Question

1.    Discuss the major corporate-level strategy formulation responsibilities, and how they are different from business-level strategy formulation responsibilities (review ch. 5)?

2.    Why might an organization choose to diversify? Define related and unrelated diversification?

3.    What are Mergers and Acquisitions? What are some potential problems with it? Define Poison Pill.

4.    What is BCG Matrix? Explain the characteristics of a question mark, star, cash cow and dog.

Answer 1

1. Discuss the major corporate-level strategy formulation responsibilities, and how they are different from business-level strategy formulation responsibilities (review ch. 5)?

At the corporate level, primary strategy formulation responsibilities includes; setting the direction of the entire organization by establishing and communicating the organizational mission, vision, enterprise strategy and long term goals; Formulation of a corporate strategy which is the selection of broad approach to corporate level- strategy – concentration, vertical integration, diversification, and international expansion; selection of business in which to compete and the management of the corporate portfolio where emphasis is given to each business unit – allocation of resources for capital equipment, etc.; selection of tactics for diversification and growthand management of resources and capabilities which is the coordination of business level strategies and an appropriate management structure for the corporation.

Corporate level strategies address the entire strategic scope of the enterprise. It includes deciding in which product or service markets to compete and in which geographic regions to operate. Business level strategies are similar to corporate strategies in that they focus on overall performance. In contrast to corporate level strategies they focus on only one rather than a portfolio of businesses.

2. Why might an organization choose to diversify? Define related and unrelated diversification?

An organization may choose to diversify due to strategic reasons such as, (1) risk reduction through investments in dissimilar business or less-dynamic environments; (2) stabilization or improvement of earnings; (3) improvement in growth,(4)cash generated in slower growing traditional areas exceeds that needed profitable investment in those areas; (5)application of resources, capabilities and or core competencies to related area; (6)generation of synergy/economics scope; (7) use of excess debt capacity; (8) desire to learn new technologies (9) increase in market power; (10) desire to turn around a failing business, leading to high returns. An organization may also choose to diversify by personal motives that the CEO may have to pursue such as; (1) desire to increase power and status; (2) desire to increase compensation from running a larger enterprise; (3) desire to increase value of the firm; (4) craving for a more interesting and challenging management environment.

Diversification can be divided into two broad categories; related diversification which implies organizational involvement in activities that is somehow related to the dominant or core business of the organization and unrelated diversification which does not depend in any pattern of relatedness.

3.What are Mergers and Acquisitions? What are some potential problems with it? Define Poison Pill.

Mergers occur any time two organizations combine into one. In Acquisitions, one organization buys the controlling interest in the stock of another organization or buys it outright from its owners.

Potential problems with mergers and acquisitions can include high financial costs such as (1) high premiums typically paid by acquiring firm, (2) increased interest costs, (3) high advisory fees and other transaction costs, (4) Poison pills which are antitakeover devices that make companies very unattractive to a potential buyer. One example of a poison pill is the “golden parachute” in which target firm executives receive large amounts of severance pay if they lose their jobs due to a hostile takeover. Problems can also include strategic problems such as; (1) high turnover among the managers of the acquired firm, (2) short-term managerial distraction (3) long term managerial distraction, (4) less innovation, (5) no organizational fit (6) increased risk.

4.What is BCG Matrix? Explain the characteristics of a question mark, star, cash cow and dog.

The BCG Matrix is based on two factors, industry growth rate and relative market share. The two factors are used to plot all of the business in which the organization is involved. The BCG Matrix is sometimes used in planning cash flows known as; Stars – which generate about as much cash as they use, on average, have the greatest potential for growth and tend to be a highly profitable businesses .Question Marks – which require additional cash to sustain rapid growth. Cash Cows – generate more cash than they can effectively reinvest. Dogs – are the least attractive types of business. The original prescription was to divest them.