Question 1

Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery products at its coffee cafes. The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

Accepted Answer

Often an acquiring firm and its target may achieve a higher level of sales growth together than either company could on its own. For example, Starbucks recently acquired a small bakery chain, La Boulange, and intends to sell La Boulange products at Starbucks cafes nationally. In leveraging Starbucks national retail chain, La Boulange will be able to dramatically expand its market exposure and sales much beyond its current 19-store West Coast market.

Question 2

It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

Question 3

For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation, it must at least create superior customer value and it must be difficult to imitate.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

Question 4

Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

Accepted Answer

Despite the potential benefits of portfolio models, there are also some notable downsides. First, they compare SBUs on only two dimensions, making the implicit but erroneous assumption that (1) those are the only factors that really matter and (2) every unit can be accurately compared on that basis.

Question 5

In analyzing the Cabot Corporation portfolio using the BDG matrix, the company decided to shift away from its core competence to unrelated areas of its business. The ensuing decline in assets indicated that it needed to return to its core competence in order to grow.

Accepted Answer

Cabot Corporation supplies carbon black for the rubber, electronics, and plastics industries. Following the BCG matrix, Cabot moved away from its cash cow, carbon black, and diversified into stars such as ceramics and semiconductors in a seemingly overaggressive effort to create more revenue growth for the corporation. The company return on assets declined as the firm shifted away from its core competence to unrelated areas. The portfolio model failed because it pointed the company in the wrong direction (away from its core business) in an effort to spur growth. Recognizing its mistake, Cabot Corporation returned to its mainstay carbon black manufacturing and divested unrelated businesses. Today the company is a leader in its field with 3.6 billion USD in revenues in 2014.

Question 6

Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

Accepted Answer

The Boston Consulting Group (BCG) growth-share matrix is among the best known of the portfolio management tools. In the BCG approach, each of the strategic business units (SBUs) of the firm is plotted on a two-dimensional grid in which the axes are relative market share and industry growth rate.

Question 7

Loews Corporation, a conglomerate with 15 billion USD in revenues, competes across several industries including oil and gas, tobacco, watches, insurance, and hotels. Its related diversification strategy is to buy low and sell high as in the example where they bought six oil tankers for 5 million USD and then sold them eight years later for 50 million USD.

Accepted Answer

With unrelated diversification, few benefits are derived from horizontal relationships (the leveraging of core competencies or the sharing of activities across business units within a corporation). Instead, potential benefits can be gained from vertical (or hierarchical) relationships in which synergies are created from the interaction of the corporate office with the individual business units. There are two main sources of such synergies. First, the corporate office can contribute to parenting and restructuring of (often acquired) businesses. Second, the corporate office can add value by viewing the entire corporation as a family or portfolio of businesses and allocating resources to optimize corporate goals of profitability, cash flow, and growth.

Question 8

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

Accepted Answer

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities (e.g., production and distribution facilities). This enables a corporation to benefit from economies of scope.

Question 9

The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk.

Accepted Answer

One of the purposes of diversification is to reduce the risk that is inherent in the variability in revenues and profits of a firm over time. If a firm enters new products or markets that are affected differently by seasonal or economic cycles, its performance over time will be more stable. For example, a firm that manufactures lawn mowers may diversify into snow blowers in order to even out its annual sales.

Question 10

Diversified public corporations, such as Berkshire Hathaway and Virgin Group, create value through management expertise by improving plans and budgets. This is an example of a related diversification strategy.

Accepted Answer

One of the purposes of diversification is to reduce the risk that is inherent in the variability in revenues and profits of a firm over time. If a firm enters new products or markets that are affected differently by seasonal or economic cycles, its performance over time will be more stable. For example, a firm that manufactures lawn mowers may diversify into snow blowers in order to even out its annual sales.

Question 11

Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

Accepted Answer

Portfolio management helps achieve a better understanding of the competitive position of an overall portfolio of businesses, to suggest strategic alternatives for each of the businesses, and to identify priorities for the allocation of resources.

Question 12

Risk reduction by itself is usually a means to create shareholder value, regardless of the overall diversification strategy of the firm.

Accepted Answer

Risk reduction in and of itself is rarely viable as a means to create shareholder value. It must be undertaken with a view of the overall diversification strategy of the firm.

Question 13

Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change.

Accepted Answer

Restructuring is a means by which the corporate office can add value to a business. Here, the corporate office tries to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, reward systems, and so forth.

Question 14

With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with outside stakeholders.

Accepted Answer

With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with the individual business units.

Question 15

Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities among businesses in the corporation such as production.

Accepted Answer

Related diversification enables a firm to benefit from economies of scope, which are cost savings that are derived from leveraging core competencies or sharing related activities among businesses in a corporation. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently.

Question 16

One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it.

Question 17

Sharing activities across business units can provide two primary benefits: cost savings and cost enhancements.

Accepted Answer

Corporations also can achieve synergy by sharing activities across their business units. These include value-creating activities such as common manufacturing facilities, distribution channels, and sales forces. Sharing activities can provide two primary payoffs: cost savings and revenue enhancements.

Question 18

IBM leverages its competencies in computing technology to provide health care services. This is an example of a core competence being used across dissimilar businesses within the same corporation.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. With Watson, the unique computer developed by IBM that processes natural language, they were able to leverage their computing expertise (core competence) to solve important medical problems and thus become medical experts.

Question 19

Core competencies do not create value in a business.

Accepted Answer

Core competencies may also be viewed as the glue that binds existing businesses together or as the engine that fuels new business growth. They reflect the collective learning in organizations such as how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services.

Question 20

Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of the company core competency in research and development.

Accepted Answer

For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: it must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and it must be difficult for competitors to imitate or find substitutes for it. Every value-chain activity has the potential to provide a viable basis for building on a core competence. At Gillette, scientists developed the Fusion and Mach 3 after the introduction of the tremendously successful Sensor System because of a thorough understanding of several phenomena that underlie shaving. These include the physiology of facial hair and skin, the metallurgy of blade strength and sharpness, the dynamics of a cartridge moving across skin, and the physics of a razor blade severing hair. Such innovations are possible only with an understanding of such phenomena and the ability to combine such technologies into innovative products. Customers are willing to pay more for such technologically differentiated products.

Quiz 6: Corporate-Level Strategy: Creating Value Through Diversification

Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery products at its coffee cafes. The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.

For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation, it must at least create superior customer value and it must be difficult to imitate.

Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

In analyzing the Cabot Corporation portfolio using the BDG matrix, the company decided to shift away from its core competence to unrelated areas of its business. The ensuing decline in assets indicated that it needed to return to its core competence in order to grow.

Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk.

Diversified public corporations, such as Berkshire Hathaway and Virgin Group, create value through management expertise by improving plans and budgets. This is an example of a related diversification strategy.

Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

Risk reduction by itself is usually a means to create shareholder value, regardless of the overall diversification strategy of the firm.

Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change.

With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships; that is, the creation of synergies from the interaction of the corporate office with outside stakeholders.

Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities among businesses in the corporation such as production.

One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

Sharing activities across business units can provide two primary benefits: cost savings and cost enhancements.

IBM leverages its competencies in computing technology to provide health care services. This is an example of a core competence being used across dissimilar businesses within the same corporation.

Core competencies do not create value in a business.

Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of the company core competency in research and development.