Diversification Flashcards
1
Q
What is corporate-level strategy?
A
Integrated and coordinated commitments , actions, and behaviors to facilitate competitiveness in multiple businesses and product markets.
2
Q
What is the value of corporate level strategy?
A
- Businesses in a portfolio may be worth more under common ownership
- Corporate level change alters the risks and returns of the corporation and its business units
3
Q
List types of diversification
A
- Product diversification
- International diversification
- Related diversification
- Unrelated diversification (combining dissimilar businesses under single corporate ownership).
4
Q
Firms must have both the incentives and the resources and capabilities to diversify (True / False)
A
True
5
Q
List reasons firms diversify
A
- Economies of scale
- Market power
- Financial economies
- Antitrust Regulation & Tax Laws
- Imitating other firms
- Low performance
- Uncertainty and risk reduction
- Decreasing managerial employment risk (value destroying)
- Increasing managerial compensation
6
Q
List advantages of related diversification
A
- Economies of scale
- Economies of scope (revenue gains or cost savings from sharing resources and capabilities across businesses)
- Synergy
- Market Power
- Vertical Integration - A firm produces or delivers its own inputs (backward) or operates output distribution systems (forward)
7
Q
List advantages of unrelated diversification
A
- Internal capital markets (allocating capital without involving outsiders)
- Risk reduction
- Purchasing firms, restructuring them, and reselling parts of them
8
Q
List Challenges of Diversification
A
- Expensive
- Complex integration & coordination
- Demands attention and resources (creates opportunity costs)
- Often subject to regulatory constraints
- Increases a firm’s exposure to multiple competitors
- Requires expertise in multiple areas
- Managers’ information processing capabilities are limited
- May increase risk, not reduce it
9
Q
A
