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Corporate - Level Strategy

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Rene Garza

on 9 June 2011

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Transcript of Corporate - Level Strategy

A number of reasons exist for diversification including:

1. Value-neutral: a desire to match and thereby neutralize a compeitor's market power.

2. Value-reducing: managers have motives to diversify a firm to a level that reduces its value.

3. Value-creating
-Operational relatedness: sharing activities between businesses
-Corporate relatedness: transferring core competencies into business 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
-Example: 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 Value-Creating Diversification (VCD): Related Strategies 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 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 Value-Creating Diversification (VCD) Unrelated Strategies Value-Neutral Diversification: Incentives and Resources

Incentives to Diversify
-Antitrust Regulation and Tax Laws
-Low Performance
-Uncertain Future Cash Flows
-Synergy and Firm Risk Reduction
-Resources and Diversification The Curvilinear Relationship between Diversification and Performance Value-Reducing Diversification: Managerial Motives to Diversify 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 Reasons for
Diversification Value-Creating Diversification Strategies: Operational and Corporate Relatedness Creates value through two types of financial economies
Cost savings realized through improved allocations of financial resources based on investments inside or outside firm
-Efficient internal capital market allocation

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 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 Value-Neutral Diversification
Incentives and Resources Corporate - Level Strategy Value-Creating Diversification (VCD): Related Strategies Value-Creating Diversification (VCD): Related Strategies Value-Reducing Diversification: Managerial Motives to Diversify Anti Trust and Regulation Laws
•Antitrust policies and tax laws provided incentive for US firms to diversity in the 1960s and 1970s
•Celler-Kefauver Antimerger Act
•Thus, regulatory changes and the degree to which they are enforced are incentives or disincentives for diversification.

Low Performance
•Low returns are related to greater levels of diversification
If your firm is experiencing high performance, the need to diversify is eliminated. However, if your firm is experiencing low performance, you now have an incentive for diversification.
•There is a curvilinear relationship here Uncertain Future Cash Flows
As a firm’s product line mature or is threatened, diversification may be an important defensive strategy.

Synergy and Firm Risk Reduction
Synergy exists when the value created by business units working together exceeds the value that those same units create working independently.
Synergy produces joint interdependence between businesses that can threaten the firm’s flexibility to respond. This will force two decisions:
a) Reduce its level of technological change by operating in environments that are more certain
b)Constrain its level of activity sharing and forgo synergy’s potential benefits Resources and Diversification
•Tangible resources may create resource interrelationships in production, marketing, procurement, and technology, defined earlier s activity sharing.

•Intangible assets are more flexible than tangible physical assets in facilitating diversification.
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