Chapter notes 6-12 (final)

Chapter notes 6-12 (final) - Chapter 6 Corporate-Level...

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Chapter 6: Corporate-Level Strategies A corporate-level strategy specified actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets Levels of Diversification Low Levels of Diversification Single business: 95% of more of revenue comes from a single business (e.g., Wrigley) Dominant business: Between 70% and 95% of revenue comes from a single business (e.g., UPS) Moderate to High Levels of Diversification Related constrained: Less than 70% of revenue comes from the dominant business, and all businesses share product, technological, and distribution linkages (e.g., Related linked (mixed related and unrelated): Less than 70% of revenue comes from the dominant business, and there Very High Levels of Diversification Unrelated: Less than 70% of revenue comes from the dominant business, and there are no common links between businesses (e.g., United Technologies, Textron, Samsung, HWL) Reasons for Diversification The primary reasons a firm uses a corporate-level strategy to become more diversified it 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. Value-Creating Diversification Value-Neutral Diversification Economies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (unrelated diversification) Efficient internal capital allocation Business restructuring Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources and intangible resources Value-Reducing Diversification Diversifying managerial employment risk Increasing managerial compensation Value-Creating Diversification: Related Constrained and Related Linked Diversification The corporate-level strategy of related diversification helps the firm to create value by sharing activities or transferring competencies between different businesses in the company’s portfolio of businesses.
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Operational Relatedness: Sharing Activities Between Businesses High Related Constrained Diversification Both Operational and Corporate Relatedness Low Unrelated Diversification Related Linked Diversification Low High Corporate Relatedness: Transferring Core Competencies into Businesses Economies of scope are cost savings that the firm creates by successfully sharing some of its
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This note was uploaded on 04/17/2008 for the course MGCR 423 taught by Professor Okhmatovskiy during the Winter '08 term at McGill.

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Chapter notes 6-12 (final) - Chapter 6 Corporate-Level...

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