MGT 406 AUD Differentiation Strategy Questions

DescriptionInstructions:
Fall 2022
Exam 2 – MGT 406 VERSION B
● This exam is worth 95 points and is comprised of 5 questions (3 short answer, and 2 essay).
● This is an individual assessment that must be completed through your own effort.
● This is an open-resources assessment. You are allowed to use your course textbook, lecture
notes, and lecture slides.
● You are not allowed to leave the class before the completion of your exam.
● The assessment carries a weight of 20% towards your final course grade.
● Please write in a coherent and concise manner. Demonstrate to me that you thoroughly
understand the concept in question.
● Remember: illustrations/pictures help me to understand your thinking!
3 Short Answer Questions (@ 15 pts. each). Please answer the following questions as fully as possible in
the space provided. Your response will be graded for thoroughness. If you need additional space, please
use the space provided at the end of the exam.
1. (15 pts.) Why might a first mover fail to develop/maintain a competitive advantage in a
rapidly changing industry?
2. (15 pts.) Characterize the difference between an overcapacity acquisition and a
product/market extension (acquisition).
3. Under what condition might a company choose a focus differentiation strategy? What
are the strategies advantages and disadvantages.
4 Essay Questions (@ 25 pts. each). Please answer the following questions as fully as possible in the
space provided. Your response will be graded for thoroughness. If you need additional space, please use
the space provided at the end of the exam.
1. (20 pts.) As of the close of the last fiscal year, Richemont earned roughly 13,000,000,000 Euros (in
revenues) from all businesses in its corporate portfolio, which is depicted below. Please note that the
revenue amount that was earned by a particular business is indicated in parentheses along with the
corresponding contribution to the overall corporate portfolio.
Given the corporate portfolio depicted on the subsequent page, please:
(1) DeterminethelevelofdiversificationthatisevidentinRichemont’scorporateportfolio; (2)
DeterminewhetherRichemontappearstouseoperationalorcorporaterelatedness.
(3) Ifany,whatistheprimarysourceofsynergyintheRichemontportfolio?
(4) HasRichemontachievedanoptimallevelofcorporatediversification?Why?Whynot?
2. As of 1996, Dell was able to manufacture PCs primarily for corporate customers (which constituted
87% of its customer base) at a cost advantage of $415 per unit when compared to its nearest
competitor, Compaq. Dell charged its customers an average selling price (ASP) of $2,316 per PC while
Compaq charged its customers an average selling price (ASP) of $2,800. It did so despite the fact that its
industry-leading (in terms of performance) post-sales technology support and defect-free mass
customization manufacturing model would have allowed it to charge prices similar to Compaq’s (note:
consumers would have been willing to pay (WTP) higher prices for Dell computers). Doing so left Dell
with a per unit profit of $500 which was $79 less than the per unit profit earned by Compaq. Assume
that if Dell had increased its selling price to $2,775 per unit (buyers would have been willing to pay this
amount), profit would have increased 91% to $959.
Given the information provided: (1) describe (in detail) Dell’s business-level (competitive) strategy in
terms of its sources of advantage and its competitive scope and (2) discuss why Dell might have chosen
to compete in the manner that it did, and (3) characterize the advantages that Dell’s choice of
competitive strategy would have been expected to attain.
3. Please answer the following questions in accordance with the corporate portfolio depicted
below:
Corporate Portfolio of the Yalla Corporation
High
G
Industry Growth
Rate
D
E
Moderate
C
H
I
Low
10x
1.0x
.1x
Relative Market Share
a. (2 pts.) What is the Yalla Corporation’s corporate scope?
b. (2 pts.) How would you characterize the distribution of the Yalla Corporation’s corporate
portfolio?
c. (2 pts.) How many Stars does the Yalla Corporation have in its portfolio?
d. (2 pts.) How many Question Marks does the Yalla Corporation have in its portfolio?
e. (3 pts.) In terms of the revenue contributed by a single business which of the following is
true?
a. The Yalla Corporation is most dependent on a business that can be characterized
as a Cash Cow.
b. The Yalla Corporation is most dependent on a business that can be characterized
as a Question Mark.
c. The Yalla Corporation is most dependent on a business that can be characterized
as a Dog.
d. The Yalla Corporation is most dependent on a business that can be characterized
as a Star.
f. (7 pts.) Assume the arrows represent the movement that is expected to occur for any
given business over the course of a 5-year period if no strategic changes are to be
implemented. How would you characterize the long-term strategic health of the
portfolio? Please justify your explanation.
g. (7 pts.) What changes, if any, would you make to the Yalla Corporation’s portfolio of
businesses?
4. In 2009 Disney paid $4,000,000,000 US for the right to acquire Marvel Comics. The deal was
valued at $50 USD per share, which included a (per share) premium of $11 USD. The primary
drivers of the acquisition were that Disney had been unable to develop a robust pipeline of
valuable characters upon which to develop blockbuster movies. As a result, Disney Studios had
fallen behind its rivals. However, with its vast international distribution network and its
marketing skill this lack of content appeared to have been remedied by the recent acquisition
of Pixar and Lucas Films along with the planned acquisition of Marvel Comics. Specifically, the
Marvel deal meant that Disney would gain control over the production of movies involving
5,000 Marvel characters ranging from Spider Man to Iron Man and The Avengers as well other
well-known (and, not so well-known) superheroes. The deal was not without its challenges.
Among them was that Disney had not led the industry in targeting teenage boys – an
increasingly relevant demographic.
Based on the information provided in the scenario determine the following: market value (per
share); takeout price (per share); and the synergy value (per share) required to make this a
strategically rational decision. Note that with respect to synergy value you may assume that
your only focus should be on what Disney would have gained in the acquisition of Marvel
Comics and not the value of the combined corporation as the scenario lacks information
regarding Disney’s value. Further, you are to identify the strategic rationale(s) behind the
acquisition and how it appeared that Disney planned to achieve synergy. In your response, be
sure to explain any highlighted (italicized) concepts.
Agenda
• Strategy Formulation
• Business-level Strategy
• H.W. for Monday: Video Case Analysis – Business strategy at Bugatti
• Identify and characterize the competitive strategy in use at Bugatti
• Identify KSFs in the super car segment of the auto manufacturing industry
• Determine, in detail, the sources of advantage (use the VRIO framework) in
use at Bugatti and whether they are oriented to cost leadership or
differentiation
• Determine the competitive scope in use at Bugatti. In the event that you
identify a narrow approach to segmenting identify the dimensions by which
Bugatti segments its market and who it targets.
• Given what you have identified does it appear that Bugatti enjoys a
sustainable competitive advantage? If so, why? Or, why not?
• In your response, be sure to identify barriers to imitation, market location, and
market timing tactics to the extent necessary.
The Difference Between Corporate,
Business, and Functional Strategy
Formulation
Strategic Consistency
Corporate
Level
Mktg.
Business
Unit 2
(Business
Strategy 2)
Business
Unit 1
(Business
Strategy 1)
Acct.
HR
……… ……… …
………
Mktg.
Business
Unit n
(Business
Strategy n)
Acct.
HR
Strategic Consistency
Emirates: The Difference Between
Corporate, Business, and Functional
Strategy Formulation
Mktg.
Emirates
Group
(102,4-Bn AED)
Emirates
Airlines
Dnata
Air Services
(92.3-Bn AED; 87.3%)
Ops
(13.07-Bn AED; 12.7%)
HR
……… ……… …
Mktg.
Ops
HR
Formulating Business Strategy to
Create Competitive Advantage
(Economic Logic)
Standard product at
lower price
Price premium from
unique product
Cost Advantage
Differentiation
Advantage
Sources of Sustainable Competitive
Advantage: Cost Leadership
Consumer
Surplus
Selling Price
Focus on reducing cost…
while maintaining
quality!
Producer’s
Profit
Cost
Total Value Created
Cost Leadership and Five Forces
Threat of
New
Entrants
Can mitigate Supplier Power
by:
• Better able to absorb
cost (inputs) increases
• Economies in purchasing
Bargaining
Power of
Suppliers
Rivalry
Competitors avoid
price wars with cost
leaders
Well positioned relative to
substitutes:
• Can lower prices to maintain
relative value proposition
• Can use limit pricing to make
entry unattractive
Can frighten off New Entrants
due to the need to:
• Must enter at scale in order
to be cost competitive
• Must move down the learning
curve – takes time
• Can use limit pricing to make
entry unattractive
Bargaining
Power of
Buyers
Can mitigate Buyer Power by:
• Predatory pricing may lead to
competitor exit; create
monopoly position
Threat of
Substitutes
Strategic Cost Analysis
IDENTIFY VALUE CHAIN
IDENTIFY VALUE
CHAIN
DIAGNOSE COST
DRIVERS
DEVELOP SUSTAINABLE
COMPETITIVE ADVANTAGE
• Separate critical activities
which:
• Represent significant
percentage of operating
cost
• Benchmark – how
performed by competitors
in different (better) ways?
Strategic Cost Analysis
DIAGNOSE COST DRIVERS
IDENTIFY VALUE
CHAIN
• Structural
• Economies of scale?
• Economies of scope?
• Process technology
DIAGNOSE COST
DRIVERS
DEVELOP SUSTAINABLE
COMPETITIVE ADVANTAGE
• Executional
• Work force commitment
• Product configuration (can
it be standardized
further?)
• Linkages with
buyers/suppliers
• Organizational slack
Strategic Cost Analysis
DEVELOP SUSTAINABLE
COMPETITIVE ADVANTYAGE
IDENTIFY VALUE
CHAIN
DIAGNOSE COST
DRIVERS
• Control cost drivers better than
competitors
• Reduce costs in activity, holding
revenues constant
• Increase revenues holding costs
constant
• Reconfigure value chain
DEVELOP SUSTAINABLE
COMPETITIVE ADVANTAGE
• Exploit ‘Centers of Gravity’
• Outsource (cost-related)
weaknesses
Value Chain in Cost Analysis: Auto
Manufacturer
PURCHASING
SUPPLIES OF
COMPONENTS
COMPONENT
MANUFACTURE
• Increase order
sizes
•Locate close to
suppliers
• Produce at
M.E.S.
• Location of
plants close to
assembly/the
customer?
ASSEMBLY
• Degree of
automation
(increase)
• Level of wages
(decrease)
INVENTORY OF
FINISHED GOODS
•Avoid oversupply
SERVICE &
DEALER
SUPPORT
•Limit the need for
warrantied repairs
and recalls
Sources of Advantage: Uniqueness
(Differentiation)
Focus on increasing value by
making the product
unique…
Selling Price
while maintaining cost
proximity
Consumer
Surplus
Producer’s
Profit
Cost
Total Value Created
Differentiation and Five Forces
Can mitigate Supplier Power
by:
• Absorbing price increases
(inputs) due to higher margin
• Passing on higher supplier
prices because buyers are
brand loyal
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Rivalry
High switching
costs reduce rivalry
Well positioned relative to
substitutes:
• Brand loyalty tends to reduce
new product trial and
switching
Can frighten off New Entrants
due to the need to:
• New products must overcome
switching costs (brand loyalty)
• Or be equal at lower prices
Bargaining
Power of
Buyers
Can mitigate Buyer Power by:
• Well-differentiated products
reduce customer sensitivity
to price increases
Threat of
Substitutes
Value Chain in Differentiation
• Identify drivers of uniqueness in each activity
• Select most promising differentiation variables
• Locate links between value chain of firm and customer
Value-Chain for
Differentiators
Firm Infrastructure (Celebrity CEO reinforces company brand)
Human Resource Management (Training, quality, orientation)
Outbound Logistics
(fast delivery)
Marketing & Sales
(Cultivate and
leverage brand)
Service
(Courteous, fast,
reliable)
Procurement (secure high quality inputs)
Operations
(defect-free mfg)
Inbound Logistics
(high quality inputs)
Tech. Dev. (Develop unique & proprietary prod. technology)
How to Compete: Breadth of
Competitive Scope (Arenas)
Specific target market
not clearly defined
Targeted at a selected
niche in the market
Broad Mass
Market
Niche
Market
Competitive Scope: Focus
Strategies
• Select narrow target segments with unique needs
• Geographic location
• Customer type (e.g. demography, consumption patterns,
psychological, socioeconomic status)
• Product or service features
• Firms create products valued most highly by buyers in target
segment
• Configure the organization to serve target segments best
• Sacrifice incremental business in broader markets
Generic BusinessLevel Strategies
Cost Leadership
Cost
Focus
Differentiation
Focus
Differentiation
Generic BusinessLevel Strategies
Cost Leadership
Differentiation
Integrated
Cost
Focus
Focus
Differentiation
Five Business-Level
Strategies
Cost Leadership
Differentiation
Stuck in
the Middle
Cost
Focus
Focus
Differentiation
Business Level Strategy
Sources of Advantage
Cost Leadership






Lower labor costs by accessing cheap
labor in South Asia (HR and Ops)
30% lower operating costs (F.I. and
Ops)
“Low” tax rates (F.I.)
Gov’t subsidies – a ‘free’ terminal and
start-up capital (F.I.)
Airbus’ largest A380 customer and
Boeing’s largest 777 customer
(Procurement)
World’s largest airline by passenger
miles (Ops)
Business Level Strategy
Sources of Advantage
Differentiation





154 international destinations (F.I. and
Ops.)
Location! Dubai as a regional hub of
entertainment and shopping at the
crossroads of 4 continents (F.I.)
Unique product/service features:
showers in 1st class; full bars in
business class; attractive cabin crew;
‘free’ meals; I.C.E. (Ops.)
World’s largest industrial kitchen (Ops)
Most valuable brand in the MENAstatus, luxury, efficiency (M&S)
Business Level Strategy
Sources of Advantage
Cost Leadership






Lower labor costs by accessing cheap
labor in South Asia (HR and Ops)
30% lower operating costs (F.I. and
Ops)
“Low” tax rates (F.I.)
Gov’t subsidies – a ‘free’ terminal and
start-up capital (F.I.)
Airbus’ largest A380 customer and
Boeing’s largest 777 customer
(Procurement)
World’s largest airline by passenger
miles (Ops)


+



Differentiation
154 international destinations (F.I. and
Ops.)
Location! Dubai as a regional hub of
entertainment and shopping at the
crossroads of 4 continents (F.I.)
Unique product/service features:
showers in 1st class; full bars in
business class; attractive cabin crew;
‘free’ meals; I.C.E. (Ops.)
World’s largest industrial kitchen (Ops)
Most valuable brand in the MENAstatus, luxury, efficiency (M&S)
Business Strategy at Emirates
Airlines
• Does Emirates use market segmentation? If so, how?
Business Level Strategy
Competitive Scope
Narrow
X
Broad
How does Emirates segment its market?
• Long-haul international only (no domestic flights/limited transfers)
• Business destinations? National capitals and financial centers
• Those willing (and able) to pay a premium
• Psychographics – interested in quality service, prestige, luxury
• Demographics – Business travelers, men (primarily ?)
• Demographics (S.E.S.) – Middle and upper income people
• ‘Product/service’ features- Transit customers and those interested in experiencing
Dubai
Why does the Apple iPhone no
longer enjoy market(share) leadership
in the smart phones industry?
PLM – 25
Competitive Dynamics and the
Smartphone…
2000
Blackberry 857
1996
Nokia Communicator
1995
IBM Simon Personal
Communicator
(50,000 units sold)
Apple Revolutionizes the
Smartphone…
(Part of) Apple’s Corporate ValueChain: iPhone
Firm Infrastructure
Human Resource Management
Technological Development
Service
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
Procurement
Returns
Build-up and Erosion of Competitive
Advantage for Apple (and the iPhone)
Build-up
Period
Strategic
move
produces
competitive
advantage
2007
Benefit
Period
Size of
Advantage
Achieved
2008
Erosion
Period
Imitation,
duplication, and
attacks by rivals
erode advantage
2010
2011 – Time
Present
Huawei Overtakes Apple in Q2
2018
https://www.counterpointresearch.com/global-smartphone-share/
How?
Nova 3 128
1,189 (Nothing)
Mate 20 Lite (64 GB)
1,520 AED (iPhone 11 2,849 AED)
Mate 30 Pro 128 GB
3,040 AED (iPhone 11 Pro4,219 AED)
Competitive Tactics: Timing (Move
Order)
FIRST MOVER
SECOND MOVER
LATE MOVER
• First to manufacture and sell
a new product
•Responds to 1st mover through
imitation
• Exploits mistakes made by 1st
mover (missing segments,
failing to reduce operating costs)
• Enters after significant time
has passed
• Imitates strategies with
significant cost/uniqueness
enhancements
• Early reputation as leader
• Early cost advantage
• Cheaper: learning costs
accrue to pioneer
• Less risky: entrepreneurial
risk accrues to pioneer
• Exploit previously ignored
markets
• No product/market
development costs
• No entrepreneurial risk
• Opportunity to change the
“rules of the game”
• Market-maker’s burden
• Entrepreneurial risk
• Market lockout
• Overcoming barriers to
imitation may be costly
• Open to forceful retaliation
• Markets may be mature!
• Expertise: Tech., Prod. Dev.,
Marketing, and Money!
• Expertise: Tech., Ops.,
Marketing
• Expertise: Ops. (cost or
uniqueness advantages),
Marketing
Characteristics
Advantages
Disadvantages
What activities
are needed?
STRUCTURAL BARRIERS
Defensive
Tactics
• Exclusive contracts with suppliers and buyers
• Use branding to raise buyer switching costs
• Secure property rights
• Limit outside access to trade secrets
RETALIATION
• Use limit pricing
• Carry excess capacity
Who are the 1st, 2nd, and
late movers in this industry?
Competitive Tactics: Market
Location
DESCRIPTION
TO SUCCEED?
RISKS?
Frontal
Assault
• Head-on-attack
• Need superior resources and
perseverance
• Expensive
• May serve to awaken a
sleeping giant
Flanking
Maneuver
• Attack a weak market
• Wait to expand out of the
undefended niche or face
retaliation
• Waiting may result in market
lockout
•Encircles the competitor with
greater product variety
• Need a variety of strategic
resources and core
competencies to attack
multiple market segments
• Diffuse approaches and use
of resources may not be
focused enough to succeed
Bypass
Attack
• Cut markets out from under
established competitors
• Change the “rules of the
game”
• Must have significant cost
or differentiation advantages
• Advantages may not be
valued by consumers
• Mature markets may be
difficult to penetrate
Guerilla
Warfare
• Hit-and-run, instead of
head-on, attacks
•Small, intermittent assaults
on different market segments
• Must be patient enough to
accept small gains and
avoid instigating retaliation
• Small assaults don’t deter,
but facilitate retaliation
Encirclement
Agenda
• Strategy Formulation
• Business-level Strategy
• H.W. for Monday: Video Case Analysis – Business strategy at Bugatti
• Identify and characterize the competitive strategy in use at Bugatti
• Identify KSFs in the super car segment of the auto manufacturing industry
• Determine, in detail, the sources of advantage (use the VRIO framework) in
use at Bugatti and whether they are oriented to cost leadership or
differentiation
• Determine the competitive scope in use at Bugatti. In the event that you
identify a narrow approach to segmenting identify the dimensions by which
Bugatti segments its market and who it targets.
• Given what you have identified does it appear that Bugatti enjoys a
sustainable competitive advantage? If so, why? Or, why not?
• In your response, be sure to identify barriers to imitation, market location, and
market timing tactics to the extent necessary.
• Should Bugatti diversify its operations? Wjhy? Why not?
Business Level Strategy: The Singlebusiness Firm
Single
Business
Mktg.
Acct.
HR
Ops
• Concentrate: how to compete (cost and/or uniqueness) and who
(broad or narrow markets) to target in a single industry
• Concentrate in attractive industries
• Tap new opportunities through product development
Concentration – Benefits and
Pitfalls
• Benefits
• TMT – deeper knowledge of
industry and business!
• Strategic unity of vision,
objectives, and culture
throughout
• Relatively low-risk option (in
munificent industries)
 Risks
 More vulnerable to
environmental changes
 Strategic myopia
 Limited growth prospects
(as industries mature and
decline)
Concentration – Benefits and
Pitfalls
• Benefits
• TMT – deeper knowledge of
industry and business!
• Strategic unity of vision,
objectives, and culture
throughout
• Relatively low-risk option (in
munificent industries)
 Risks
 More vulnerable to
environmental changes
 Strategic myopia
 Limited growth prospects
(as industries mature and
decline)
Must have consistently superior resources
and capabilities!
The Domain of Corporate Strategy
Strategic Consistency
• Diversifying into new markets:
• When existing opportunities dry up
• Around slack resources/capabilities (akin to excess capacity)
Corporate
Level
Business
Strategy 2
(Industry 2)
Business
Strategy 1
(Industry 1)
Mktg.
Acct.
HR
……… ………
……
Business
Strategy n
(Industry n)
Mktg. Acct.
HR
Resource-based Strategy at
Corning Using Slack Resources
Heat-resistant
Glass (Pyrex)
1879
1915
Heat-resistant
Windows (NASA)
1939
T.V. picture
tubes
Glass for
light bulbs
1961
Ceramic filters for
car emissions
1970
Low-loss
optical fiber
1972
2003
Display
glass
Bendable
fiber
2007
2017
Pharma.
glass
Gorilla glass
Resource-based Strategy at Corning:
Leveraging Slack Resources
Glass-related
Innovations
(Core Product)
Fiber
(end product)
Life Sciences
Display
Tech.
(end product)
Specialty
Materials
(end product)
Environmental
Tech.
(end product)
(end product)
Questions for Corporate Strategists?
• What should be the scope of the corporation?
• Portfolio Analysis
• How should the corporation’s businesses be related?
• Synergy through technological and/or market relatedness
• How can slack resources/capabilities be leveraged to create
economies of scope?
• How should the scope of the corporation be managed?
• Acquisitions, organic growth (horizontally/vertically), divestment,
etc.
Classifying Levels and Types of
Diversification
Low
Single: > 95% of revenues come from a single business
Dominant: between 70% and 95% of all revenues come
from a single business
Moderate
High
Related-constrained: < 70% of all revenues come from a single business; all businesses share some functional linkage Related-linked: < 70% of all revenues come from a single business; limited functional linkages between businesses Unrelated: < 70% of all revenues come from a single business and there are no linkages between businesses A A B A C B A C B A C B Concept of Relatedness • Two Types • Operational relatedness • Corporate relatedness Why Diversify? Value-enhancing Reasons • Related Diversification (Low and Moderate) • Achieve economies of scope (Operational/Technological Relatedness) • Gain market (bargaining) power • Vertical integration (backward or forward) • Market relatedness - pooled negotiating power (horizontal diversification) • Unrelated Diversification (High) • Create financial economies through • Efficient capital allocation • Business restructuring • Parenting Performance Level of Diversification and Firm Performance Dominant Business Related Constrained Level of Diversification Unrelated Business Why Diversify? Value-neutral Reasons • Neutral Effects on Competitiveness: • Antitrust regulation (e.g. Celler-Kefauver Act) • Tax laws (e.g. penalizing dividend payments) • Uncertain future cash flows (e.g. volatile industries) • Risk reduction for firm (e.g. dis-integration) • Access to resources (intangible and tangible) Why Diversify? Self-interest! • Managerial Motives (Value-reduction) • Diversify employment risk • Increase compensation Justifying Diversification… • Value-creation only! • Options must pass a variety of tests • Attractiveness test (structurally) • Cost-of-entry test (NPV > 0?)
• Better-off test
• Diversification Assumptions
• Unique management skills
• Slack resources, capabilities, or core competencies
Which Business Portfolio is Related?
Which is Unrelated?
• Johnson & Johnson








Baby products
Band-Aids
Stayfree, Carefree
Non-prescription drugs
Surgical/hospital products
Reach dental products
Accuvue contact lenses
Skin care products
• Textron, Inc.








Bell Helicopters
Cessna Aircraft
E-Z-Go golf carts
Missile reentry systems
Specialty fasteners
Financial services
Tanks and armored vehicles
Jacobson Turf Care equipment
Test Your Knowledge: Diversification
and Business Portfolio
• Identify the following about Tesla, Inc.:
• Number of business segments
• Overall corporate revenues and revenues by segment
• Proportion of revenues by segment
• How would you characterize the level of diversification? Are
there any risks?
https://www.globaldata.com/data-insights/automotive/teslas-quarterlyrevenue-by-segment/
Portfolio Analysis: BCG (Boston
Consulting Group) Growth Share
Matrix
High
Stars
Question Marks
Rapid growth and expansion
New ventures. Risky.
Remainder
Divested
A Lucky Few
Industry
Growth
Rate
Cash Cows.
Dogs.
Milk to finance question marks and
stars.
No investment. Keep if some profit,
otherwise divest.
Low
High
Adapted from Contemporary Strategy Analysis, 6e by Grant, R.M.
Relative Competitive Position
(Market Share)
Low
Liquidated
Characteristics of the BCG
Matrix
• Business units evaluated:
• Industry growth rate and relative market share
• Characteristics
• Businesses represented by a circle
• Circle size is the portfolio-relative revenue
• Corporate scope = number of circles
• Corporate distribution = relative size of the circles
• Balanced = circles of equal size
• Unbalanced = circle size is unequal
Hypothetical Corporate Portfolio:
Company A Today
20%
Stars
Question Marks
Cash Cows
Dogs
18%
16%
14%
12%
Industry
Growth 10%
8%
Rate
6%
4%
Relative Market Share
.1X
.2X
.3X
.4X
.5X
1X
2X
4X
0%
10X
2%
Test Your Knowledge: Portfolio
Analysis of Apple, Inc.
• (3 pts.) What is the scope of Apple’s portfolio?
• (3 pts.) How would you characterize its distribution? How
many cash cows, dogs, stars, and question marks?
• (3 pts.) Assuming the accuracy of the BCG Growth-Share
matrix, what do you see as the long-term prognosis of this
portfolio?
• (1 pt.) Should any changes be made to the portfolio’s
structure?
• What would you advise?
Managing the Corporate Portfolio:
GE/McKinsey Matrix
Industry Attractiveness (e.g., market size, market
growth, industry profit, structural threats, etc.)
High
Medium
Low
Low
Medium
Business Unit Competitive Advantage (e.g., strategic
resources and distinctive competencies, market share,
customer loyalty, cost structure, cash flow, etc.)
Adapted from Contemporary Strategy Analysis, 6e by Grant, R.M.
High
Achieving Economies of Scope
Bus. A
Bus. B
Bus. C
PROCUREMENT
PROCUREMENT
PROCUREMENT
TECHNOLOGY
TECHNOLOGY
TECHNOLOGY
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
Achieving Economies of Scope
Bus. A
Bus. B
Bus. C
TECHNOLOGY
PROCUREMENT
TECHNOLOGY

TECHNOLOGY
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
➢ Opportunities to combine procurement activities and gain leverage with suppliers
Achieving Economies of Scope
Bus. A
Bus. B
Bus. C
PROCUREMENT
PROCUREMENT
PROCUREMENT
TECHNOLOGY
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
OPERATIONS
SALES/
MARKETING
DISTRIBUTION
➢Opportunities to share technology, transfer technical skills, combine R&D
Winner’s Curse: Understanding the
True Value of Acquisitions
Synergy
Value
Purchase Price
Value
Gap
Intrinsic
Value
Market
Value
Market Mechanism And the Industry
Value Chain
U
U
U
Raw
Materials
Parts
Mfg.
Prod./
Assembly
Upstream
Activities
D
D
Mktg. Distribution
D
D
Retail
Postsales
Service
CUSTOMER
Downstream
Activities
• Few firms vertically integrated
• Price mechanism guides independent decisions of individuals
and firms
• Transaction costs include search, negotiating, contracting,
monitoring, and enforcement costs
When Transaction Costs Exceed
Administrative Costs…
Vertical
Scope
Product
Scope
Geographic
Scope
V1
Several
Specialized
Firms
V2
P1
V3
P2
P3
C1
C2
C3
C2
C3
Market Mechanism yields to…
V1
Single
Integrated
Firm
V2
V3
P1
P2
P3
C1
Administrative Mechanism
Adapted from Contemporary Strategy Analysis, 6e by Grant, R.M.
Vertical Integration
• Benefits
• Lower/market transaction
costs
• Building barriers to entry
• Information access
• Protection of proprietary
technology
• Risks
➢ Reduced organizational
flexibility
➢ Compounded risk-of
environmental changes
➢ Coordination costs
➢ Loss of focus
➢ Alienating suppliers
➢ Incentive problem
➢ Strategic/admin. costs
Types of Vertical Relationships
Low
Formalization
Informal
Supplier/
Customer
relationships
Vertical
integration
Supplier/
Customer
partnerships
Spot sales/
purchases
Joint
ventures
Agency
agreements
Long-term
contracts
Franchises
High
Low
Adapted from Contemporary Strategy Analysis, 6e by Grant, R.M.
Degree of Commitment
High

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