Chapter 7 DQs and Responses

1. How does horizontal growth differ from vertical growth as a corporate strategy? from concentric
diversification?

Students often confuse these three strategies. Horizontal growth is the expanding of a firm's activities into other
geographic regions and/or by increasing the range of products and services offered to current markets. It often
involves the acquisition of another firm in the same industry (an example of external growth), but it could also be
through the expansion of a firm's products in its current markets (e.g., through line extensions) or expansion into
another geographic region (an example of internal growth). One example of external horizontal integration would
be if Anheuser-Busch bought Coors. An internal example was Coors' expansion into the eastern U.S. Vertical
growth, in contrast, involves a firm's taking over a function previously performed by a supplier or a distributor. This
would typically involve the addition of activities in other industries either forward (downstream) or backward
(upstream) on the industry value chain of current products or services. The additions are primary justified in terms
of support of the current product lines regardless of their being in other industries (and thus can be argued to be
diversification). Concentric diversification, in contrast, is the addition of products or divisions which are related to
the corporation's main business, but are added because of the attractiveness of other industries rather than because
they support the activities of the current product lines. The additions may be through acquisition or through internal
development. The firm buys or develops another division which is similar to its present product-line. Anheuser-
Busch's diversification into snack foods (Eagle Snacks) to complement its line of beers was an example of
concentric diversification. The products are not alike, but have a "common thread" relating them. If Coca Cola
bought PepsiCo, it would be an example of horizontal integration. If it purchased its distributors, this would be an
example of forward vertical integration. Its acquisition of Taylor Wines, however, was an example of concentric
diversification.

2. What are the tradeoffs between an internal and an external growth strategy? Which approach is best as
an international entry strategy?

As pointed out in the text, research suggests that there is no significant sales or profits advantage to either external or
internal growth. There are, however, some tradeoffs for each approach. Here are some of them:

Internal Growth

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 Pros Cons

 More likely to be based on some proprietary
development giving competitive advantage.
 More likely to fit well with current business
units/products
 Can finance slowly out of returned earnings.
 If plan no good, can always cut losses before in
too deep.
 May take a long time to develop a new product
or new concept.
 May be hard to get current managers to try
something new.
 May ignore other uses of money with quicker
return.
 Favored program may take time away from
current businesses

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External Growth

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 Pros Cons
 Can grow quickly.
 Good way to use financial leverage to boost  All or nothing gamble.
EPS.  Need a lot of money and/or financial moxie to do
 Don't have to build anything from scratch. it right.
 Can generate a lot of excitement on Wall Street  Can purchase someone else's problems.
and boost stock price.  50% of all acquisitions fail to achieve the
purchaser's objective.

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The same list of pros and cons fit an international entry strategy. Internal growth in the form of a green-
field development has an additional con of sometimes going against a particular country's laws. External
growth in the form of acquisitions has an additional con of running up against a country's laws against
foreigners purchasing total control of a company important to national interests.

3. Is stability really a strategy or is it just a term for no strategy?

An argument can be made that stability is not really a strategy in itself, but is just a pause between
strategies. Since one way to view strategy is as a direction the corporation is taking in order to reach its
objectives, standing still has no direction and thus is not a strategy. The text takes the position, however,
that stability is a strategy in itself. Just as no decision is the same as making a decision, it is argued that
even though stability may be viewed as not choosing a strategy, it is therefore a strategy by default.
Stability may be a very appropriate long-term strategy for a small business in which the owner/manager
does not want the corporation to grow beyond his/her abilities to manage it personally and is very happy
with the level of life style the business provides. Typically, however, stability is perceived only as a viable
short-term strategy while strategic managers are waiting for key factors needed for growth to fall into place.
Nevertheless, to the extent that stability helps explain the movement of a corporation toward its objectives,
it deserves to be called a strategy.

4. Compare and contrast SWOT analysis with portfolio analysis.

In comparing these two approaches, they are alike in a number of ways. They are both attempts to
summarize the key strategic factors coming out of an in-depth analysis of the external and internal
environment of a corporation or business unit. They are also easy to remember buzz-words for use in the
situational analysis. Terms like S.W.O.T., cash cows, and dogs help remind the student that the basis of
strategic management is environmental assessment.

In contrasting these two approaches, they are different in terms of what they stand for. S.W.O.T. is merely
an acronym for Strengths, Weaknesses, Opportunities, and Threats. It is not really a technique to aid in
situation analysis. It merely is a buzzword to help a person remember to search for strategic variables.
Portfolio analysis, in contrast, is a term for a whole series of different techniques for analyzing internal and
external environmental factors. Neither is really a substitute for the other and can actually complement
each other.

5. How is corporate parenting different from portfolio analysis? How is it alike? Is it a useful
concept in a global industry?

The basic difference between these two approaches to corporate strategy lies in the questions they attempt
to answer. According to the text, portfolio analysis attempts to answer the following two questions:

• How much of our time and money should we spend on our best products and business units in
order to ensure that they continue to be successful?

• How much of our time and money should we spend developing new costly products, most of
which will never be successful?

The basic theme of portfolio analysis is its emphasis on cash flow. Portfolio analysis puts corporate
headquarters into the role of an internal banker. In portfolio analysis, top management views its product
lines and business units as a series of investments from which it expects to get a profitable return. The
product lines/business units form a portfolio of investments which top management must constantly juggle
to ensure the best return on the corporation's invested money.

Corporate parenting attempts to answer two similar, but different questions:

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 • What businesses should this company own and why?

• What organizational structure, management processes, and philosophy will foster superior
performance from the company's business units?

Portfolio analysis attempts to answer these questions by examining the attractiveness of various industries
and by managing business units for cash flow, that is, by using cash generated from mature units to build
new product lines. Unfortunately, portfolio analysis fails to deal with the question of what industries a
corporation should enter or with how a corporation can attain synergy among its product lines and business
units. As suggested by its name, portfolio analysis tends to primarily take a financial point of view and
views business units and product lines as if they were separate and independent investments. Corporate
parenting, in contrast, views the corporation in terms of resources and capabilities that can be used to build
business unit value as well as generate synergies across business units. The central job of corporate
headquarters is not to be a banker, but to coordinate diverse units to achieve synergy. This is especially
important in a global industry in which a corporation must manage interrelated business units for global
advantage. Corporate parenting is similar to portfolio analysis in that it attempts to manage a set of diverse
product lines/business units to achieve better overall corporate performance.