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What type of value should corporate
level strategy create?
1) such that businesses forming the corporate whole are worth more than they would be under independent ownership
2) that equity holders cannot create through portfolio investing
What is the source of
synergy in vertical integration?
Value chain economies
What is the source of
synergy in diversification?
Economies of scope
What are economies of scope?
- the increase in the value of a firms products or services that results from a firm
- operating in multiple industries or markets.
The term scope refers?
range of industries or markets served by a diversified firm
What are Diversification strategies?
when a firm operates in multiple industries or markets simultaneously.
Links refer to?
- similarity of industry or market customers, technologies, inputs, distribution channels,
What is Product Diversification?
operating in multiple industries
What is Geographic Market Diversification?
operating in multiple geographic markets
What is Product-Market Diversification?
operating in multiple industries in multiple geographic markets
What is Limited Diversification?
- When all or most of a firm’s business activities fall within a single industry and
- geographic market
What is Related Diversification?
- When less that 70% of a firm’s revenues come from a single industry and market and
- these industries and markets are linked
Two criteria for value of diversification?
- 1) Some economy of scope
- 2) Must create value that outside equity holders can't create on their own
What are Sharing Activities?
exploiting efficiencies of sharing business activities
*Results in cost sharing across businesses
*Can occur at any stage of a firm’s value chain
What are Spreading Core Competencies?
- utilizing a core competency developed in one market or business in others
- * Core competencies are complex sets of resources and capabilities that link different
- businesses through managerial or technical know-how.
*Increases value because multiple core competencies don’t have to be developed
What is Internal Capital Market?
- notion that insiders can allocate capital across division more efficiently than the
- external capital market because managers have better, more detailed information about the earnings prospects and performance of a
May serve to protect proprietary information – may also result in escalating commitment to bad projects or investments
What is Risk Reduction?
counter cyclical businesses may provide decreased overall risk
*Usually does not create value that stockholders could not achieve through portfolio diversification
What are Tax Advantages?
- losses in one division can offset losses in another division – thereby reducing a
- firm’s tax liability
What is Multipoint Competition?
when two or more firms compete simultaneously in multiple markets
What is mutual forbearance?
- when a firm chooses not to compete aggressively in one market to avoid competition
- in another market
What is Market Power?
Diversification can facilitate the subsidization of one business by another
- *This may allow for a firm to engage in predatory pricing in one business in order to
- drive competitors out of that market.
What is Managerialism?
an economy of scope that benefits managers at the expense of equity holder
What is Executive Compensation?
executive compensation is positively related to firm size (sales) –
What is Executive Employment Risk?
Executives make firm-specific investments in their human capital