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Terms in this set (11)
Corporate Level Strategy
• The primary reason a firm uses a corporate-level strategy to become more diversified is to create additional value.
• Using a single- or dominant-business corporate-level strategy may be preferable to seeking a more diversified strategy, unless a corporation can develop
economies of scope or financial economies between businesses, or unless it can obtain market power through additional levels of diversification.
• Economies of scope and market power are the main sources of value creation when the firm diversifies by using a corporate-level strategy with moderate to high levels of diversification.
Related Diversification
• The related diversification corporate-level strategy helps the firm create value by sharing activities or transferring competencies between different businesses in the company's portfolio.
Sharing Activities
• Sharing activities usually involves sharing tangible resources between businesses.
• Transferring core competencies involves transferring core competencies developed in one business to another business.
• It also may involve transferring competencies
between the corporate headquarters office and a business unit.
• Sharing activities is usually associated with the related constrained diversification corporate-level strategy.
• Activity sharing is costly to implement and coordinate, may create unequal benefits for the divisions involved in the sharing, and may lead to fewer managerial risk-taking behaviors.
Transferring
• Transferring core competencies is often associated with related linked (or mixed related and unrelated) diversification, although firms pursuing both sharing activities and transferring core competencies can also use the related linked strategy.
Unrelated Diversification
• Efficiently allocating resources or restructuring a target firm's assets and placing them under rigorous financial controls are two ways to accomplish successful unrelated
diversification.
• Firms using the unrelated diversification strategy focus on creating financial economies to generate value.
Value-Neutral
• Diversification is sometimes pursued for value-neutral reasons. Incentives from tax and antitrust government policies, performance disappointments, or uncertainties about future cash flow are examples of value-neutral reasons that firms may choose to become more diversified.
Motives to Diversify
• Managerial motives to diversify (including to increase compensation) can lead to overdiversification and a subsequent reduction in a firm's ability to create value.
• Evidence suggests, however, that the majority of top-level executives seek to be good stewards of the firm's assets and avoid diversifying the firm in ways and amounts that destroy value.
Optimum Diversification
• Managers need to pay attention to their firm's internal organization and its external environment when making decisions about the optimum level of diversification for their company.
• Of course, internal resources are important determinants of the direction that diversification should take.
• However, conditions in the firm's external environment may facilitate additional levels of diversification,
as might unexpected threats from competitors
Low levels of Diversification
-Single Business 95% one thing
-Dominant Business 70-95%% on thing
Moderate to high levels of Diversification
-Related Constrained less then 70% not thing, all businesses share products, tech and distribution (Sharing activities!)
-Related Linked
(mixed related and unrelated): less then 70% one thing, only limited links between business (transferring Core Competencies)
Very High Diversification
-Unrelated
- less then 70% on thing, no common links between businesses
-completely separate businesses
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