Hoofdstuk 7 Corporate diversificatie

Question 1

Corporate diversification

Answer 1

Operates in multiple industries (product diversification) or markets (geographic market diversification) simultaneously

Question 2

Limited corporate diversification

Answer 2

When all or most of its business activities fall within a single industry and geographic market
Single-business: 95% or more of firm revenues comes from a business
Dominant-business: 70-95% of firm revenues comes from a single business

Question 3

Related diversification

Answer 3

Related-constrained: < 70% of firm revenues comes from a single business, and different businesses share numerous links and common attributes (inputs, production technologies, distribution channels, similar customers)
Related-linked: < 70% of firm revenues comes from a single business, and different businesses share only a few links and common attributes or different links and common attributes

Question 4

Unrelated diversification

Answer 4

< 70% of firm revenues comes from a single business, and there are few, if any, links or common attributes among businesses

Question 5

Value of corporate diversification

Answer 5

Economies of scope exist in a firm when the value of the products or services it sells increases as a function of the number of businesses in which that firm operates

It must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own. unrelated diversification is possible for equity holders

Question 6

Operational economies of scope

Answer 6

• Shared activities across several different businesses within a diversified firm (reduces costs, increases revenues through offering bundled set of products or exploiting a positive reputation) (limit: limit ability of a particular businesses to meet specific customers’ and bad reputation)
• Core competencies (the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies; exploit the resources and capability advantages in its original business) (limit: organizational issues, intangible)

Question 7

Financial economies of scope

Answer 7

• Internal capital allocation (being part of a diversified firm which allocates capital among its various businesses; better funding of capital since better information and better ability to judge the actual performance) (limit: harder for unrelated diversification, information should be high-quality, and decisions can be made based on reputation)
• Risk reduction (+ and - lead to moderate)
• Tax advantages (use losses to offset profits, and interest payments on debt are sometimes tax deductible)

Question 8

Anticompetitive economies of scope

Answer 8

• Multipoint competition (two or more diversified firms simultaneously compete in multiple markets; avoid competitive activity because you will get it back in another market)
• Exploiting market power (use monopoly profits to subsidize another business)

Question 9

Employee and stakeholder incentives for diversification

Answer 9

• Maximizing management compensation (bigger firm is more compensation)

Question 10

Rarity of corporate diversification

Answer 10

Less costly-to-duplicate
Shared activities, risk reduction, tax advantages, employee compensation

costly-to-duplicate
Core competencies, internal capital allocation, multipoint competition, exploiting market power

Question 11

Imitability of corporate diversification

Answer 11

• Direct duplication (how costly it is for competing firms to realize this same economy of scope)
• Substitutes (grow and develop each of its businesses separately; strategic alliance)