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Exam 6: Corporate-Level Strategy

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Question 1

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Case Scenario 1: Syco. Syco is a diversified company that has six primary lines of business. Fifty percent of its revenues and 18 percent of its profits come from retailing. Most of its retail outlets are discount department stores that serve as anchor tenants for large suburban shopping malls. The remaining businesses are broken out as follows: Insurance accounts for 30 percent of revenues and 50 percent of profits; consumer credit card operations are 6 percent of sales and 17 percent of profits; 5 percent of revenues and 6 percent of profits come from its stock brokerage business; commercial and residential real estate operations generate 4 percent of sales and 8 percent of profits; finally, 5 percent of revenues and 1 percent of profits come from its online portal business. The company's management states that all these businesses are essential to its competitive future. -Part 1: (Refer to Case Scenario 1) Develop a logical argument that would lead you to describe Syco's diversification type as related linked and another logical argument that Syco's diversification type is related constrained. For both the related linked and for the related constrained arguments, what product, technological, or distribution activities might link these businesses together? Part 2: Would you describe either of the logical arguments you developed in response to Part 1 as a good corporate strategy?

Correct Answer

verified

Part 1: The purpose of this exercise is to give students an opportunity to view the diversified firm from the perspective of the top management team. The best answers will start with related linked strategies and note that superficial linkages can be provided by global brandings (i.e., all businesses under one name), one-stop shopping (i.e., all businesses under one roof), and shared accounting systems (i.e., centralized accounting, cash allocation, and planning). The best answers to the related constrained questions will offer more complex linkages beyond those noted above like shared customer lists, active cross-selling, and rotation of key personnel. Because the businesses are so different, however, the students should begin to see that more complex linkages may be difficult to achieve. Part 2: Based on the challenges of developing answers for Part 1, this question forces students to stand back and criticize the strategies that they created. Since there are many possible approaches to Part 1, it should become clear to students that each of these competing arguments has significant drawbacks. Ultimately, students should reach the point where they may agree that offering a bundle of services is desirable, although there is no reason that Syco has to own all of these offerings. This discussion also provides a nice way to foreshadow the role and importance of strategic alliances which are covered in Chapter 9.

Question 2

Multiple Choice

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Case Scenario 3: Walt Disney Company. Walt Disney Company is famed for its creativity, strong global brand, and uncanny ability to take service and experience businesses to a higher level. In the 1970s, the company realized nearly 90% of its revenues from its cartoons and the Disneyland theme park in Anaheim, CA. By the beginning of the 21st Century, Disney had not only opened up more parks and ramped up its output of animated films, it had also diversified into many businesses well beyond its traditional core of high-quality cartoon animation and theme parks. For instance, the Disney empire diversified vertically and horizontally into retail (The Disney Store, since licensed to The Children's Place) , cruise lines, theaters, motels, and the Disney Press. It also moved into new product offerings such as sports franchises, TV networks (ABC and ESPN) and stations, Miramax, Broadway shows (Beauty and the Beast) , and vacation clubs. International growth included EuroDisney and Hong Kong Disney and new releases of TV shows, videos, and movies worldwide. Indeed, while many of Disney's businesses had some tie to Mickey Mouse, only about 28% of total revenues now came directly from its parks. -(Refer to Case Scenario 3) What level and type of diversification best characterized Disney at the beginning of the 21st Century?

A) dominant business
B) related constrained
C) related linked
D) unrelated

E) All of the above
F) A) and D)

Correct Answer

verified

B

Question 3

Multiple Choice

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Which of the following is NOT a limit directly relating to vertical integration?

Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify?

Case Scenario 2: Jewell Company. Jewell Company (JC) is a $2 billion diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, JC's business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s however, the company has diversified extensively through acquisition into such businesses as paintbrushes, writing pens, pots and pans, and hairbrushes. Over 90 percent of its growth can be attributed to these many small acquisitions, whose performance it improved tremendously through aggressive restructuring and its corporate emphasis on cost-cutting and cost controls. While JC's sixteen different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items and sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because JC operates each line of business autonomously (separate manufacturing, R&D, and selling responsibilities for each line), it is perhaps best described as pursuing a related linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). JC is presently contemplating the acquisition of Plastico, a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Plastico has been highly innovative (over 80% of its growth has come from internal new product development), it has had difficulty controlling costs and is losing ground against powerful customers like Wal-Mart. JC believes that the market power it wields with retailers like Wal-Mart will help it turn Plastico's prospects around. -(Refer to Case Scenario 2) What difficulties might you expect JC to encounter related to its acquisition of Plastico?

Partial vertical integration is not practical because it involves excessive levels of coordination between internal company units and outside contractors.

Successful unrelated diversification through restructuring is typically accomplished by

Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to move one of its key managers from its plant in St. Louis to Ireland. This can be considered a method of transferring corporate-level core competencies.

The use of e-commerce to allow firms to reduce the costs of processing transactions while improving their supply-chain management skills and tightening the control of their inventories is beginning to replace

The downside of synergy in a diversified firm is

Differentiate between corporate-level and business-level strategies and give examples of each.

Which of the following is a value-reducing reason for diversification?

As product markets become worldwide, we can expect that multipoint competition will decrease.

Describe how diversified firms can use activity sharing and transfer of core competencies to create value.

Virtual integration tends to erode the relationships between suppliers and customers as personal contacts are replaced with impersonal electronic communications.

Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the board of directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because

Corporate tax laws, rather than tax laws affecting individuals, have had the most impact on the firm's use of free cash flows for investment in acquisitions.

Contract manufacturers who manage their customers' entire product line, and offer services ranging from inventory management to delivery and after-sales services are prime examples of virtual integration.

Companies in emerging markets prefer to use related constrained diversification because it allows the firm to concentrate on a few core competencies which it can share among the sister organizations.

When implementing a restructuring strategy a company would do best by focusing on mature, low-technology businesses.