 Parents around the world are happy to by a toy to get children away from mobile

devices, computer, etc.

 They also need to internationalize its management and not have its headquarter in a
small town in Denmark.

Chapter 6 – Business strategy: Differentiation, Cost Leadership, and Blue Oceans

6.1 Business-level strategy: How to compete for advantage

 Business-level strategy: goal-directed actions managers take in their quest for

competitive advantage when competing in a single product market. Managers need to
keep in mind that both industry and firm effects determine competitive advantage.
Formulation through four questions:
 Who – which customer segment will we serve?
 What customer needs will we satisfy?
 Why do we want to satisfy them?
 How will we satisfy our customers’ needs?
 Strategic position: strategic profile based on value creation and cost determined by
the business-level strategy in a specific product market. To achieve a strategic
position, managers make strategic trade-offs – choices between a cost or value
position.
 Business-level strategy is more likely to lead to competitive advantage if a firm has
a clear strategic profile, either as differentiator or a low-cost leader.
 Differentiation strategy: generic business strategy that seeks to create higher value
for customers than the value that competitors create
 Cost-leadership strategy: generic business strategy that seeks to create the same or
similar value for customers at a lower cost.
 Scope of competition: the size- narrow or broad- of the market in which a firm
chooses to compete; essential for a manager to define.
 Focused cost-leadership strategy: same as cost leadership, but with a narrow focus
on a niche market
 Focused differentiation strategy: same as differentiation strategy, but with a narrow
focus on a niche market
 Possible problem: being stuck in the middle of different strategic positions which
leads to inferior performance and competitive disadvantage

6.2. Differentiation Strategy: Understanding value drivers

 Goal: add unique features that increase perceived value in the minds of consumers so
they are willing to pay a higher price.
 This can lead to competitive advantage, if the economic value (V-C) is greater than
that of its competitors.

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  Managers also need to control costs, because rising costs reduce economic value.
There are two pricing options:
 Premium pricing
 Similar price as competitors, but higher perceived value -> higher market share
 Economies of scale: decreases in costs per unit as output increases
 Economies of scope: savings that come from producing two or more outputs at less
costs than producing each output individually, despite using the same resources and
technology
 Most important value drivers managers can use:
 Product features: e.g. possible through high R&D capabilities
 Customer service
 Complements: add value to product when used with complement in tandem
 Relate to firm’s expertise and organization of value chain and can only lead to
competitive advantage if their increase in value exceeds increase in costs

6.3. Cost- Leadership Strategy: Understanding cost drivers

 Goal: reduce cost below that of its competitors while offering an adequate value by
optimizing value chain activities to achieve a low cost position.
 Competitive advantage can be achieved if economic value (V-C) is greater than that of
its competitors
 Two pricing options:
 Charge lower price than competitors: gain higher profits from higher volume
 Charge similar prices to competitors: gain from higher profit margin per unit
 Most important cost driver managers can manipulate:
 Cost of input factors: lower cost of raw material, capital, labor, IT services, etc.
 Economies of scale: might be in position to reap economies of scale possible
trough:
o Spreading fixed cost over larger output
o Employing specialized systems and equipments
o Taking advantage of certain physical properties (MES- minimum
efficient scale-: output range needed to bring down the cost per unit as
much as possible allowing a low-cost position-> sometimes not
possible in diseconomies of scale: increases in cost per unit when
output increases)
 Learning-curve effects: learning curves go down, because it takes less time to
be more efficient. The steeper the curve, the more learning has taken place.
Learning-curve effect is driven by increasing cumulative output within the
existing technology over time. Learning effects differ from economies of scale:
o Differences in timing: effects occur over time while economies of scale
occur at one point in time. Moreover there are no diseconomies of
learning.
o Differences in complexity: sometimes learning effects are minimal,
while effects of economies of scale are significant and vice versa.

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  Economies of learning allow movement down a given learning curve
which leads to a competitive advantage
 Experience-curve effects: change in underlying technology while holding
cumulative output constant. Process innovation may initiate a steeper curve.
Driving down per unit cost is possible by leapfrogging to a steeper learning
curve.

6.4 Business-level strategy and the five forces: Benefits and risks

 Differentiation strategy:
 Benefits:
o reduces rivalry among competitors
o threat of entry is reduced
o reduces threat of suppliers, due to larger economic value
o powerful buyers are less likely to emerge
 Risks:
o Overshoot differentiated appeal by adding product features that raise
cost and not value
o Costs of providing uniqueness should not raise above customers’
willingness to pay
 Cost-leadership strategy:
 Benefits:
o Protected from other competitors, because of having the lowest cost
o Isolated from threat of powerful suppliers, because it can absorb price
increases more easily
o Defend substitutes by further lowering its prices
 Risks:
o Threat of new entrants with more expertise which erodes cost-leaders
margins due to loss in market share
o Powerful buyers and suppliers may reduce margin so much that cost-
leader cannot cover cost of capital
o Competitors that have same strategy, but implement it more efficiently
o Customers may focus on non-price attributes
 Effectiveness of strategy depends on how well strategy leverages internal strengths
while mitigating its weaknesses and how well the firm exploits external
opportunities while avoiding external threats

6.5. Blue Ocean Strategy: Combining differentiation and cost-leadership

 Blue Ocean strategy: Business-level strategy that successfully combines

differentiation and cost-leadership activities using value innovation to reconcile the
inherent trade-offs (blue ocean- untapped market space)
 Two possible pricing options:
 Higher price than cost-leader: gain trough higher value and greater margin

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  Lower price than cost-leader: gain market share and make up loss in margin
through increased sales
 Value innovation: simultaneous pursuit of differentiation and low cost in a way that
creates a leap in value for both the firm and the consumers, considered a cornerstone
of blue ocean strategy
 Eliminate: Which factors that are taken for granted should be eliminated?
Costs
 Reduce: Which factors should be reduced well below industry standard?
 Raise: Which factors should be raised well above industry standard? Value
 Create: Which factors should be created that the industry has never offered?
 Stuck in the middle: having neither a clear differentiation or cost-leadership profile
 Value curve: horizontal connection of the points of each value on the strategy canvas
that helps strategists diagnose and determine courses of action.
 Differentiation strategy: all scores go along with relatively high price
 Cost-leadership: low scores along bottom of strategy canvas
 Lack of effectiveness can be seen through a zigzag line on the strategy canvas

6.6- Implications for the strategist

 Only when well-formulated a business-level strategy enhances a firm’s chances of

obtaining superior performance

6.7. Mini-case 14: Cirque du Soleil- Searching for a New Blue Ocean

 Eliminate:
 Animal shows
 Star performers
 Standard three-ring venues
 Aisle concession sales
 Reduce:
 Clown performance and shifted humor from slapstick to intellectual style
 Raise:
 Quality by signature acrobatic and aerial stunts
 Glamorized the circus tent and increased level of comfort -> older audience
 Create:
 New entertainment experience by combining fun with sophistication and high-
quality performances
 Each show has a story line which is more remindful of theater and ballet
 Problems:
 Financial crisis 2008-2010 led to significant problems
 They offered too many shows that were too little differentiated
 Accident in Las Vegas were artist fell down 95 feet during a live show
 Now in search of a new blue ocean: wants to diversify away from live shows to
reduce risks for artist
 Wants to offer TV shows, special events, improve comedy and auxiliary services
such as ticketing

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 Chapter 7- Business Strategy: Innovation and Entrepreneurship

7.1. Competition Driven by Innovation

 Joseph Schumpeter: Competition is a process driven by the “perennial gale of creative

destruction” innovation as competitive weapon, which can create/destroy value
 Technological change is characterized by accelerating speed, due to: creation of the
necessary infrastructure for further innovation, emergence of new business systems
that make innovations more accessible

 The innovation process: innovation in four steps

 Idea: presented in terms of abstract concepts or as findings derived from basic
research; then transformed into applied research with commercial applications
 Invention: idea is transformed into a new product or existing one is modified.
o If invention is useful, novel and non-obvious it can be patented.
Patent: form of intellectual property that gives inventor exclusive rights
to benefit from commercializing the technology for a time period in
exchange for public disclosure of the underlying idea. Often result in
temporary monopoly position until patent expires.
o Trade secret: valuable proprietary information that is not in the public
domain and where the firm makes every effort to maintain its secrecy.
Often preferred to patents.
 Innovation: commercialization of the new product or modification of existing
ones that, if successful, allows temporary monopoly profits. To sustain
competitive advantage, a firm has to continuously innovate.
o Innovators can profit from first-mover advantages including economies of
scale, learning curve effects, experience curve effects, critical patents and
the cooperation with key suppliers and customers facing switching costs
 Imitation: if innovation is successful, competitors will try to imitate it.

7.2. Strategic and Social Entrepreneurship

 Entrepreneurship: process by which people undertake economic risk to innovate; to

create new products, processes and sometimes new organizations. Entrepreneurs try to
create new business opportunities and assemble resources to exploit them.
Entrepreneurship creates value for individual entrepreneurs and society at large
 Entrepreneurs: agents that introduce change into the competitive system. They figure
out how to use inventions and introduce new product, services, production processes
and forms of organizations. Can either introduce change by starting new ventures or
found within existing firms- intrapreneurs who pursue corporate entrepreneurship.
 Strategic entrepreneurship: pursuit of innovation using tools and concepts from
strategic management. How to combine entrepreneurial actions, creating new

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 opportunities or exploiting existing ones with strategic actions taken in the pursuit of
competitive advantage.
 Social entrepreneurship: pursuit of social goals while creating a profitable business.
They use a triple-bottom line approach to assess performance.

7.3. Innovation and the Industry Life Cycle

 Industry life cycle: five stages- introduction, growth, shakeout, maturity, decline- that
occur in the evolution of an industry over time. Each stage requires different
competencies for the firm to perform well. Development follows an S-curve.
 Introduction stage: trough invention a new industry may emerge. Core
competency in this stage is R&D, which is very capital intensive and therefore
contributes a high price when product is launched. Marketing competency is also
very important.
Market size is small, growth is slow. Only a few firms are in the market.
Product features are more important than price. Competition is intense.
o First-mover disadvantages: firms have to educate customers, find
distribution channels, find complementary assets, perfect product
o Network effects: positive externality that user has on value of the product
can help company to reach the next stage
 Growth stage: after initial innovation, demand increases as first-time buyers
enter the market.
Efficient and inefficient companies thrive. Prices begin to fall as standards
emerge. Distribution channels are expanded and complementary assets become
available. Focus moves from product innovation to process innovation.
Economies of scale take effect. Core competency shifts towards manufacturing
and marketing capabilities. More competitors, more strategic variety.
o Standards emerge: agreed-upon solutions about common set of
engineering features and design choices. Can emerge bottom-up through
competition or top-down by government or other agencies. Tends to
capture larger market share and can persist for a long time (e.g. Blue Ray)
o Product innovation: new or recombined knowledge embodied in new
products
o Process innovation: new ways to produce existing products or deliver
existing services

Key objective: stake out strong strategic position not easily imitated by
rivals

 Shakeout stage: rate of growth declines, firms compete directly against each other,
competitive rivalry increases, weaker firms are forced out of the industry. Prices are
cut. Core competency is manufacturing and process engineering capabilities that drive
costs down. Price becomes most important competitive weapon.
Only the strongest competitors survive, some may implement a blue ocean
strategy
Profitability is eroded, the industry often consolidates
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 Maturity stage: industry becomes an oligopoly with only a few large firms.
Additional market demand is limited. Demand consists of replacement and repeat
purchases. Industry growth is zero or negative which increases competition. Level of
process innovation reaches its maximum
Economies of scale
 Decline stage: often caused by changes in the external environment. Size of market
contracts as demand falls. Strong pressure on prices, strong competition. Options:
 Exit: forced to exit industry through bankruptcy or liquidation
 Harvest: firm reduces investments and allocated only a minimum of human and
other resources. Firm does not invest in future innovation and maximized cash
flow from their existing product line.
 Maintain: firm continues to support marketing efforts at a given level despite the
fact that consumption has been declining.
 Consolidate: firm consolidates the industry by buying rivals to get a strong
position and approaching monopolistic power

 Crossing-the-Chasm framework: framework by Geoffrey Moore that shows how

each stage of the industry life cycle is dominated by a different customer group with
different preferences and different responses to innovation.
Only companies that recognize these differences are able to apply appropriate
competencies and will have a chance to transition from stage to stage successfully.
 Technology enthusiasts: customers in introductory stage, make up 2.5%.
They have an engineering mind-set, pursue new technology proactively, seek
out new products before they are officially launched, e.g. through beta
versions. They will often pay a premium price for the latest gadget.
 Early adopters: enter in the growth stage and make up 13.5%. They are eager
to buy into a new technology, but their demand is driven by imagination and
creativity rather than by technological features. They appreciate the new
possibilities of the technology.
Firm needs to communicate the products potential applications in a more
direct way than when it attracted to technology enthusiasts.
 Early majority: enter during the shakeout stage and make up one third.
Mainly considered whether or not to adopt the technology. They are
pragmatists that weigh benefits and costs carefully. They prefer to observe
early adopters and wait and read reviews. Once they enter a herding effect is
observed.
Without adequate demand from the early majority, most innovations
wither away
 Late majority: enter the market in maturity stage and make up 34%. They are
quite similar to early majority in their attitude; difference: they are not
confident in their ability to master the new technology. They only buy when
uncertainty is reduces and prefer buying from well-established firms with a
strong brand image.

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  Laggards: enter in decline stage and make up 16%. They adopt product only
when necessary and don’t want the new technology.
Generally not considered worth pursuing.
 Industry does not necessarily evolve through these stages
 Innovation can emerge at any stage, which can initiate a new cycle
 Industries can be rejuvenated, often in declining stage
 Some industries never go through entire cycle
 External factors, such as fads in fashion, changes in demographics or deregulation
can affects dynamics of cycle

7.4. Types of innovation

Markets-and-technology

framework
 Incremental innovation:
existing market & existing
technology. Steady
improvement of an existing
product or service.
Most common innovation
 Radical innovation: new
market & new technology.
Derived from entirely
different knowledge base or recombination of existing knowledge with new stream of
knowledge.
 Firms use radical innovation to create a temporary competitive advantage, then they
follow up with a string of inceremental innovations to sustain that lead
 Radical innovations are generally introduces by new entrepreneurial ventures, due to
 Economic incentives: as soon as innovator has become an incumbent firm, it
has strong incentives to defend its strategic position and market power.
Incremental innovations strengthen both and maintain entry barriers.
Radical innovations are the only option to enter a protected industry.
Winner-take-all markets: markets where the market leader captures almost the
entire market share and extracts a significant amount of the value created.
 Organizational Inertia: resistance to changes in the status quo. More
established firms need more formalized business processes and structures.
Incremental innovations reinforce existing structures, while radical ones disturb
the existing power distribution.
 Innovation ecosystem: a network of suppliers, buyers, complementors, which
requires interdependent strategic decision making. Incremental innovations
reinforce this network, while radical ones disturb it.
 Architectural innovation: new market & existing technology. New product in which
known technologies are reconfigured in a new way to attack new markets.

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  Disruptive innovation: new technology & existing market. Innovation that leverages
new technologies to attack existing markets from the bottom up by first capturing the
low end which incumbent firms often fail to defend. Necessary characteristics:
 Low-cost solution to an existing problem
 Initially, lower performance than existing technology, but rate of improvement
over time is faster than rate or performance increases required by different
market segments
 Possible responses to disruptive innovation:
o Continue to innovate in order to stay ahead of the competition
o Guard against disruptive innovation by protecting the low end of the
market by introducing low-cost innovations to preempt stealth
competitors.
o Disrupt yourself, rather than wait for others to disrupt you, e.g. through
reverse innovation/ frugal innovation- innovation that was developed
for emerging economies before being introduced in developed
economies
 Closed innovation: firm conducts all R&D in-house using the tradition funnel
approach. The firm’s boundaries are impenetrable. They are extremely protective of
intellectual property.
 Open innovation: a framework for R&D that proposes permeable firm boundaries to
allow a firm to benefit not only from internal ideas, but also from external sources.
 Shift to open innovation due to
 Increasing supply and mobility of skilled workers
 Exponential growth of venture capital
 Increasing availability of external options to commercialize ideas that were
previously shelved or insource promising and inventions
 Increasing capability of external suppliers globally

 Absorptive capacity: a firm’s ability to understand external technology

developments, evaluate them, and integrate them into current products or create new
ones.

7.5. Mini case 17- Wikipedia: Disrupting the Encyclopedia Business

 for 250 years, Encyclopedia Britannica was the standard for authoritative reference
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  first disruptive innovation: introduction of electronic encyclopedia Encarta by
Microsoft in 1993
 Second disruptive innovation: Jimmy Wales launched Wikipedia, a free online
Multilanguage encyclopedia. After the attacks of 9/11 millions of people visited the
website
 Wikipedia has 35 million articles in 288 different languages
 Nonprofit, free of advertising social entrepreneurship venture that is financed by
donations only, because founder is of the opinion that knowledge should be available
to everyone
 “The free encyclopedia that anyone can edit” – open source; but has just as many
errors as the Britannica encyclopedia. It relies on the “wisdom of the crowds”
 Still many concerns about reliability and bias that group dynamics may cause

Chapter 8- Corporate Strategy: Vertical Integration and Diversification

8.1. Corporate Strategy

 Corporate Strategy: the decisions that senior management makes and the goal-
directed actions to gain and sustain competitive advantage in several industries and
markets simultaneously-> must align with business strategy. Defines where to
compete.
 Vertical integration in what stages of the industry’s value chain it competes
 Diversification what range of products the firm should offer
 Geographic scope where the firm should compete geographically
 It is essential for a firm to grow due to several reasons
 Increase profits: provide higher return for shareholders/owners. Market
valuation of a firm is partly determined by expected future revenue stock
price falls if company fails to achieve growth target.
 Lower costs: profit from economies of scale
 Increase market power: increased market share means fewer competitors
which generally generates higher industry profitability
 Reduce risk: competing in different industries makes a firm able to compensate
low performance in one industry with higher performance profit from
economies of scope
 Managerial motives: problem that managers sometimes are more interested in
pursuing their own interest than in firm’s goals. CEO pay package often
correlates more strongly with firm size.
 Underlying concepts of the three dimensions of vertical integration, diversification and
geographic competition:
 Core competencies: unique strengths deeply embedded within a firm that
allows them to differentiate its products. A firm’s boundaries are delineated by
its core competencies resource-based framework.

30
  Economies of scale: occur when a firm’s average cost per unit decreases as its
output increases
 Economies of scope: saving that come from producing two or more outputs at
less cost than producing each individually, using the same resources and
technology
 Transaction costs: all costs associated with an economic exchange. The
concept enables managers to answer the question of whether it is cost-effective
to expand its boundaries through vertical integration or diversification.

8.2. The boundaries of the firm

 Transaction cost economics: explains and predicts the boundaries of the firm. Helps
to decide which activities to do in-house and which to obtain from the external market,
by comparing the different transaction costs.
 Transaction costs: all internal and external costs associated with an economic
exchange, whether it takes place within the firm’s boundaries or in markets.
 External transaction costs: occur when firms transact in the open market, e.g. cost of
searching for somebody with whom to contract and then negotiating, monitoring and
enforcing the contract
 Internal transaction costs: include costs pertaining to organizing an economic
exchange within a firm, e.g. salaries/ recruitment; also include administrative cost to
coordinate economic activities between different business units of the same
cooperation or business units and corporate headquarters, e.g. resource allocation
Tend to increase with organizational size and complexity
 Firm vs. Markets: Make or buy?

 Advantages of firm:
o Make command-and-control decisions by fiat along clear lines of
hierarchical authority
o Coordination of highly complex tasks through division of labor
o Transaction specific investments that are highly valuable within the
firm, but of no use in the market
 Disadvantages of firm:
o Administrative costs due to bureaucracy

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 o Low-powered incentives, e.g. salary
o Principal-agent problem: situation in which an agent performing
activities on behalf of a principal pursues his own interests solution:
give managers stock to make them owners
 Advantage of market:
o High powered incentives: provide financial security, capture profit of a
new venture or be acquired by an existing firm liquidity events
o Increased flexibility: compare prices among different providers
 Disadvantages of market
o Search costs: to find reliable suppliers among all competitors
o Opportunism by other parties: self-interest seeking with guile
o Incomplete contracting: all contracts are incomplete, because not all
future contingencies can be anticipated at the time of contracting
o Enforcement of contracts: difficult, costly, time-consuming to enforce
legal contracts
o Information asymmetry: situation in which one party is more informed
than another because of the possession of private information
 Alternative on the market make-or-buy continuum hybrid arrangements
 Short-term contracts: firm sends out requests for proposals (RFPs) to various
companies, which initiates competitive bidding for contracts to be awarded
with a short- term duration, generally less than one year. Allows a longer
planning period than market transactions; firm can demand lower prices due to
competitive bidding; but firm responding to RFP has no incentive to make
transaction specific investments
 Strategic alliances: voluntary arrangements between firms that involve the
sharing of knowledge, resources, and capabilities with the intention to develop
processes, products or services
o Long-term contracts:
 Licensing: present in manufacturing sector that enables firms
to commercialize intellectual property, e.g. a patent
 Franchising: contract in which a franchisor grants a franchisee
the right to use the franchisor’s trademark and business
processes to offer goods that carry the franchisor’s brand name
o Equity alliances: partnership in which at least one partner takes partial
ownership in the other partner, by buying stocks or assets greater
commitment, inside look into the company to gain private information;
and if based on mere contractual agreement, one partner could attempt
to hold up the other by demanding lower prices or threatening to walk
away from the agreement. A long-term decision that is difficult and
costly to reverse is a credible commitment.
o Joint venture: a stand-alone organization created and jointly owned
by two or more parent companies contribute equally and make
transaction-specific investments

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  Parent-subsidiary relationship: most integrated alternative to performing an
activity within one’s own corporate family. The corporate parent owns the
subsidiary and can direct it via command and control. Arising transaction costs
are due to political or turf battles, which may include e.g. transfer prices.

8.3. Vertical integration along the industry value chain

 Vertical integration: the firm’s ownership of its production of needed inputs or of the
channels by which it distributes its outputs
 Industry value chain/vertical value chain: transformation of raw materials into
finished goods and services along distinct vertical stages. Each firm decides where in
the value chain to participate. This defines the vertical boundaries of the firm.

 Types of vertical integration: varying degrees of vertical integration

 Full vertical integration: everything is conducted within the firm’s boundaries
firm competes in different industries with different competitors
 Vertical disintegration with low degree of vertical integration: focus on one or
only few stages of the industry’s value chain
 Backward vertical integration: changes in an industry value chain that involve
moving ownership of activities upstream to the originating (inputs) point of the
chain
 Forward vertical integration: moving ownership of activities closer to the end
(customer) point of the value chain
 Benefits and Risks of vertical integration
 Benefits:
o Lowering costs:
o Improving quality:
o Facilitating schedule and planning: for changes in demand
o Facilitating investments in specialized assets: unique assets with high
opportunity costs: have more value in intended use than in next best use.
There are assets with site specificity, physical-assets specificity, human-
asset specificity
o Securing critical supplies and distribution channels
 Risks:
o Increasing costs: in-house suppliers are not exposed to market
competition
o Reducing quality: due to knowing that there will always be a buyer, lower
learning and experience curve effects
o Reducing flexibility
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 o Increasing the potential for legal repercussions
 Alternatives to vertical integration
 Taper integration: a way of orchestrating value activities in which a firm is
backwardly integrated but also relies on outside-market firms for some of its
supplies and/or is forwardly integrated but also relies on outside market firms for
some of its distribution
o Exposes in-house suppliers to competition so that performance can be
compared and allows a firm to retain and fine-tune its competencies in
upstream and downstream value chain activities
o Enhances flexibility
o Combines internal and external knowledge path for innovation
 Strategic outsourcing: moving one or more internal value chain activities
outside the firm’s boundaries to other firms in the industry value chain reduces
level of vertical innovation. Outsourcing activities outside the home country is
called off-shoring.

8.4. Corporate diversification: Expanding beyond a single market

 Diversification: increase in the variety of products and services a firm offers or

markets and regions in which it competes
 Product diversification: strategy in which a firm is active in several product markets
 Geographic diversification: strategy in which a firm is active in different countries
 Product-market diversification: strategy in which a firm is active in different
product markets and in different countries
 Different types of corporate diversification:
 Single business: firm derives more than 95% of revenue from one business
 Dominant business: firm derives 70-95% of revenue from single business, but
pursues at least one other activity that accounts for remaining revenue. It shares
competencies in products, services, technology, distribution
 Related diversification: strategy in which a firm derives less than 70% of
revenue from single business and benefits from economies of scope. This
businesses pool and share resources as well as leverage competencies across
different business lines
o Related-constrained diversification: choices of alternative business
activities are limited by the fact that they need to be related to common
resources, capabilities and competencies
o Related-linked diversification: executives consider business activities
that share only a limited number of linkages and benefit from economies
of scale and scope.
 Unrelated diversification- the Conglomerate: strategy in which a firm derives
less than 70% of revenue from single business and there are few or no linkages
among its businesses.
o Conglomerate: company that combines two or more SBUs under one
overarching corporation; follows an unrelated diversification strategy.

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 Can be used in emerging economies very well, because it allows the
conglomerate to overcome institutional weaknesses of emerging
economies, e.g. lack of capital and property rights
 Core competence-market matrix: framework to guide corporate diversification
strategy by analyzing possible combinations of existing/new competencies and
existing/new markets

 Diversification-performance relationship: U-shaped relationship that implies that

high and low levels of diversification are associated with lower performance and
moderate levels of diversification result in higher overall performance

 Diversification discount: situation in which the stock price of highly diversified firms
is valued at less than the sum of all their SBUs
 Diversification premium: : situation in which the stock price of related-
diversification firms is valued greater than the sum of all their SBUs, due to
 Providing economies of scale
 Exploiting economies of scope
 Reduction of costs and increasing value
 Restructuring: process of reorganizing and divesting business units and activities to
refocus a company to its core competencies, e.g. by using the Boston Consulting
Group’s (BCG) growth-share matrix

35
  Internal capital markets: can be source of value creation in diversification strategy if
the conglomerate’s headquarters does a more efficient job of allocating capital through
its budgeting process than what could be achieved in external capital markets
 Related-constrained/related-linked diversification is more likely to lead to competitive
advantage than single/dominant diversification
o because restructuring and economies of scope and scale create value
o Possible costs that have to be lower than value are coordination and
influence costs. Coordination costs: function of the number, size and
type of businesses that are linked. Influence costs: occur due to political
maneuvering by managers to influence capital and resource allocation and
the resulting inefficiencies stemming from suboptimal allocation of scarce
resources

8.5. Implications for the Strategist

 Corporate strategy needs to be dynamic over time

 Corporate strategy includes making the three choices of vertical integration,
diversification, geographic scope
 Related diversification is most likely to lead to competitive advantage due to U-shaped
relationship between diversification and performance
 Related diversification has to overcome additional costs such as coordination and
influence costs

Chapter 9: Corporate Strategy- Strategic Alliances and Mergers and

Acquisitions

9.1. How Firms Achieve Growth

 Three different options how to achieve growth

 Organic growth through internal development
 External growth through alliances
 External growth through acquisitions
 Build-borrow-or-buy framework: conceptual model that aids firms in deciding
whether to pursue internal development (build), enter a contractual arrangement or

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