6 - Corporate Level Strategy

Question 1

corporate level strategy

Answer 1

actions taken to gain a CA by selecting + managing a group of different businesses competing in different product markets

= become more diversified = create additional value

Question 2

levels of diversification

Answer 2

low:

• single business (>95% revenue from its core business area)
• dominant business (70%-95% revenue from a single business)

moderate to high: (<70% revenue from dominant business)

• related constrained (all share product/distribution linkage)
• related linked (limited linkage)

high levels: (<70% revenue from dominant business)
- unrelated (no common links)

Question 3

reasons for diversification

Answer 3

value creating
value neutral
value reducing

Question 4

economies of scope

Answer 4

cost savings created by:

• sharing activities (operational relatedness)
• transferring core competencies (corporate relatedness)

Question 5

value creating diversification strategies

Answer 5

x: corporate relatedness (core competencies)
y: operational relatedness (activities)

related constrained diversification (low, high)

both operational + corporate relatedness (high, high)

unrelated diversification (low, low)

related linked diversification (high, low)

Question 6

operational relatedness

Answer 6

• can be primary or support activities
• risky because it creates links b/w outcomes
• requires careful coordination
• difficult: often synergies not realized as planned

Question 7

corporate relatedness: sources of value creation

Answer 7

1. expense incurred in 1st business and knowledge transfer reduces resource allocation for 2nd business
2. intangible resources difficult for competitors to imitate = immediate CA

Question 8

market power

Answer 8

when a firm is able to:

• sell its products above the existing competitive level, or:
• reduce costs of primary + support activities below the competitive level

firms foster market power through:

• multipoint competition
• vertical integration

Question 9

unrelated diversification strategies

Answer 9

obtain financial economies through:

• efficient internal capital market allocation
• restructuring of acquired assets

(not related to corporate/operational relatedness strategies)

Question 10

value neutral diversification: incentives

Answer 10

antitrust regulation + tax laws
low performance
uncertain future cash flows
risk reduction for firm
resources

Question 11

value reducing diversification

Answer 11

top managerial motives:

• increased compensation
• reduced managerial risk

(no benefits to shareholders)

Question 12

goal of related diversification strategies

Answer 12

= economies of scope

= market power

Question 13

difference between business level and corporate level strategies?

Answer 13

business level: competing in single market

corporate level: competing in several product markets (diversified)

business-level strategy is focused on how an organization generates value by positioning products + services relative to the offerings of other firms in the same industry, whereas, corporate-level strategy deals with a portfolio of distinct products + services.