Lecture 7

Question 1

Corporate surplus

Answer 1

The value of the company is higher than the sum of its parts

Question 2

CAGR

Answer 2

Compound annual growth rate

Question 3

Good sides of CAGR

Answer 3

Compound annual growth rate

• considers compounding effect
• Provides a standardised comparison for different investments

Question 4

Downsides of CAGR

Answer 4

Compound annual growth rate

• ignores volatility (ups & downs) during the investment period
• doesn’t account for deposits or withdraws

Question 5

What does CAGR measure

Answer 5

It measures the average annual return of investment considering compounding

Question 6

Conglomerate discount

Answer 6

When a big firm is worth less than the sum of its parts

Question 7

Diversification

Answer 7

A corporate strategy to create a corporate advantage

Question 8

Key question of corporate strategy

Answer 8

How to create a competitive advantage for the whole company

Question 9

Normative perspective

Answer 9

• Focuses on what ought to be (values-driven decisions).
• Ensures alignment with company vision and mission, beyond profitability.

Question 10

Does the Corporate Strategy Make Sense?

Answer 10

Mnemonic: RACE-VALUE
1. Resources: Do businesses share tangible/intangible resources?
2. Alignment: Are capabilities and strategies complementary?
3. Customers: Are supplier/customer relationships shared?
4. Execution: Do they have similar competitive strategies?
5. Vision: Does it align with values, mission, vision?
6. Areas: Do they serve similar geographic areas?
7. LUcrative: Are they in growing/profitable industries?
8. Evaluation: Does it resonate across all tests?

Question 11

What is corporate strategy according to Michael Porter?

Answer 11

Company strategy is what makes the corporate whole add up to more than the sum of its parts
- Michael Porter

Question 12

Parenting advantage

Answer 12

refers to the value a corporate parent (the overarching company) adds to its subsidiaries by effectively managing, supporting, and guiding them.

This advantage comes from the parent company’s ability to provide resources, expertise, and strategic oversight that individual business units wouldn’t achieve on their own.

Key idea: The parent company enhances the performance of its subsidiaries, creating synergy rather than unnecessary interference.

Question 13

Reasons for corporate diversification

Answer 13

“Great Managers Excel At Spreading Rewards”
• Growth
• Market Power
• Efficiency Gains
• Addressing Declining Markets
• Spreading Risks
• Responding to Stakeholder Expectations

Question 14

Diversification types

Answer 14

Into related business
Into unrelated business
Into both related and unrelated

Question 15

Why do we diversify into related businesses

Answer 15

We diversify into industries because of strategic resources

Question 16

Unrelated diversification advantages

Answer 16

• spread business risk
• stability of profits
• financial resources can be directed to those industries that offer the best profit prospects
• if bargain - priced firms with big profit potential are bought, shareholder wealth can be enhanced

Question 17

Disadvantages of unrelated diversification

Answer 17

• demanding managerial requirements
• lack of cross-business strategic-fits offers no potential for synergistic advantages

Question 18

SIC code

Answer 18

Standard industry classification code
4 digit code that tells us the industries in which a company operates

Question 19

T/F Total Entropy of 1 means the company presets in only one business and decreases with diversification

Answer 19

Herfindahl Index (HI) of one means the company operates in only one business and decreases with diversification

Question 20

Factors to consider in judging business-unit performance

Answer 20

“Some People Contribute Real Effort Creating Impact.”
• S: Sales Growth
• P: Profit Growth
• C: Contribution to Earnings
• R: Return on Capital
• E: Economic Value Added
• C: Cash Flow Generation
• I: Industry Strength Ratings