theme 8

Question 1

Scope of operation ?

Answer 1

means different products within the same organization and the same firms operations

Question 2

Horizontal and vertical scope of operation ?

Answer 2

• Horizontal scope: the range of products and services that serves within the local markets
o Like Pepsi, they sell Pepsi coke but also ships and more

it can be done in 2 ways ( Merge or Acquisition)

• Vertical scope: part of the value chain
o Pepsi doesn’t only sell chips and drinks but also they offer cans and they produce cans

it can be done in 2 ways ( backward or forward ) (coca cola producing cans is backward ) (apple opening retail store is forward)

Question 3

Merge and acquisition ( M & A)?

Answer 3

• merger: you merge two companies in a new single entity

* acquisition: one company takes over another

Question 4

advantages of horizontal scope?

Answer 4

• increase efficiency in operations
• heightened product differentiation
• reduce rivalry
• increase firm bargaining power

Question 5

advantages of vertical scope?

Answer 5

backwards integration :
o reducing supplier power
o reducing costs

forward integration :
o	increase channel activity efficiencies
o	increase bargaining power
o	better access to end users
o	increasing brand awareness
o	product differentiation

Question 6

what is the substitute of M&A

Answer 6

instead of using mergers and acquisitions (M&A) you can have
• strategic alliances: formal agreement with another corporate that you decide to work with on a common objective
o it is hard because often these companies are in the same industries and are competitive
• joint venture: a kind of an alliance where you create an independent corporate entity which means getting the companies together to become a third one

Question 7

advantages of strategic alliances and joint ventures

Answer 7

• minimize problems
• extend the scope to international expansion
• greater flexibility

Question 8

why going for an alliance and not an M&A

Answer 8

the risk is less because you remain a separate party and both sides work to get benefits from each other’s so you just the agreement over time and adapt to new circumstances
Not like in joint venture which means there is no way back
Alliance is like dating and joint venture is like marriage with having kids

Question 9

what is a corporate strategy ?

Answer 9

a company that has different divisions , for example Philips has medical , electronical and lightening , each division may have different competitive advantage and strategies are not always aligned , but the corporate center which is Philips has a corporate strategy that bring all these divisions together

Question 10

Explain to me the managerial challenges when you have so many business units and more particularly about the importance of synergies

Answer 10

strategic challenges are :

• increasing pressure from capital markets
• capturing synergy is much more difficult than expected
• adjusting portfolio is not easy

Strategically you can only justify a corporate is if there are synergies, synergies need to be available in order for having a corporate

Question 11

The importance of creating synergies

Answer 11

• Synergies are created because you can share activities that enhances revenues and reduce cost
• Coordinate certain business strategies to enhance revenues
• Join business creation
• Pooled market strength which means getting the strength of another market and use it
• Control over business systems like IT systems (you don’t need new ones)
• Sharing assets

Question 12

Explain Synergy ?

how can we create it ?

Answer 12

Strategically you can only justify a corporate is if there are synergies, synergies need to be available in order for having a corporate

Synergies is not 1+1=2 it is 1=1=3
Which means the sum of two companies is not equal to summing the value of each individually (breakup value). it means that summing them will generate a value that is bigger than both values separately (enterprise value)

we can create synergy by :

• Reducing cost
• Enhancing revenue
• improve margins

Question 13

what are synergy killers

Answer 13

• Fighting between both companies which will generate climate hostility
• Culture of secrecy: not giving information
• Misaligned incentives: when companies have different incentives system than the other which misaligns bonuses and rewards are not given in the same manner which can create jealousy
• Mistrust undermines corporation which is the ultimate goal of synergy

Question 14

The Boston consulting group growth share matrix

Answer 14

• A dog is when you have both low market share and growth rate and this means no growth potential and you want to get rid of this position by divesting or selling
• A cow means you have high market share in the industry but the industry is not exiting or growing but your cash flow is high because you have a great position what you do is (you keep ad milk the cow)
• The question mark is where you position is week but the industry is promising, and it is hard to know what you do here because you either divest or invest and you should try to know if your business will become a dog or a star
• A star is when you have a big market share and the industry is fast growing so this is the optimal thing you want

Question 15

Differentiation vs diversification

Answer 15

Differentiation refers to creating different products in one industry ( it can be Horizontal : different type of juice)
(it can be Vertical : different qualities of cars )

Diversification means different business activity in different industries

Question 16

How to justify Diversification ?

Answer 16

testing whether a diversification will add long term value for shareholders

1- the industry attractiveness test (has to be attractive)
2- Cost of Entry ( should not be high)
3- the better off : you need to create significant synergies because without them there is no point of diversifying in that industry

Question 17

Difference between economies of scope and economies of scale

Answer 17

• Scale: means you have the same product but because you can produce more and sell more of that product your average costs are reducing through learning
• Scope: you also can reduce the cost but not because you have the same products but because you have synergies between different kinds of products like Unilever they have shampoos, deodorant, soap…. therefore you have larger scope and you are benefitting from bringing these businesses together by synergies which also reduces the costs

Question 18

Walt Disney case

Answer 18

It has been acquiring a number of companies in the theater and entertainment industry, by doing that they are owning the entertainment, the television, theme parks, media network, sports network, resort groups, property clubs, four cruise ships and a lot more. All of these are managed by the corporate Walt Disney and it is very important that it unifies all the divisions and this corporate is creating as much synergies as much as possible between these units.