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Chapter 6: Corporate-Level Strategy

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Stephanie Duesler

on 9 June 2011

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Transcript of Chapter 6: Corporate-Level Strategy

Value-Creating Diversification (VCD):
Unrelated Strategies Chapter 6: Corporate-Level Strategy Creates value through 2 types of financial economies 1) Efficient internal capital market allocations 2) Restructuring of acquired assets Market Power
Exists when a firm is able to sell its products above the existing competitive level, to reduce costs of primary and support activities below the competitive level, or both.

Multimarket (or Multipoint) Competition
Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets.

Related diversification strategy may include
Vertical Integration
Virtual integration Market Power Reasons for Diversification
A number of reasons exist for diversification including Value-creating Operational relatedness: sharing activities between businesses
Corporate relatedness: transferring core competencies into business Value-neutral Value-reducing Value-Creating Diversification (VCD): Related Strategies Purpose: Gain market power relative to competitors

Related diversification wants to develop and exploit economies of scope between its businesses 1. Operational Relatedness: Sharing activities
Can gain economies of scope
Share primary or support activities (in value chain)
-Risky as ties create links between outcomes
Related constrained share activities in order to create value
Not easy, often synergies not realized as planned 2. Corporate Relatedness: Core competency transfer
Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience and expertise
Two sources of value creation -Expense incurred in first business and knowledge transfer reduces resource allocation for second business
-Intangible resources difficult for competitors to understand and imitate, so immediate competitive advantage over competition
Use related-linked diversification strategy Value-Neutral Diversification Incentives to diversify
internal low performance
uncertain future cash flows
pursuit of synergy
reduction of risk external antitrust regulations
tax laws Relationship between Diversification and Performance Performance Diversification Uncertain Future Cash Flows maturing product lines may need diversity for L-T survival e.g. GM diversifying their green car tech into residential appliances keeping your eggs out of one basket Diversified egg baskets--you'd have to drop all three! Consolidated egg basket-- don't drop it :( Synergy/risk reduction exists when the value created by business units working together eceeds the value of the units working independently SYNERGY *note: increased synergy leads to increased risk of corporate failure, as synergy "produces joint interdepedence that constrains flexibility" This leads to two basic strategic choices for a firm concerning synergy: A. Become risk-averse, and pursue related diversification B. Constrain level of activity sharing instead of pursuing benefits of synergy Resources & Diversification Basis of diversification affects imitability, and thus long-term competitive advantage gained
Diversification based on common (usually tangible) resources, like finances, do not grant the same competitive advantage as diversifying based on intangible, hard-to-imitate resources like unique expertise The resources need to diversify affect ease and profitability of diversifying--diversification is easier if operational relatedness exists between old and new ex: Acer using excess laptop factory capacity to manufacture netbooks and smartphones, achieving integration of manufacturing and sales integration opportunities operational relatedness not always easy to achieve (ex: Foster and its beer and wine manufacturing) 1) Efficient internal capital market allocation
-Cost savings realized through improved allocations of financial resources based on investments inside or outside firm

2) Restructuring of acquired assets
-Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market Value-Creating Diversification (VCD): Unrelated Strategies Value-Reducing Diversification: Managerial Motives to Diversify Top-level executives may diversify in order to diversity their own employment risk, as long as profitability does not suffer excessively

Diversification adds benefits to top-level managers but not shareholders
This strategy may be held in check by governance mechanisms or concerns for one’s reputation Summary Model of the Relationship Between Diversification and Firm Performance Economies of scope: Cost savings firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses
VCD: Composed of ‘related’ diversification strategies including Operational and Corporate relatedness THE END
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