Chp 6

Question 1

Corporate level strategy (company-wide)

Answer 1

Actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of SBUs.

Question 2

Business level strategy (competitive)

Answer 2

A means of competing in a product market.

Question 3

How can firms obtain growth?

Answer 3

• Horizontal integration
• Vertical integration
• Enter different geographic markets

Question 4

Goals of corporate-level strategy

Answer 4

Profit, revenue, and growth. Help the firm earn above-average returns by creating value.

Question 5

What’s the basic corporate-level strategy?

Answer 5

Product diversification

Question 6

What does a successful corporate strategy look like?

Answer 6

Reducing variability in the firm’s profitability as earnings are generated from different businesses

Question 7

Levels of diversification

Answer 7

• Low
• Moderate to High
• Very High

Question 8

Low levels of diversification

Answer 8

• Single business

- Dominant business

Question 9

Moderate to high levels of diversification (value-creating diversification)

Answer 9

• Related constrained

- Related linked

Question 10

Very high levels of diversifcation

Answer 10

• Unrelated

Question 11

Single business diversification strategy

Answer 11

Firm generates 95% or more of its sales revenue from its core business.

Question 12

Dominant business diversification strategy

Answer 12

Firm generates between 70 and 95% of its total revenue within a single business area

Question 13

Pros of low levels of diversification

Answer 13

• Develop market-specific capabilities
• Superior customer service
• Easier time reaching EoS
• Efficient use of resources

Question 14

Related constrained diversification strategy

Answer 14

Firm generates more than 30% of its revenue outside a dominant business. Businesses are related to each other by using similar sourcing, throughput, and outbound processes.

Question 15

Pros of related constrained diversification strategy

Answer 15

• Sharing resources and capabilities
• Transfer of knowledge across businesses
• Customers and markets are similar
• R&D approach

Question 16

Related linked diversification strategy

Answer 16

Firm generates more than 30% of its revenue outside a dominant business. Businesses only have a few links between them.

Question 17

Pros of related linked diversification strategy

Answer 17

• Transfer of knowledge across businesses

Question 18

Unrelated diversification strategy (conglomerates)

Answer 18

A highly diversified firm with no relationships between SBUs.

Question 19

Reasons for diversification

Answer 19

• Value-creating diversification
• Value-neutral diversification
• Value-reduced diversification

Question 20

Value-creating diversification

Answer 20

• Economies of scope
• Market power
• Financial economies

Question 21

Value-neutral diversification

Answer 21

• Antitrust regulation
• Tax laws
• Low performance
• Uncertain future cash flows
• Risk reduction for firm
• Tangible resources
• Intangible resources

Question 22

Value-reducing diversification

Answer 22

• Diversifying managerial employment risk

- Increasing managerial compensation

Question 23

Economies of scope

Answer 23

Cost savings a firm creates by successfully sharing resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses.

Question 24

Corporate-level core competencies

Answer 24

Complex set of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise

Question 25

Market power

Answer 25

Firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level, or both

Question 26

Multipoint competition

Answer 26

When two or more diversified firms simultaneously compete in the same product areas or geographical markets

Question 27

Vertical integration

Answer 27

When a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration). - Acquiring a company in the supply chain

Question 28

Financial economies

Answer 28

Cost savings realized through improved allocations of financial resources based on investments inside or outside the firm

Question 29

Types of financial economies

Answer 29

- Efficient internal capital market allocation | - Restructuring of assets

Question 30

Efficient internal capital market allocation

Answer 30

Capital markets are believed to efficiently allocate capital Efficiency results as investors take equity positions (ownership) with high expected future cash-flow values. Capital is also allocated through debt as shareholders and debt holders try to improve the value of their investments by taking stakes in businesses with high growth and profitability prospects.

Question 31

Restructuring of assets

Answer 31

Creating value by buying, restructuring, and then selling the restructured companies' assets in the external market

Question 32

How does growth occur?

Answer 32

Diversification --> profitability --> outsourcing all risk to smaller firm