Lecture 7 - Corporate Strategy Overview
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Questions and Answers

What are mundane transaction costs primarily related to?

  • Costs of violations of contracts
  • Costs incurred due to legal disputes
  • Costs of describing, communicating, and negotiating about goods (correct)
  • Costs associated with quality assurance

    • What does Oliver Williamson's Nobel Prize recognize in relation to economic governance?

  • The importance of transaction costs in property rights
  • The legal implications of informal agreements
  • The analysis of vertical integration's impact on firms
  • Understanding the boundaries of firms and their governance (correct)

    • How does vertical integration occur according to transaction cost economics?

  • When a firm has low transaction costs
  • When market competition is extremely low
  • When transaction costs are perceived as manageable
  • When transaction costs are high (correct)

    • What type of transaction costs arise when a party violates a formal contract?

    <p>Blatant transaction costs</p> Signup and view all the answers

    What is the main purpose of transaction cost economics according to Coase's contributions?

    <p>To clarify the role of property rights</p> Signup and view all the answers

    What defines a single business diversification strategy?

    <p>95% or more of revenue comes from a single business.</p> Signup and view all the answers

    Which type of diversification involves businesses that have no links between them?

    <p>Unrelated diversification</p> Signup and view all the answers

    What is one of the primary motives for a company to pursue diversification?

    <p>To escape stagnant or declining industries.</p> Signup and view all the answers

    What are economies of scope primarily concerned with?

    <p>Utilizing a resource across multiple activities more efficiently.</p> Signup and view all the answers

    Which resource type includes distribution networks and customer databases?

    <p>Tangible resources</p> Signup and view all the answers

    What is a key reason firms choose to vertically integrate?

    <p>To protect against opportunistic behavior</p> Signup and view all the answers

    What does the term 'hold-up behavior' refer to in the context of vertical integration?

    <p>Opportunistic actions that exploit incomplete contracts</p> Signup and view all the answers

    Which asset specificity type pertains to the unique nature of investments that are more valuable in one transaction than repurposed elsewhere?

    <p>Transaction asset-specificity</p> Signup and view all the answers

    What was the primary aim of Kodak's acquisition of Ofoto in 2001?

    <p>To create a life networking platform for sharing pictures</p> Signup and view all the answers

    What is one major risk associated with vertical integration?

    <p>Reduced flexibility in operations</p> Signup and view all the answers

    How can taper integration benefit a firm?

    <p>By allowing dual sourcing to manage cost-quality challenges</p> Signup and view all the answers

    In what area did Kodak hold significant expertise prior to its downfall?

    <p>Pharmaceuticals and chemical knowledge</p> Signup and view all the answers

    What might be a consequence of decreasing costs through vertical integration?

    <p>Reduction in overall product quality</p> Signup and view all the answers

    How did Kodak's early strategy with digital photo sharing conflict with market trends?

    <p>It focused on printing rather than sharing experiences.</p> Signup and view all the answers

    What trend did Kodak miss when developing its digital strategy?

    <p>The rise of smartphone photography</p> Signup and view all the answers

    In the situation described with the coal mine and electricity producer, what advantage does the coal mine have?

    <p>Ability to renegotiate contracts</p> Signup and view all the answers

    What was a key factor in Kodak's financial decline between 2000 and 2010?

    <p>A steady decline in the market for chemical imaging</p> Signup and view all the answers

    What does corporate strategy primarily involve?

    <p>Defining the scope of the firm’s operations</p> Signup and view all the answers

    Which of the following markets did Kodak diversify into?

    <p>Health diagnostics and pharmaceuticals</p> Signup and view all the answers

    How did Kodak's focus on printing impact its potential for innovation?

    <p>It limited Kodak's ability to adapt to digital trends.</p> Signup and view all the answers

    What was one of the major consequences of Kodak not adapting to digital trends?

    <p>A significant loss of market share</p> Signup and view all the answers

    What characterizes related constrained diversification?

    <p>All businesses share product, technological, and distribution linkages.</p> Signup and view all the answers

    Which of the following best describes the idea of economies of scope?

    <p>Sharing activities among businesses to create value.</p> Signup and view all the answers

    What is the difference between related constrained and related linked diversification?

    <p>Related constrained has strong links; related linked has limited links.</p> Signup and view all the answers

    What are core competencies in the context of diversification?

    <p>Unique capabilities that give competitive advantage.</p> Signup and view all the answers

    How can firms achieve economies of scope?

    <p>By sharing activities and transferring core competencies.</p> Signup and view all the answers

    Which of the following is NOT an example of a related linked diversification?

    <p>A company offering both household appliances and fashion apparel.</p> Signup and view all the answers

    What makes it difficult for competitors to imitate a firm's economies of scope?

    <p>The complex relationships between different business units.</p> Signup and view all the answers

    Which of the following is an example of operational relatedness?

    <p>Leveraging customer data analytics across multiple brands.</p> Signup and view all the answers

    What is a merger?

    <p>The joining of two independent firms to form a combined entity</p> Signup and view all the answers

    Which type of acquisitions tend to outperform others?

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

    What is a significant factor contributing to declining performance in mergers and acquisitions as a firm increases its acquisitiveness?

    <p>CEO overconfidence</p> Signup and view all the answers

    What is one of the benefits of divesting unprofitable and risky businesses?

    <p>It reduces costs and helps refocus resources</p> Signup and view all the answers

    Which of the following is a primary goal of placing certain assets in independent businesses?

    <p>To preserve opportunities for future growth</p> Signup and view all the answers

    What effect might excessive management of M&As have on corporate growth?

    <p>It diminishes chances for long-term growth</p> Signup and view all the answers

    What is a primary purpose of a divestiture?

    <p>To generate cash and improve performance</p> Signup and view all the answers

    What trend has been observed in stock returns and operating performance in M&As?

    <p>Related acquisitions outperform unrelated ones</p> Signup and view all the answers

    Study Notes

    Lecture 7 - Corporate Strategy

    • Corporate strategy focuses on where a firm competes
    • Business strategy focuses on how a firm competes within a specific area of business
    • Corporate strategy involves decisions defining 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:
      • Transaction cost economics
    • Types of diversification:
      • Single business
      • Dominant business
      • Related diversification
      • Unrelated diversification
    • Motivations for diversification:
      • Growth (escaping stagnant/declining industries)
      • Risk spreading (improving cash flow for managers)
      • Value creation (synergies and economies of scope)
    • Economies of scope: Sharing resources across multiple activities, resulting in more efficient use of those resources.
    • Economies of scope examples:
      • Tangible resources (distribution networks, sales forces)
      • Intangible resources (brands, reputation)
      • General management capabilities (motivating, developing managers, cost control, strategic planning)

    Vertical Scope

    • Transaction Cost Economics (TCE): Firms vertically integrate when transaction costs are high
      • Core questions for TCE:
        • Why do transactions happen within firms when markets are efficient?
        • What’s the relative efficiency of markets vs. firms?
        • Answer: Governance structures (markets or firms) are chosen to minimize transaction costs
    • Definition of Transaction Costs:
      • Mundane Transaction Costs: Costs of describing, negotiating, transferring, verifying quality, and valuing goods
      • Lawful Transaction Costs: Costs from breaking informal & relational contracts
      • Blatant Transaction Costs: Costs from violating formal contracts or breaking the law
    • Reasons for Vertical Integration, based on High Asset-Specific Investments:
      • Hold-up Behaviour: Opportunistic behaviour by one party
        • Example: A coal mine and an electricity producer
      • Physical asset-specificity, human asset-specificity, location asset specificity,
    • Benefits of Vertical Integration: - Protection against opportunistic behavior, better scheduling and planning; securing critical supplies and distribution channels.
    • Risks of Vertical Integration: Reduced flexibility, potential for legal repercussions, increasing costs (no exposure to market competition), decreasing quality (no exposure to market competition).
    • Taper Integration: A firm is backwardly integrated but also relies on outside markets for some supplies, or a firm is forwardly integrated but also relies on outside markets for some distribution

    Product Scope

    • Some questions on diversification:
      • Is specialization or diversification better?
      • Is there an optimal level of diversification?
      • When does diversification create rather than destroy value?
      • When does diversification lead to a competitive advantage?
    • Types of Diversification:
      • Single business (95% or more of revenue)
      • Dominant business (70-95% of revenue)
      • Related diversification (less than 70% of revenue - links between businesses exist)
      • Unrelated diversification (less than 70% of revenue - no links between businesses)
    • Motivations for diversification (growth, risk spreading, value creation)
    • Economies of Scope (sharing activities, core competencies, corporate relatedness)
    • Three Tests of Diversification: Attractiveness, Cost of entry, Better-off test
    • Diversification & Value Creation: Examples of how firms create economies of scope (e.g., sharing activities), transfer core competencies, and improve efficiency.
    • Operational Relatedness: Sharing Activities between Businesses
    • Corporate Relatedness: Transferring Core Competencies into Businesses
    • Case Example - The Walt Disney Company (businesses and units)
    • Unrelated diversification: can create value through asset restructuring or acquiring other corporations or businesses
    • Acquisition considerations: Potential sources of value creation, potential sources of costs and risks

    Managing Corporate Portfolios

    • Portfolio Planning Matrices (tool to facilitate portfolio management for firms with multiple businesses).
      • Show the positioning and value of the different businesses
    • Examples of matrices
      • GE-McKinsey Matrix
      • BCG Growth-Share Matrix
    • Industry Attractiveness axis (combines market size, market growth, profitability, cyclicality, inflation recovery and international potential)
    • Business Unit Competitive Advantage axis (combines market share, relative position with competitors in quality, technology, manufacturing, distribution, marketing and cost)
    • Different business scenarios (growth/investment, hold/protect, harvest/divest)
    • BCG Matrix (categorizing businesses based on market growth rate and relative market share)
    • Question Mark, Star, Cash Cow, Dog
    • Merger (joining of two independent firms)
    • Acquisition (purchase or hostile takeover)
    • Sources of Value Creation (V) and Costs (C):
      • V: Reduction in competitive intensity, lower costs, increased differentiation
      • C: Integration failure, reduced flexibility, increased potential for legal repercussions
    • Mergers & Acquisitions (M&A) literature review: Consistent predictors of short-term and long-term stock return and operating performance of M&A deals.
      • Related acquisitions outperform unrelated acquisitions
      • Performance declines as acquisitiveness increases
    • Divestiture (of unprofitable, risky businesses): Recreating value by refocusing resources to core businesses and reducing costs
    • Placing certain assets in independent businesses: Preserving growth opportunities, improving company focus on core business, generating cash, and improving operational performance

    Kodak Case Study Discussion

    • Early success of Kodak cameras
    • Kodak's 1895 first pocket camera
    • Kodak's dominant position in the film market
    • The rise of digital photography & Kodak's reaction
    • Reasons for the failure in transitioning to digital photography
    • Kodak's late investment - more than $2 billion in R&D
    • Diversification attempts
    • Acquisition of photo-sharing site, Ofoto
    • Kodak's filing for bankruptcy in 2012
    • Factors that could have contributed to Kodak's decline. Potential reasons for its failure:
      • Fear of cannibalizing existing business, reluctant to disrupt existing business strategy
      • Inconsistent management decisions & response to the changing market
      • Not reacting quickly enough to changes in technology

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    Corporate Strategy Lecture 7 PDF

    Description

    This quiz covers the key concepts of corporate strategy as discussed in Lecture 7. It addresses the scope of the firm, the dimensions of corporate strategy, types of diversification, and the motivations behind these strategies. Test your understanding of how businesses compete and position themselves in various markets.

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