Barney Chapter 7 for Spring 2011 - Chapter7 2

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Corporate Diversification Chapter 7
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Corporate Diversification? Corporate diversification strategy A firm is pursuing a corporate diversification strategy when it  operates in multiple industries or markets at the same time General case with more specific forms Product diversification strategy When a firm operates in multiple industries Geographic market diversification strategy When a firm operates in multiple geographic markets Product-market diversification strategy When a firm does both product and geographic market  diversification 2
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Corporate Diversification? Three types of corporate diversification: 1. Limited corporate diversification 2. Related corporate diversification 3. Unrelated corporate diversification 3
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Corporate Diversification? (1) Limited corporate diversification Exists when all or most of a firm’s business activities fall within  a single industry and geographic market Two sub-types Single-business firms 95% of sales in a single product market E.g., WD-40 Dominant-business firms 70 to 95% of sales in single product market E.g., Donato’s pizza 4
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Corporate Diversification? (2) Related corporate diversification Exists when (a) less than 70% of firm’s revenues come from a  single product market AND (b) multiple businesses are linked  in some way E.g., PepsiCo and Disney Two sub-types Related-constrained Exists when businesses share significant number of inputs,  production technologies, distributions channels, customers, etc. Diversification is constrained to product markets that share  numerous resource/capability requirements Related-linked 5
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Corporate Diversification? Unrelated corporate diversification Exists when firm’s businesses share few, if any, common  attributes E.g., General Electric or Siemens 6
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Value of Corporate Diversification Main source of value of corporate diversification is  some kind(s) of economies of scope Economies of scope Exist to the extent that value of products/services firm sells  increases because the firm simultaneously operates in other  businesses Note: This is a super broad definition Scope refers to the number of businesses the firm operates in Economies of scope produce value by: Reducing costs Increasing revenues 7
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Value of Corporate Diversification Three kinds of economies of scope (Table 7.1) 1.
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