MGMT 466 Exam 2 - FLASHCARDS - Chapter 6
What specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets?
Corporate level strategy
What is a strategy that involves a company expanding into new products, services, or markets?
Diversification
What are the five categories of businesses according to increasing levels of diversification?
• Single business
• Dominant business
• Related constrained
• Related linked
• Unrelated
Do single businesses have high or low diversification?
Low
Do related constrained businesses have high or low diversification?
Moderate to high
Do unrelated businesses have high or low diversification?
Very high
Do dominant businesses have high or low diversification?
Low
Do related linked businesses have high or low diversification?
Moderate to high
What type of business has 95 percent or more revenue coming from a single business?
Single business
What type of business has between 70 and 95 percent of revenue coming from a single business?
Dominant business
What type of business has less than 70 percent of revenue coming from a dominant business and all businesses share product, technological, and distribution linkages?
Related constrained
What type of business has less than 70 percent of revenue coming from a dominant business and there are limited links between businesses?
Related linked
What type of business has less than 70 percent of revenue coming from a dominant business and there are no links between businesses?
Unrelated
True or false: A firm uses a related diversification strategy when it generates more than 30 percent of its revenue outside a dominant business?
TRUE
True or false: A firm uses a related diversification strategy when its businesses are related to each other in some manner?
TRUE
What are the two types of related diversification strategies?
Related constrained diversification strategy
Related linked diversification strategy
True or false: In a related constraint diversification strategy, links between the diversified firm’s businesses are direct?
TRUE
True or false: in a related linked diversification strategy, the firm’s portfolio of businesses have only a few links between them?
TRUE
True or false: A related linked diversification strategy shares fewer resources and assets than related constrained?
TRUE
True or false: A related linked diversification strategy is more challenging to run than related constraint?
TRUE
True or false: A highly diversified firm that has no relationships between its businesses follows an unrelated diversification strategy?
TRUE
What are firms using an unrelated diversification strategy called?
conglomerates
True or false: Unrelated firms make no effort to share activities or transfer core competencies between or among their businesses?
TRUE
Are firms with an unrelated diversification strategy difficult to manage?
Yes
What is the objective of a diversification strategy?
Increase the firm’s value, increasing revenue or reducing costs
What exists when the value created by business units working together exceeds the value that those same units create working independently?
Synergy
What is saving gained by producing two or more distinct goods, when the cost of doing so is less than that of producing each separately?
Economies of scope
What provides opportunities to share resources among the operational activities of the firm?
Operational relatedness
What provides opportunities for transferring corporate level competencies across businesses of the firm?
Corporate relatedness
What are the benefits of diversification based on operational relatedness?
Sharing activities creates economies of scope
Is sharing activities usually associated with the related constrained diversification corporate-level strategy?
Yes
What are the risks of diversification based on operational relatedness?
losing focus on your core business, overestimating the synergy between different operations, spreading resources too thin, potential for cannibalization between product lines, increased complexity in management
What are the benefits of diversification based on corporate relatedness?
Fixed cost already incurred and immediate use. Hard to imitate.
What are the risks of diversification based on corporate relatedness?
Resistance
What exists when a firm is able to sell its products above the existing competitive price level, reduce its costs, or both?
Market power
What are ways a firm might increase market power through related diversification?
−reducing costs below the levels of close competitors or increasing the firm’s ability to charge a price that is higher than competitors.
−producing inputs for its value creation system that were previously bought from other companies (backward vertical integration).
−vertically integrating forward by becoming its own customer for some of its products or services
Through market power, do firms block competitors through multipoint competition in the same product area or geographic market?
Yes
What is an example of how through market power, firms block competitors through multipoint competition in the same product area or geographic market?
The actions taken by UPS and FedEx in two markets, overnight delivery and ground shipping, illustrate multipoint competition. UPS moved into overnight delivery, FedEx’s stronghold; in turn, FedEx bought trucking and ground shipping assets to move into ground shipping, UPS’s stronghold
True or false: through multipoint competition, rival firms often experience pressure to diversify because other firms in their dominant industry segment have made acquisitions to compete in a different market segment?
TRUE
Firms can create operational relatedness by sharing either a primary activity, such as an inventory delivery system, or a support activity, such as human resource management. Firms using the related constrained diversification strategy share activities like these in an effort to create additional value for stakeholders
.
Is simultaneous operational relatedness and corporate relatedness difficult for competitors to understand and imitate?
Yes
How does Amazon use a related diversification strategy?
Amazon uses a related diversification strategy to simultaneously create economies of scope through operational and corporate relatedness. This relatedness is illustrated in how its deep customer knowledge is integrated in the various retail and media businesses along with the cloud service and shipping businesses. Amazon has pursued a related business strategy primarily through its online retail portal.
How does Disney use a related diversification strategy?
The company has separate but related businesses in media networks, parks and resorts, studio entertainment, consumer products, and interactive media. Within the firm’s studio entertainment business, for example, Disney can gain economies of scope by sharing activities among its different movie distribution companies, such as Marvel, Touchstone Pictures, Hollywood Pictures, and Dimension Films. Disney relies on broad and deep knowledge about its customers to sustain its corporate-level core competencies in advertising and marketing. With these competencies, Disney is able to create economies of scope through corporate relatedness as it cross-sells products highlighted in its movies through the distribution channels that are part of its parks and resorts and consumer products businesses.
What are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm?
Financial economies
Do financial economies have unrelated diversification?
Yes
Financial economies can be created when firms learn how to create value by what?
−buying assets at a low cost.
−restructuring the assets.
−selling the assets at a price that exceeds their cost in the external market
What are the benefits of financing internally?
Access to full picture, keep info. private, see potential outsiders cannot, trouble shoot better than outside investors– you have more power to oust weak managers etc
What is the cost of financing internally?
Financial economies can be replicated by competitors
Is value creating diversification more relevant in emerging markets?
because of lower domestic competition due to still limited local talent pools
True or false: The broad objective of a diversification strategy is to increase the firm’s value by improving its overall performance?
TRUE
True or false: The quality and quantity of the firm’s resources may permit only diversification that is value neutral rather than value creating?
TRUE
What do incentives to diversify come from?
Both the external environment and a firm’s internal environment
What are external incentives to diversify?
Antitrust regulations and tax laws
What are internal incentives to diversify?
low performance, uncertain future cash flows, and reduction of risk for the firm
True or false: Diversification and firm size are highly correlated?
True. larger companies tend to be more diversified across different product lines, markets, or industries, as their scale allows them to spread risk and pursue multiple growth avenues more easily compared to smaller firms.
True or false: Managerial motives to diversify can lead to overdiversification and a subsequent reduction in a firm’s ability to create value?
TRUE
