Chapter 7: Corporate Diversification

Types of Corporate Diversification

Includes: Product Diversification Strategy, Geographic Market Diversification Strategy, Product-Market Diversification Strategy

Related Diversification

Includes: Related-Constrained and Related-linked

Limited Corporation Diversification

Includes: Single-business and Dominant-business

Types of Diversification

Includes: Unrelated Diversification, Related Diversification, Limited Corporation Diversification

Imitability of Diversification

Includes: direct duplication and substitutes

Operational Economies of Scope

Includes: shared activities and core competencies

predatory pricing

setting prices so that they are less than the subsidized business's costs

Product Diversification Strategy

operations in different industries simultaneously

Corporate Diversification Strategy

operations in multiple markets or industries at the same time

Geographic Market Diversification Strategy

operations in multiple markets simultaneously

shared activities

potential sources of operational economies of scope for diversified firms

Types of Economies of Scope

Includes: Operational Economies of Scope, Financial Economies of Scope, Anticompetitive Economies of Scope, and Employee and Stakeholder Incentives for Diversification

Rarity of Diversification

If only a few competing firms have exploited a particular economy of scope, that economy of scope can be rare

Anticompetitive Economies of Scope

Includes Multipoint competition / Collusion and Exploiting market power

Financial Economies of Scope

Includes: Internal capital allocation, Risk reduction and Tax advantages

2 Values of Corporate Diversification

Valuable Economies of Scope and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own

Single-business

more than 95% of revenues comes from one business alone

Dominant-business

about 70 to 95% of revenues comes from one business

deep-pockets model

diversification enables a firm to apply its monopoly power in several different businesses

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

Unrelated Diversification

less than 70% of revenues come from one business most of the business share very few links or commonalities or nothing in common at all

Related-linked

less than 70% of revenues come from one business and different business share few links or commonalities or different links and attributes

Related-Constrained

less than 70% of revenues come from one business and different business share many links or commonalities

Employee and Stakeholder Incentives for Diversification

maximizing management compensation

core competencies

the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies

Product-Market Diversification Strategy

using both product and geographic market diversifications strategies at the same time