the nature of Kodak's acquisition strategy in relation to the pharmaceutical industry?

  • Kodak is focusing solely on its existing photographic technology.
  • Kodak is planning to divest from the pharmaceutical sector.
  • Kodak is merging with pharmaceutical companies to enhance its photo business.
  • Kodak aims to leverage its expertise in analytical chemistry for production of APIs. (correct)

How did Kodak's failure to transition to digital technology impact its business model?

<p>It weakened its market power significantly. (C)</p> Signup and view all the answers

What lesson can be learned from Kodak's downfall regarding corporate strategy?

<p>Technology changes require timely adaptation. (D)</p> Signup and view all the answers

What can be inferred about Kodak's transition to digital photography based on its past strategies?

<p>Kodak failed to adapt quickly enough to the digital landscape. (B)</p> Signup and view all the answers

How has technology impacted Kodak's business model in recent years?

<p>It resulted in a loss of relevance in the photographic market. (C)</p> Signup and view all the answers

Which aspect of corporate strategy pertains to 'make, buy or ally' decisions?

<p>Vertical scope (A)</p> Signup and view all the answers

Which is a key motivation for firms to diversify their products?

<p>To mitigate corporate risk (C)</p> Signup and view all the answers

What lesson can be learned from Kodak's downfall in relation to corporate strategy?

<p>Diversification without core competence can lead to failure. (B)</p> Signup and view all the answers

In the case studies of corporate strategy, which approach is highlighted in Kodak's strategy to enter new markets?

<p>Utilizing related diversification by applying its chemical expertise. (C)</p> Signup and view all the answers

In the context of corporate strategy, what does the 'invisible hand' refer to?

<p>Market-driven production organization (B)</p> Signup and view all the answers

What was one of the core questions of transaction cost economics?

<p>Why choose firms over markets for transactions? (C)</p> Signup and view all the answers

What is a merger?

<p>Joining two independent firms to create a combined entity. (C)</p> Signup and view all the answers

Which factor is a main driver of underperformance in mergers and acquisitions?

<p>Overconfidence of CEOs (D)</p> Signup and view all the answers

Which type of acquisition has been shown to outperform others?

<p>Related acquisitions (A)</p> Signup and view all the answers

What is one key benefit of divestiture for a company?

<p>Refocusing strategic resources into core businesses (A)</p> Signup and view all the answers

How can divesting certain assets affect a corporation?

<p>It can diminish chances for long-term growth. (B)</p> Signup and view all the answers

What is one goal of corporate divestiture?

<p>To improve operating performance. (D)</p> Signup and view all the answers

What occurs when a firm increases its acquisitiveness?

<p>Performance tends to decline deal by deal. (B)</p> Signup and view all the answers

What can effective divestiture help a company achieve?

<p>Focus on its core business activities. (A)</p> Signup and view all the answers

What is the impact of acquisitions that are unrelated or diversifying?

<p>They are often less successful than related acquisitions. (C)</p> Signup and view all the answers

What does the BCG Matrix help manage in corporate portfolios?

<p>Resource allocation among business units. (C)</p> Signup and view all the answers

What is a primary goal of the shared-service organizations supporting both Disney Entertainment and ESPN?

<p>To create a more cost-effective and streamlined operation (C)</p> Signup and view all the answers

Which test evaluates if diversification must be directed towards attractive industries?

<p>Attractiveness Test (C)</p> Signup and view all the answers

What does the cost of entry test evaluate in the context of diversification?

<p>If the cost of entry capitalizes on all future profits (C)</p> Signup and view all the answers

Which matrix is primarily used as a strategy tool for portfolio planning in multi-business firms?

<p>GE-McKinsey Matrix (D)</p> Signup and view all the answers

How is industry attractiveness evaluated in the context of portfolio management?

<p>By examining market size and growth rate (D)</p> Signup and view all the answers

In the context of unrelated diversification, which of the following is considered a type of financial economy?

<p>Restructuring of assets (B)</p> Signup and view all the answers

What does the better-off test assess in corporate diversification?

<p>If the new unit gains a competitive advantage from its association (B)</p> Signup and view all the answers

What could be a reason why a company might face challenges in diversifying its portfolio?

<p>Inability to assess market trends accurately (A)</p> Signup and view all the answers

Which of the following is NOT a component of evaluating industry attractiveness?

<p>Employee engagement levels (C)</p> Signup and view all the answers

Which of the following is NOT a benefit of shared service organizations in the context of a corporate restructuring?

<p>Increasing competition among internal teams (A)</p> Signup and view all the answers

What was Kodak's primary concern regarding their investment in digital technology?

<p>Fear of cannibalizing core business (C)</p> Signup and view all the answers

In which year did Kodak's CEO invest aggressively in digital imaging R&D?

<p>1996 (D)</p> Signup and view all the answers

What significant investment strategy did Kodak undertake regarding its digital imaging?

<p>Establishing digital kiosks in partner stores (A)</p> Signup and view all the answers

What was a key factor contributing to Kodak's failure in the digital transition?

<p>Overvaluing their traditional products (A)</p> Signup and view all the answers

What does the term 'innovator’s dilemma' refer to in the context of Kodak?

<p>The struggle to continue investing in new technology while profitable products dominate (D)</p> Signup and view all the answers

How much did Kodak invest in research and development for digital imaging?

<p>$2 billion (B)</p> Signup and view all the answers

What challenges did Kodak face due to their commitment to specific product specifications for digital imaging?

<p>Challenges in changing business models (D)</p> Signup and view all the answers

What lesson can be learned from Kodak's downfall in the context of corporate strategy?

<p>Understanding market trends is crucial for success (C)</p> Signup and view all the answers

What type of business model did Kodak struggle to adjust while transitioning to digital imaging?

<p>Traditional film sales model (A)</p> Signup and view all the answers

Which of the following describes Kodak's strategy towards their digital investment?

<p>Rushed investments without solid market analysis (B)</p> Signup and view all the answers

Flashcards

Corporate Strategy

Decisions defining a firm's scope; includes vertical, product, and geographic scope.

Vertical Scope

Decisions about whether a firm produces inputs internally, outsources, or allies with others.

Transaction Cost Economics

Explains when firms are more efficient than markets in organizing transactions.

Vertical Integration Reasons

Reasons for a firm to control its supply chain: profitability, cost reduction, market power, risk reduction.

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Product Scope

Decisions about the range of products a firm offers.

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Diversification

Expanding into new products or markets.

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BCG Matrix

A tool for analyzing and prioritizing a corporation's business units in its portfolio.

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Growth Motives

Reasons for businesses to grow: profitability, cost reduction, market power, risk reduction, employee motivation.

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Merger

The joining of two independent companies to form a single, combined entity.

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Acquisition

The purchase of one firm by another, often through a hostile takeover.

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Related Acquisition

When a company acquires another firm in the same industry or with complementary products/services.

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Unrelated Acquisition

When a company acquires a firm in a completely different industry.

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Diversifying Acquisition

When a company acquires a firm to expand into new markets or product lines.

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Divestiture

The act of selling off parts of a company, such as unprofitable or risky businesses.

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Refocusing Strategic Resources

Concentrating resources on core businesses and activities that contribute to the company's long-term success.

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M&A for Vertical Scope

Mergers and acquisitions aimed at acquiring companies that are part of a company's supply chain.

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Parent Firms' Announcement Date

The date when a parent company announces a merger, acquisition, or divestiture.

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EBITDA Margin

A measure of profitability that shows how much profit a company generates from its operations before deducting interest, taxes, depreciation, and amortization.

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Unrelated Diversification

Expanding into new products or services that are unrelated to the company's existing businesses.

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Financial Economies

Cost savings or revenue increases that come from acquiring or merging with other corporations, restructuring their assets, or selling parts of them.

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Restructuring Assets

Changing the structure or ownership of a company's assets during a merger or acquisition to maximize value.

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Real Options

Investments in projects that offer flexibility to take advantage of future opportunities, like buying land for a potential project.

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Attractiveness Test

Diversification should target industries that are profitable or have the potential to become so.

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Cost of Entry Test

The cost of entering a new market should not be so high that it eats up all potential future profits.

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Better-Off Test

The new business should gain something from its connection to the existing company, or vice versa.

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Portfolio Planning Matrices

Tools that help companies analyze and manage their different businesses, showing their potential for growth and profitability.

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GE-McKinsey Matrix

A portfolio planning matrix that uses industry attractiveness and business unit competitive advantage to evaluate business units.

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BCG Growth-Share Matrix

A portfolio planning matrix that uses market growth rate and relative market share to evaluate business units.

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Kodak's Core Expertise

Kodak's expertise in analytical chemistry, which stemmed from its photo industry operations, provides it with valuable knowledge and capabilities applicable to the pharmaceutical industry.

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APIs: Active Pharmaceutical Ingredients

These are the key chemical components in medicines, which Kodak proposed to produce, leveraging its chemical expertise.

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Kodak's Pharmaceutical Strategy

Kodak's proposed strategy was to leverage its chemical expertise to enter the pharmaceutical industry by producing Active Pharmaceutical Ingredients (APIs).

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Market Growth & Investment

If a market is expected to grow significantly and a company has potential in that market, it might be a good idea for the company to invest.

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Kodak's Dilemma

Kodak, a leader in film photography, faced the challenge of adapting to the rise of digital cameras. They invested heavily in digital imaging technology but were hesitant to fully embrace it, fearing it would cannibalize their core film business.

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Innovator's Dilemma

A situation where established companies struggle to innovate and adapt to new technologies that disrupt their existing markets. They often prioritize protecting their current business model, even if it means losing out on future opportunities.

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Cannibalizing Core Business

When a company introduces a new product or service that competes directly with its existing products, potentially reducing sales of those established offerings.

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Fear of Killing the Golden Goose

A company's reluctance to embrace new technologies or products that might threaten its existing profitable business, even if those changes are necessary for long-term survival.

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Kodak's Investment in Digital

Kodak invested over $2 billion in research and development for digital imaging technology, demonstrating their awareness of the changing market. However, their commitment to traditional film products hindered their full embrace of digital.

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Kodak's Business Model

Kodak’s business model remained largely unchanged in the face of the digital revolution. They failed to adapt quickly to the changing market dynamics and consumer preferences.

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Kodak's Advantix Preview

Kodak’s attempt to bridge the gap between film and digital by introducing a film and camera system called Advantix. The company invested $500 million in this project, but it ultimately failed to gain traction in the market.

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Kodak's Digital Kiosks

Kodak deployed 10,000 digital kiosks in partner stores to offer digital printing services. This was an attempt to capitalize on the increasing digital photography trend. However, it was too little too late.

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Price Points and Specifications

Kodak committed to specific price points and product specifications for their digital products too early. This made it difficult to adjust their strategy based on market feedback and competitor pressure.

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Kodak's Inflexibility

Kodak struggled to adapt its business model and pricing due to its initial commitments. This inflexibility ultimately contributed to their decline in the face of digital disruption.

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Study Notes

Corporate Strategy Lecture Notes

  • Corporate strategy defines where a firm competes

  • Business strategy defines how a firm competes within a particular area of business

  • Corporate strategy decisions define the scope of the firm

    • Vertical scope → make, buy, or ally
    • Product scope → diversification
    • Geographic scope → internationalization

  • Corporate strategy has three dimensions: vertical, product, and geographic scope

  • Reasons for vertical integration include: increasing profitability, lower costs, increasing market power, and motivating employees and reducing risk

  • Transaction cost economics (TCE) helps explain when firms vertically integrate (when transaction costs are high)

    • Core questions:
      • Why organize transactions in firms when markets are efficient?
      • What is the comparative efficiency of markets versus firms?
    • Answer: Firms choose governance structures (market or firm) that minimize transaction costs
    • Types of transaction costs:
      • Mundane: describing, communicating, negotiating, transferring goods, verifying quality, valuing and paying for goods
      • Lawful: breaking informal or relational contracts
      • Blatant: violating formal contracts or breaking the law

  • Vertical integration is a firm's ownership and control of multiple vertical stages in the supply chain of a product.

  • Reasons for vertical integration: high asset-specific investments; hold-up behavior (opportunism)

  • Types of asset-specificity: physical, human, and location

  • Benefits and risks of vertical integration:

    • Benefits: protection against opportunistic behavior, better scheduling, securing critical supplies and distribution channels
    • Risks: reduced flexibility, legal repercussions

  • Taper integration: a firm is backwardly integrated but also relies on outside-market firms for some of its supplies; and/or a firm is forwardly integrated but also relies on outside-market firms for some of its distribution

  • Dual or concurrent sourcing: solve cost-quality tensions, best of both worlds; absorptive capacity

  • Product scope → diversification

    • Questions on diversification:
      • Is specialization or diversification better?
      • Is there an optimal degree of diversification?
      • When does diversification create rather than destroy value?
      • When will diversification lead to competitive advantage?

  • Types of diversification:

    • Single business → greater than 95% of revenue from one business
    • Dominant business → between 70% and 95% of revenue from one business
    • Related diversification → less than 70% of revenue from the dominant business, but links between businesses exist.
    • Unrelated diversification → less than 70% of revenue from the dominant business, no common link between businesses

  • Motives for diversification:

    • Growth: escaping stagnant or declining industries
    • Risk spreading: more stable cash flow for managers; shareholders can hold a diverse portfolio at a lower cost
    • Value creation: diversification to attractive industries; synergies: sharing resources and capabilities to gain efficiencies

  • Economies of Scope: Using a resource across multiple activities

  • Types of relatedness in diversification:

    • Operational Relatedness – sharing activities between businesses
    • Corporate Relatedness – transferring competencies across businesses

  • Three tests of diversification:

    • Attractiveness: directed towards attractive industries
    • Cost of entry: not capitalizing all future profits
    • Better-off: new unit gains competitive advantage from its link with the company; or vice-versa (i.e. synergies)

  • Portfolio planning matrices:

    • GE-McKinsey Matrix: industry attractiveness x business unit strength
    • BCG Growth-Share Matrix: market growth x relative market share

  • Sources of value creation and costs:

    • Value: reduction in competitive intensity, lower costs, increased differentiation
    • Costs: integration failure, reduced flexibility, potential for legal repercussions

  • Mergers & Acquisitions (M&A): (merger → joining of two firms into one; acquisition → one firm buys another)

    • Extended review suggests:
      • Related acquisitions outperform unrelated ones
      • Performance declines as acquisitiveness increases
      • CEO overconfidence drives underperformance

  • Kodak Case Study:

    • Early success with film cameras; 90%+ market share in the 1970s.

    • Failed transition to digital imaging due to management's inability to see digital photography as a disruptive technology; unwillingness to see digital photography as a disruptive technology

    • Kodak focused on printing and developing digital images, which didn't match customer needs.

    • Kodak developed pharmaceuticals – knowledge of chemicals used in film

    • Kodak acquired Ofoto – photo sharing platform - did not capitalize on opportunities

    • Kodak employed a "razor and blade" business model, capturing high profits from consumable supplies compared to cameras

    • Kodak had issues transitioning to digital, missed out on opportunities

    • Diversification of Kodak into APIs, chemical, and healthcare avenues.

  • What is next?

    • Analyzing the Amazon case
    • Utilizing online tutorials and materials provided
    • Completing assignments on K2

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Corporate Strategy Lecture 7 PDF

Description

This quiz covers key concepts in corporate strategy, focusing on how firms define their competitive scope through vertical, product, and geographic dimensions. Explore the reasons for vertical integration and the role of transaction cost economics in strategic decision-making. Test your understanding of these fundamental ideas in the context of business strategy.

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