ch 6 corporate level strategy (exam 2)

synergy; vertical integration (related constrained)

(HIGH operations relatedness & LOW Corporate Relatedness) The firm with a strong capability in managing operational ___________ , especially in sharing assets between its businesses ***also represents vertical sharing of assets through ___________ ___________ .

transferring; core competencies (related linked diversification)

(LOW operations relatedness & HIGH Corporate Relatedness) represents a highly developed corporate capability for ___________ one or more ___________ _______________ across businesses

Financial economies (unrelated diversification)

(LOW operations relatedness & LOW Corporate Relatedness) ___________ ___________, rather than either operational or corporate relatedness, are the source of value creation for firms using the unrelated diversification strategy

reduce; increase; negative

(Reasons for diversification) Decisions to expand a firm's portfolio of businesses to ___________ managerial risk or ___________ top managers' pay can have a ___________ effect on the firm's value.

diversification rationales

(Reasons for diversification) ___________ _________ that may have a neutral or negative effect on the firm's value

greater; managerial; risk

(Reasons for diversification) ___________ amounts of diversification reduce ___________ risk in that if one of the businesses in a diversified firm fails, the top executive of that business does not risk total failure by the corporation · this reduces the top executives' employment ________.

size; managerial; reduces

(Reasons for diversification) because diversification can increase a firm's ___________ and thus ___________ compensation ---> managers have motives to diversify a firm to a level that ___________ its value.

public domain; marketing power; capability

(Related Diversification strategy Disney example) Downside of these fairy tale themes = the stories are in the _________ _________ ----> competitors are following Disney's successful approach · Competitors don't have Disney's _________ _________ nor franchising _________ along with its interrelated business and corporate skills

related; sharing; knowledge; capability

(Related Diversification strategy Disney example) successful strategy... o 1st --> Disney has _________ set of businesses which they share activities across its different production firms *By _________ = can learn faster and gain success by the knowledge sharing and efficiencies associated with each studio's expertise *Has broad and deep _________ about its customers which is a corporate level capability in terms of advertising and marketing --> this _________ allows Disney to cross sell products highlighted in its movies through its media distribution outlets, parks & resorts, and consumer product business

interrelated; cross selling

(Related Diversification strategy Disney example) successful strategy... o Moving its historical central focus on animation in movies into the same titles or stories using a live action approach ---> leading to consumer product success/ feeding products into its Disney stores and Disney themed sections in department stores as well as promoted resort themes = drive _________ revenue through _________ _________ . *Examples of movies: Cinderella, beauty & the best, and jungle book

corporate; business; synergy

(Related Diversification strategy Disney example) · Successful strategy because uses _________ level strategy rather than _________ -level -->Which adds value across its set of businesses above what the individual businesses could create individually = _________ (or economies of scope)

2nd; decreasing; increases

(Related Diversification strategy Disney example) · _____ largest mass media producer after Comcast · Competitors have seen _________ revenue (lower ratings/tv ad weakness) while Disney is seeing an ________ because of their diversification strategy

reduced; activity-sharing (operational relatedness)

(related constrained strategy= activity sharing risk) if demand for one business's product is __________ , it may not generate sufficient revenues to cover the fixed costs required to operate the shared facilities · These types of organizational difficulties can reduce __________ -__________ success.

coordination; managed (operational relatedness)

(related constrained strategy= activity sharing risk) requires careful __________ between the businesses involved. · Must be __________ effectively for the appropriate sharing of activities

synergy

*****related constrained example: Publicis Groupe uses a related constrained strategy, deriving value from the potential _______ across its various groups, especially the digital capabilities in its advertising business. Strategy has created value for Publicis customers and its shareholders by helping target particular audiences through appropriate media and digital strategies.

growth; resources

**Corporate level strategy Decision to pursue ________ is not a risk-free choice for firms o Carefully evaluate these options (including different corporate strategies) before committing firm ________ to any of them

unrelated; conglomerates (high diversification)

**Fill in blanks Ex: United Technologies Corporation, Textron, Samsung, and Newell Brand Corporation are some firms using ______ diversification type of corporate-level strategy. o Commonly, firms using this strategy are called ______

horizontal (Corporate strategy)

**fill in blank Ex: Disney acquired Pixar and Marvel movie production studios - increasing its ____________ integration in the movie product & distribution business

Incentives to Diversify (value neutral)

*internal -Antitrust Regulation & Tax Laws -Low performance -uncertain future cash flows -synergy & firm risk reduction

Diversification Strategy

- Value-Creating Influences - Value-Neutral Influences - Value-Reducing Influences

increasing (types and levels of diversification)

5 categories of businesses according to _______ levels of diversification

single business (low levels of diversification)

95% or more of revenue comes from a single business

operational relatedness (creating value)

=sharing activities *can create value

Corporate Related

=transferring of core competencies

related diversification corporate-level strategy (moderate diversification)

A firm generating more than 30 percent of its revenue outside a dominant business and whose businesses are related to each other in some manner uses this strategy

related

A firm is ______ through its diversification when its businesses share several links.

risky (operational relatedness)

Activity sharing is also __________ because ties among a firm's businesses create links between outcomes.

suppliers; internal (Efficient Internal Capital Market Allocation)

Although businesses seeking capital must provide information to potential __________ (banks or insurance companies), firms with _________ capital can have at least 2 informational advantages.

(value neutral)

Although, low performance can be an incentive to diversify, firms that are more broadly diversified compared to their competitors may have overall lower performances

diversifying; CEOs; top management

Because firms incur development and monitoring costs when _____________, the ideal portfolio of businesses balances diversification's costs and benefits. o ______ and ______ _____________teams are responsible for determining the best portfolio for their company.

diversified

Because the ________ firm operates in several different and unique product markets and likely in several businesses, it forms 2 types of strategies: 1. Corporate level 2. Business level

dominant business (low levels of diversification)

Between 70% and 95% of revenue comes from a single business.

(Low Performance/value neutral)

Brands which has incentive to diversify, need to be careful because often there are brand risks to moving into areas that are new and where company lacks operational expertise · Can be negative synergy and problems between leaders and cultural fit difficulties with recent acquisitions

(antitrust regulation incentives to diversify/value neutral)

Conglomerates, or highly diversified firms, of the 1960s and 1970s became more "focused" in the 1980s and early 1990s as merger constraints were relaxed and restructuring was implemented.

know-how

Corporate Related: Transferring of Core Competencies o Over time, the firm's intangible resources, such as its _______ -______, become the foundation of core competencies

horizontal; vertical

Corporate Strategies helps companies to select new strategic positions that are expected to increase the firm's value (& growth)..... o Firms can acquire competitors (horizontal integration) or buy a supplier or customer (vertical integration)

geographic markets

Corporate Strategies helps companies to select new strategic positions that are expected to increase the firm's value (& growth)..... o Firms can also pursue market development by entering different __________ __________

diseconomies (Simultaneous Operational Relatedness & Corporate Relatedness)

Cost of realizing both types of relatedness not offset by the benefits created = _________________

investors (Simultaneous Operational Relatedness & Corporate Relatedness)

Difficult for _____________ to identify the value create by a firm as it shares activities and transfers core competencies

discounted; investors (Simultaneous Operational Relatedness & Corporate Relatedness)

Difficult for investors to identify the value create by a firm as it shares activities and transfers core competencies *For this reason, the value of the assets of a firm using a diversificaiton strategy to create economies of scope often is ______________ by ______________.

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

Diversified firms (related and unrelated) can be innovative if the firm pursues these strategies appropriately

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

Diversified firms pursuing economies of scope often have investments that are too inflexible as they try to realize synergy among business units. · number of problems may arise.

level of diversification

Diversified firms vary according to their ______ ___ _____________and the connections between and among their businesses. -low -moderate to high -very high

(uncertain future cash flows-Incentives to Diversify/value neutral)

Diversifying into other product markets or into other businesses can reduce the uncertainty about a firm's future cash flows.

(antitrust regulation incentives to diversify/value neutral)

During 1980s, antitrust enforcement lessened, resulting in more and larger horizontal mergers.

example (Corporate Level Strategy- increases value/growth)

Ex: Disney adds values by competing in a number of related entertainment and distribution industries. Their strategy used as a means to grow revenue and profits but there can be additional strategic intent to growth.

example (tangible resources/activtity sharing to create resource interrelationships)

Ex: Dyson, which produces vacuum cleaners, has invested in battery technology. Dyson's CEO, James Dyson, has indicated that the company, besides producing a battery-operated vacuum, will seek to launch products using new, more efficient battery technology, including an electric automobile. They will also be launching 100 products in 4 categories that are "new" to the company with their efficient battery technology.

Example (too much dependence on outsourcing can lower the usefulness of core competencies/corporate relatedness related linked)

Ex: Fiat has developed a novel organizational solution in how firms can organize R&D to protect against innovation competence loss in R&D outsourcing, by maintaining certain design capabilities in cooperation with the supplier

example (Efficient Internal Capital Market Allocation- large diversified companies, corporate headquarters office distributes capital to create value)

Ex: GE used this approach to internal capital allocation among its unrelated business units.

example (intangible assets difficult to restructure)

Ex: Human Capital and effective relationships that have evolved over time between buyers (customers) and sellers (firm personnel).

(uncertain future cash flows-Incentives to Diversify/value neutral)

Family firms and companies in mature or maturing industries sometimes find it necessary to diversify for long-term survival of the legacy business.

reasons

Firm uses a corporate-level diversification strategy for a variety of _______

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

Firm using a related diversification strategy is more careful in bidding for new businesses, whereas a firm pursuing an unrelated diversification strategy may be more likely to overbid because it is less likely to have full information about the firm it wants to acquire.

primary; support

Firms can create operational relatedness by sharing either a ___________ activity (Ex: inventory delivery systems) or a ___________ activity (Ex: purchasing practices)—> ( value chain )

Unrelated diversification

Firms do NOT seek either operational relatedness or corporate relatedness when using the __________ ___________ corporate-level strategy. · Can also create value

(Resources & Diversification)

Firms may have several value-neutral incentives &/or value-creating incentives to diversify. Value-Creating Incentives: the ability to create economies of scope

related linked (Corporate Related Transferring of Core Competencies)

Firms seeking to create value through corporate relatedness use the _________ __________ diversification strategy (2 ways)

one; few; capabilities

Firms that focus on ______ or very _____ businesses and markets can earn positive returns, because they develop ________useful for these markets and can provide superior service to their customers. ***LOW LEVELS of DIVERSIFICATION

gain market power

Firms using a related diversification strategy may _______ ___________ ________when successfully using a related constrained or related linked strategy.

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

Firms using either a related or an unrelated diversification strategy must understand the consequences of paying large premiums.

related constrained (operational relatedness)

Firms using the ___________ ___________ diversification strategy share activities in order to create value.

(antitrust regulation & tax laws incentives to diversify/value neutral)

Government antitrust policies and tax laws provided incentives for U.S. firms to diversify in the 1960s and 1970s.

high; high

HIGH Operational Relatedness (Sharing Activities between Businesses) HIGH Corporate Relatedness (Transferring Core competencies into Businesses) = Both Operational & Corporate Relatedness

related constrained diversification (value-creating)

HIGH Operational Relatedness (Sharing Activities between Businesses) LOW Corporate Relatedness (Transferring Core competencies into Businesses) =

related constrained (Low Performance-Incentives to Diversify/value neutral)

High Performance & High Level of Diversification =

recession; increases; internal; foreign divestitures (restructuring assets unrelated diversification)

Ideally, executives will follow a strategy of buying businesses when prices are lower, such as in the mist of a _________ , and selling them at late stages in an expansion · Because of the _________ in global economic activities, including more cross-border acquisitions, there is also a growing number of foreign divestitures and restructuring in _________ markets (partial or full privatization of state-owned enterprises) o _________ _________ are even more complex than domestic ones and must be managed carefully.

(Low Performance-Incentives to Diversify/value neutral)

If high performance eliminates the need for greater diversification, then low performance may provide an incentive for diversification.

outside; indirect (unrelated diversification strategy- Efficient Internal Capital Market Allocation)

If intervention from _______ the firm is required to make corrections to capital allocations, only significant changes are possible because the power to make changes by outsiders is often _______

economic down turns (unrelated diversification strategy- Efficient Internal Capital Market Allocation)

In _______ ______ _____ , diversification can help some companies improve future performance

(Value-Reducing Diversification: Managerial Motives to Diversify)

In some instances, a firm's governance mechanisms may not be strong, allowing executives to diversify the firm to the point that it fails to earn even average returns.

unrelated; emerging (unrelated diversification strategy- Efficient Internal Capital Market Allocation)

In spite of the challenges --> number of corporations continue to use the _______ diversification strategy, especially in Europe and in _______ markets.

(Resources & Diversification)

Service firms also pursue diversification strategies especially through greenfield ventures

(Resources & Diversification)

Sharing of tangible resources may induce diversification, intangible resources such as tacit knowledge could encourage even more diversification.

economies of scope (Simultaneous Operational Relatedness & Corporate Relatedness)

Some firms simultaneous seek operational and corporate relatedness to create _________________ __ _______

(Resources & Diversification)

Sometimes the benefits expected from using resources to diversify the firm for either value-creating or value-neutral reasons are not gained.

independent; competencies (Value-Creating Diversification)

Studies of these ___________ relatedness dimensions show the importance of resources and key ___________

variability; flexibility

Successful diversification is expected to reduce ______ in the firm's profitability as earnings are generated from different businesses. o can also provide firms with the ______ to shift their investments to markets where the greatest returns are possible rather than being dependent on only one or a few markets.

(Resources & Diversification)

Tangible resources may create resource interrelationships in production, marketing, procurement, and technology --> activity sharing.

(Resources & Diversification)

Tangible resources tend to be less-flexible assets. · EX: usually include the plant and equipment

unrelated; more; less (Efficient Internal Capital Market Allocation)

The Achilles' heel for firms using the _______diversification strategy in a developed economy is that competitors can imitate financial economies _______ easily than they can replicate the value gained from the economies of scope developed through operational and corporate relatedness o Less of a problem in emerging economies

simultaneously (Simultaneous Operational Relatedness & Corporate Relatedness)

The ability to _________________ create economies of scope by sharing activities (operational relatedness) and transferring core competencies (corporate relatedness) is difficult for competitors to understand and learn how to imitate.

Related Linked (mixed related & unrelated firm-- moderate diversification)

The diversified company with a portfolio of businesses that have only a few links between them · As with firms using each type of diversification strategy, companies implementing this strategy constantly adjust the mix in their portfolio of businesses as well as make decisions about how to manage these businesses

(Value-Reducing Diversification: Managerial Motives to Diversify)

The greater the incentives and the more flexible the resources, the higher the level of expected diversification.

(Value-Reducing Diversification: Managerial Motives to Diversify)

The greater the incentives and the more flexible the resources, the higher the level of expected diversification. · Financial resources --> should have a stronger relationship to the extent of diversification than either tangible or intangible resources. o The most flexible · Tangible resources --> are useful primarily for related diversification o The most inflexible

corporate relatedness (Value-Creating Diversification)

The horizontal dimension suggests opportunities for transferring corporate-level core competencies

(Value-Reducing Diversification: Managerial Motives to Diversify)

The loss of adequate internal governance may result in relatively poor performance --> triggering a threat of takeover.

(Value-Reducing Diversification: Managerial Motives to Diversify)

The loss of adequate internal governance may result in relatively poor performance --> triggering a threat of takeover. o Takeovers may improve efficiency by replacing ineffective managerial teams, managers may avoid takeovers through defensive tactics, such as "poison pills," or may reduce their own exposure with "golden parachute" agreements. o An external governance threat, although restraining managers, does not flawlessly control managerial motives for diversification.

constrained; related

The more links among businesses, the more "____________" is the level of diversification. (= ______ )

indirect; external (unrelated diversification strategy- Efficient Internal Capital Market Allocation)

_______= through member of the board of directors _______parties can try to make changes by forcing the firm into bankruptcy or changing the top management (Efficient Internal Capital Market Allocation)

business; single

_________ -level strategies and the competitive rivalry and competitive dynamics associated with them have concentrated on firms competing in a _________ industry or product market

operational; corporate (Value-Creating Diversification)

___________ relatedness and ___________ relatedness are two diversification strategies that can create value

efficiency; cash-flow; capital; debt (Efficient Internal Capital Market Allocation)

____________ results as investors take equality positions (ownership) with high expected future _______-______ values. __________ is allocated through _______ as shareholders and debt holders try to improve the value of their investments by taking stakes in business with high growth and profitability prospects

family; controlled; less

____________-owned and ____________ businesses, are commonly ________diversified. ex: McIlhenny company's Tabasco Sauce business ***LOW LEVELS of DIVERSIFICATION

internal; external; less; underpeforming (unrelated diversification strategy- Efficient Internal Capital Market Allocation)

_______capital market, the corporate headquarters office can fine-tune its corrections, such as choosing to adjust managerial incentives or encouraging strategic changes in one of the firm's businesses o Capital can be allocated according to more specific criteria than is possible with _______market allocation *Because has _______accurate information, the external capital market may fail to allocate resources adequately to high-potential investors. * Corporate headquarters office of a diversified company can more effectively perform such tasks as disciplining _______________ management teams through resource allocations

value

_______is created—either through related diversification or through unrelated diversification—when the strategy allows a company's businesses to increase revenues or reduce costs while implementing their business-level strategies (Reasons for diversification)

Corporate level core competencies

are complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise.

Economies of Scope (value creating)

are 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

Financial Economies (unrelated diversification)

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

value; more; competitiveness

corporate-level strategy's ________ is ultimately determined by the degree to which "the businesses in the portfolio are worth ________ under the management of the company than they would be under any other ownership." o creates, across all of a firm's businesses, aggregate returns that exceed what those returns would be without the strategy and contributes to the firm's strategic ________ and its ability to earn above-average returns

resources

difference between sharing activities and transferring competencies =is based on how separate ___________ are jointly used to create economies of scope.

Vertical Integration (within market power)

exists when a company produces its own inputs (backward) or owns its own source of output distribution (forward)

Market Power

exists when a 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. Efforts to gain scale as a mean of increasing ------ ------.

Synergy

exists when the value created by business units working together exceeds the value that those same units create working independently.

Multipoint Competition (within market power)

exists when two or more diversified firms simultaneously compete in the same product areas or geographical markets.

economies of scale

fewer challenges in managing one or a very small set of businesses, allowing them to gain _________ __ _______ and efficiently use their resources ***LOW LEVELS of DIVERSIFICATION

(Resources & Diversification)

greenfield venture approach to diversification is not unfamiliar to other professional service firms such as Bain Strategy Consulting, which also started Bain Capital, a private equity fund, through the support of Bain partners (owners) in their consulting business

unrelated; increases (Efficient Internal Capital Market Allocation)

in which the absence of a "soft infrastructure" (including effective financial intermediaries, sound regulation, and contract laws) supports and encourages use of ________ diversification strategy · Emerging economies such as those in Korea, India, and Chile, has shown that diversification ________ the performance of firms affiliated with large diversified business groups.

Value-neutral (reasons for diversification)

include a desire to match and thereby neutralize a competitor's market power

Single business diversification strategy (low diversification)

is a corporate-level strategy wherein the firm generates 95 percent or more of its sales revenue from its core business area.

operational

know-how transferred between separate activities with no physical or tangible resource involved is a transfer of a corporate-level core competence **not an ___________ sharing of activities

knowledge; experience; premium

manager of an older business may be reluctant to transfer key people who have accumulated ______________ and ______________ critical to the business's success o managers with the ability to facilitate the transfer of a core competence may come at a ____________, or the key people involved may not want to transfer.

Business level (competitive)

must be selected for each of the businesses in which the firm has decided to compete

Conglomerates (high diversification)

number of consumer businesses that are not related to each other, and the firm makes no efforts to share activities or to transfer core competencies between or among them **difficult to manage due to firm's size and diversity

(Resources & Diversification)

o Although both tangible and intangible resources facilitate diversification, they vary in their ability to create value. *The degree to which resources are valuable, rare, difficult to imitate, and nonsubstitutable influences a firm's ability to create value through diversification.

Market power (Value-Creating Diversification reason)

o Blocking competitors through multipoint competition Vertical integration

Internal Governance & Capital Market Intervention and the Market for Managerial Talent

o Both go into diversification along with value influences

Firm performance

o Capital Market Intervention and the Market for Managerial Talent o Strategy Implementation

(Tax laws incentives to diversify/value neutral)

o Under the 1986 Tax Reform Act, the top individual ordinary income tax rate was reduced from 50 to 28%, and the special capital gains tax was changed to treat capital gains as ordinary income. *Yet, there have been changes in the maximum individual tax rates since the 1980s. · The top individual tax rate has varied from 31 percent in 1992 to 39.6 % in 2017.

greenfield ventures (Resources & Diversification)

opening a new business for the firm without acquiring a previous established brand-name business.

increases; higher

operational relatedness:sharing activities/related constrained --> can create value studies of acquisitions of firms in the same industry (horizontal acquisitions), such as the banking and software industries, found that sharing resources and activities and thereby creating economies of scope contributed to post-acquisition __________ in performance and __________ returns to shareholders.

lower

operational relatedness:sharing activities/related constrained --> can create value · firms that sold off related units in which resource sharing was a possible source of economies of scope have been found to produce __________ returns than those that sold off businesses unrelated to the firm's core business.

sharing activities; transferring core competencies (value creating)

seek to create value from economies of scope through two basic kinds of operational economies: ________ ________ (operational relatedness) and ________ corporate-level ________ ________ (corporate relatedness)

negative synergy (Low Performance-Incentives to Diversify/value neutral)

where potential synergy between acquiring and target firms is illusory (not real)

business level

with this strategy, a corporate-level strategy is expected to help the firm earn above-average returns by creating value

(antitrust regulation incentives to diversify/value neutral)

· Antitrust laws prohibiting mergers that created increased market power (via either vertical or horizontal integration) were stringently enforced during that period. o Merger activity that produced conglomerate diversification was encouraged primarily by the Celler-Kefauver Antimerger Act (1950), which discouraged horizontal and vertical mergers *many of the mergers during the 1960s and 1970s were "conglomerate" in character, involving companies pursuing different lines of business. · Between 1973 and 1977, 79.1 % of all mergers were conglomerate in nature.

Value-Neutral Diversification (reasons)

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

Limitations (risks/costs of vertical integration)

· Bureaucratic costs can be present · Because it can require substantial investments in specific technologies, it may reduce the firm's flexibility, especially when technology changes quickly. · Changes in demand create capacity balance and coordination problems. · If one business is building a part for another internal business but achieving economies of scale requires the first division to manufacture quantities that are beyond the capacity of the internal buyer to absorb, it would be necessary to sell the parts outside the firm as well as to the internal business.

external; tangible; intangible (restructuring assets unrelated diversification)

· Buying & restructuring service-based assets can be profitably sold in the _________ market = difficult o Both High-technology and Service-based companies, relatively few _________ assets can be restructured to create value and sell probability o _________ assets can be difficult to restructure

(Value-Reducing Diversification: Managerial Motives to Diversify)

· Diversification and firm size are highly correlated o As firm size increases, so does executive compensation and social status

(Value-Reducing Diversification: Managerial Motives to Diversify)

· Diversification and firm size are highly correlated o Because large firms are complex, difficult-to-manage organizations, top-level managers commonly receive substantial levels of compensation to lead them, but the amounts vary across countries. * Greater levels of diversification can increase a firm's complexity, resulting in still more compensation for executives to lead an increasingly diversified organization.

(Value-Reducing Diversification: Managerial Motives to Diversify)

· Diversification provides additional benefits to top-level managers that shareholders do not enjoy.

(Value-Reducing Diversification: Managerial Motives to Diversify)

· Diversified firm may acquire other firms that are poorly managed in order to restructure its own asset base. o Knowing that their firms could be acquired if they are not managed successfully encourages executives to use value-creating diversification strategies.

Value-Reducing Diversification (reasons)

· Diversifying managerial employment risk · Increasing managerial compensation

related linked strategy (value creating)

the transferring of core competencies across the firm's different businesses

related constrained strategy (value creating)

through the sharing of resources

competencies; knowledge; outsourcing

top-level managers from the transferring business may not want the ______________ transferred to a new business to fulfill the firm's diversification objectives. o the nature of the top management team can influence the success of the ______________ and skill transfer process. o Also, too much dependence on ______________ can lower the usefulness of core competencies, thereby reducing their useful transferability to other business units in the diversified firm.

low diversification (levels)

uses either a single-or a dominant-business, corporate-level diversification strategy

economies of scope; non-profit (value creating)

using related diversification corporate-level = wants to develop and exploit _______ __ _______ between its businesses. ______-________ organizations have found that carefully planned and implemented related diversification can create value

related; unrelated (level of diversification)

More fully diversified firms are classified into ______ and ______ categories

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

Operating in environments that are more certain will likely lead to related diversification into industries that lack potential, while constraining the level of activity sharing may produce additional, but unrelated, diversification, where the firm lacks expertise.

increase; value

Typically, a diversification strategy is used to _______the firm's _______by improving its overall performance (Reasons for diversification)

financial economies

Value-Creating Diversification reason for __________ ________is unrelated diversification

Economies of Scope; Market Power

Value-Creating Diversification reason for ______________ ____ __________ & __________ ________is related diversification

create value

When Related diversification is properly used, these strategies help _______ _______ in the diversified firm, either through the sharing of resources or the transferring of core competencies across the firm's different businesses

headquarters; external

When firm pursue vertical integration, more information is processed at _____________ and therefore, more knowledge processing is needed as illustrated by these servers. _________ relations with suppliers are also supported by such information networks.

related constrained (moderate diversification)

When the links between the diversified firm's businesses are rather direct = meaning they use similar sourcing, throughput, and outbound processes. · firm shares resources and activities across its businesses

competitive advantage

With the related diversification corporate-level strategy, the firm builds upon or extends its resources and capabilities to build a_______ _______ by creating value for customers.

Tax effects (Tax laws incentives to diversify/value neutral)

_____ _________of diversification stem not only from corporate tax changes, but also from individual tax rates.

Related (value creating)

_______ diversification signifies a moderate to high level of diversification for the firm

horizontal mergers

acquisitions of target firms in the same line of business

expensive; reduce (Limitations risks/costs of vertical integration)

an outside supplier may produce the product at a lower cost. As a result, internal transactions from vertical integration may be __________ and _________ profitability relative to competitors.

(Tax laws incentives to diversify/value neutral)

-Corporate tax laws also affect diversification. · Acquisitions typically increase a firm's depreciable asset allowances. o Increased depreciation (a non-cash-flow expense) produces lower taxable income, thereby providing an additional incentive for acquisitions.

(Tax laws incentives to diversify/value neutral)

-Corporate tax laws also affect diversification. · At one time, acquisitions were an attractive means for securing tax benefits, but changes recommended by the Financial Accounting Standards Board (FASB) eliminated the "pooling of interests" method to account for the acquired firm's assets. o It eliminated the write-off for research and development in process *reduced some of the incentives to make acquisitions, especially acquisitions in related high-technology industries. --->regulatory changes create incentives or disincentives for diversification. Ex: European antitrust laws have historically been stricter regarding horizontal mergers than those in the United States, but recently have become more similar.

Value-Creating Diversification (reasons)

-Economies of Scope -Market Power -Financial economies

Vertical Integration (in detail)

-Firms can foster increased market power through this -Sometimes firms partially integrate their operations, producing and selling their products by using company-owned businesses as well as outside sources -Commonly used in firm's core business to gain market power over rivals

Multipoint Competition (in detail)

-Firms can foster increased market power through this -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

Reasons for Diversification

-Value-Creating -Value-Neutral -Value-Reducing

High Levels of Diversification

-conglomerates -business groups

Low Performance (Incentives to Diversify/value neutral)

-low returns are related to greater levels of diversification -brands, need to be careful because often there are brand risks to moving into areas that are new and where company lacks operational expertise

related linked

-mixed related and unrelated

High-technology and Services Businesses (restructuring assets unrelated diversification)

-often human-resource dependent -These people can leave or demand higher pay and then appropriate or deplete the value of an acquired firm

moderate to high levels of diversification

-related constrained -related linked

2 types of related diversification (value creating)

-related constrained strategy -related linked strategy

low levels of diversification

-single business -dominant business

types of diversification

-single business -dominant business -related constrained -related linked -unrelated

very high levels of diversification

-unrelated

2 ways (Firms seeking to create value through corporate relatedness use the related linked diversification strategy)

1. Because the expense of developing a core competence has already been incurred in one of the firm's businesses, transferring this competence to a second business eliminates the need for that business to allocate resources to develop it. 2. Managers can move key people into new management positions

2 types of financial economies (Can create value- unrelated diversification)

1. Efficient Internal Capital Market Allocation 2. Restructuring of (acquiring) Assets

example (Low Performance-Incentives to Diversify/value neutral)

Ex: Coca-Cola has not met its growth and profit targets in its dominant business of soft drinks in recent years. As such, it has sought to diversify into higher growth areas like bottled water, tea, and fruit juices

2 informational advantages (Efficient Internal Capital Market Allocation- internal capital)

1. Information provided to capital markets through annual reports and other sources emphasize positive prospects and outcomes. o External sources of capital have a limited ability to understand the operational dynamics within large organizations *Even external shareholders who have access to information are unlikely to receive full and complete disclosure. 2. Although firms must disseminate (spread information widely) information, that information also becomes simultaneously available t the firm's current and potential competitors. o Competitors might attempt to duplicate a firm's value-creating strategy with insights gained by studying such information. *The ability to efficiently allocate capital through an internal market helps the firm protect the competitive advantages it develops while using its corporate-level strategy and its various business-unit-level strategies

private label equity (high diversification)

Another form of unrelated diversification strategy pursued by ______ _____ _______ = They often have an unrelated set of portfolio firms

(Resources & Diversification)

Any excess capacity often can be used only for closely related products, especially those requiring highly similar manufacturing technologies.

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

As a firm increases its relatedness among business units, it also increases its risk of corporate failure because synergy produces joint interdependence among businesses that constrains the firm's flexibility to respond. · This threat may force two basic decisions.

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

As a firm increases its relatedness among business units, it also increases its risk of corporate failure because synergy produces joint interdependence among businesses that constrains the firm's flexibility to respond. · This threat may force two basic decisions. 1. the firm may reduce its level of technological change by operating in environments that are more certain. **This behavior may make the firm risk averse and thus uninterested in pursuing new product lines that have potential but are not proven

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

As a firm increases its relatedness among business units, it also increases its risk of corporate failure because synergy produces joint interdependence among businesses that constrains the firm's flexibility to respond. · This threat may force two basic decisions. 1. the firm may reduce its level of technological change by operating in environments that are more certain. 2. the firm may constrain its level of activity sharing and forgo potential benefits of synergy. o Either or both decisions may lead to further diversification.

(uncertain future cash flows-Incentives to Diversify/value neutral)

As a firm's product line matures or is threatened, diversification may be an important defensive strategy. · During a financial downturn, diversification improves firm performance because external capital markets are costly and internal resource allocation become more important.

(Resources & Diversification)

Even when incentives to diversify exist, a firm must have the types and levels of resources and capabilities needed to successfully use a corporate-level diversification strategy.

example (related linked)

Ex: GE has used a ---------corporate-level diversification strategy. Here, firms share fewer resources and assets between their businesses, concentrating instead on transferring knowledge and core competencies between the businesses. GE has four strategic business units it calls "divisions," each composed of related businesses. There are few relationships across the strategic business units, but many among the subsidiaries or divisions within them. GE's recent decline suggests that such business can be challenging to run and at times may be excessively complicated

example (evaluate growth options before committing-- corporate strategy)

Ex: General Electric (GE) experienced difficulty in its oil and gas service, and power equipment businesses. GE also suffered significant revenue declines in its financial services businesses and thus sold its assets in that area, choosing to seek growth in other industrial and equipment businesses and to better integrate its digitization strategy through the Internet

Example (market power)

Ex: Heinz was bought by a private equity firm in Brazil called 3G Capital Partners LP, which subsequently combined Kraft Foods Group with Heinz to form Kraft-Heinz. These deals were supported by Warren Buffet's Berkshire Hathaway & Co., who teamed up with 3G to buy these food businesses. In a similar deal to build market power, 3G took private food restaurant Burger King Worldwide, Inc., and also bought Tim Hortons Inc. (a Canadian coffee and donut fast-food restaurant) through its Burger King holdings. Warren Buffet also contributed $11 million to help finance the latter deal. These deals obviously build market power for the combining firms in branded consumer foods and fast food restaurants.

example (Single business diversification strategy)

Ex: McIlhenny Company (headquartered on Avery Island in Louisiana and producer of Tabasco brand) has maintained its focus on its family's hot sauce products for seven generations. On its website, the following quote is provided about its products: "Back in 1868, Edmund McIlhenny experimented with pepper seeds from Mexico (or somewhere in Central America) to create his own style of Louisiana hot sauce—our Original Red Sauce. Since then we've continued this tradition of exploration and experimentation, and today McIlhenny Company crafts seven unique and distinct flavors of sauce, each with its own variety of deliciousness. From mild to wild, there's something for everyone!" o Historically McIlhenny has used a single-business strategy while operating in relatively few product markets. o Recently, it has begun to partner with other firms so that the Tabasco taste can be found in a variety of food products such as jellybean candies (Tabasco Jelly Belly), crackers (Hot N' Spicy Cheez-It), and ice cream (Chocolate Chipotle Rocky Road)

example (Multipoint Competition)

Ex: 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 strong hold; in turn, FedEx bought trucking and ground shipping assets to move into ground shipping, UPS's stronghold. Similarly, J.M. Smucker Company, a snack food producer, in 2015 bought Big Heart Pet Brands, which specializes in snacks such as Milk-Bone dog biscuits, treats, and chews and has over $2.2 billion in annual revenue. Smucker's competitor, Mars, had acquired a significant portion of Proctor & Gamble's dog and cat food division in 2014. Apparently, Smucker's was seeking to keep up its size and cross-industry positions relative to Mars by also diversifying into snacks for pets. In 2018 following these acquisitions, General Mills announced its intent to acquire Blue Buffalo Pet Products for about $8 billion to obtain "a piece of the rapidly expanding natural pet-food market."

example (Dominant business diversification strategy)

Ex: United Parcel Service (UPS) uses this strategy. Recently UPS generated 63% of its revenue from its U.S. package delivery business and 20 % from its international package business, with the remaining 17% coming from the firm's non-package business. Though the U.S. package delivery business currently generates the largest percentage of UPS's sales revenue, the firm anticipates that in the future its other two businesses will account for the majority of revenue growth. This expectation suggests that UPS may become more diversified, both in terms of its goods and services and in the number of countries in which those goods and services are offered.

example (reduce uncertain future cash flows)

Ex: Alcoa, the largest U.S. aluminum producer, has been pursuing a "multi-material" diversification strategy driven by the highly competitive nature of its basic commodity business. Alcoa has been diversifying into other metals beside aluminum while simultaneously moving into a variety of end-product industries. In 2015, it announced that it would acquire RTI International Metals, Inc., which is one of the largest titanium producers for the aerospace industry; this allowed greater ability to negotiate prices with customers. However, shortly after its increased diversification, it announced it would break into two businesses, the commodity upstream business and a multi-metal downstream business, due to pressure by activist owners and stock analysts.

example (related constrained)

Ex: Campbell Soup, Proctor & Gamble, and Merck & Co. use this type of strategy

example (private label equity-high diversification)

Ex: Carlyle Group, Blackstone, and KKR.

examples (Limitations risks/costs of vertical integration)

Ex: Intel and Dell began to reduce vertical integration by reducing ownership of self-manufactured part and components. This trend also occurred in some large auto companies, Ford and General Motors, as they developed independent supplier networks. Flex (formerly known as Flextronics), a large electronics contract manufacturer, helps to supplier this approach to supply chain management. These firms often manage their customers' entire product lines and offer services ranging from inventory management to delivery and after-sale service. Some firms though are beginning to reintegrate in order to gain better control over quality and timing of their supplies. Ex: Samsung has maintained control of its operations through a vertical integration strategy, while being a manufacturer for competitors such as Apple in consumer electronics

examples (related constrained diversification strategy)

Ex: Proctor & Gamble uses this corporate-level strategy. Ex: Caterpillar's various businesses share marketing activities because all of their equipment is sold to firms in the construction and mineral extraction industries.

example (unrelated diversification strategy- Efficient Internal Capital Market Allocation)

Ex: Siemens is a large diversified German conglomerate that engages in substantial diversification in order to balance its economic risk

example (restructuring trade offs)

Ex: United Technologies has used this strategy. Likewise, Danaher Corp's success requires a focus on mature manufacturing businesses because of the uncertainty of demand for high-technology products. It has acquired 400 businesses since 1984 and applied the Danaher Business System to reduce costs and create lean organizations.

examples (number of firms have successfully transferred one or more corporate-level core competencies across their businesses)

Ex: Virgin Group, known for its airline, has also transferred its brand through its marketing competence to other product areas such as cosmetics, music, drinks, mobile phones, health clubs, and a number of other businesses. Ex: Honda has developed and transferred its competence in engine design and manufacturing among its businesses making products such as motorcycles, lawnmowers, and cars and trucks. Company officials state that Honda is a major manufacturer of engines focused on providing products for all forms of human mobility

example (related level of diversification)

Ex: businesses may share product markets (goods or services), technologies, or distribution channels.

example (Efficient Internal Capital Market Allocation-reduce risk)

Ex: by leading to the development of a portfolio business with different risk profiles

example (excess capacity only for closely related products)

Ex: large computer makers such as Dell and Hewlett-Packard have underestimated the demand for tablet computers. Apple developed a tablet computer, the iPad, and many expect such tablets to eventually replace the personal computer (PC). In fact, Dell's and HP's sales of their PCs have been declining since the introduction of the iPad. Dell, HP, Lenovo, and others have responded by making cheaper tablet-like laptops and iPad-like tablets and have stayed in the game without having to diversify too much

example (horizontal mergers)

Ex: merger between two oil companies

example (Value-neutral reason)

Ex: to neutralize another firm's advantage by acquiring a similar distribution outlet.

Example (related)

Example: Disney adds value using a ----- diversification strategy ---> by using its movies to create franchises and platforms around its popular cartoon and action movie figures.

(Resources & Diversification)

Excess capacity of other tangible resources can be used to diversify more easily.

reputation; focused; moderate; constrained

FAMILY-owned & CONTROLLED BUSINESSES prefer the narrower focus because the family's ____________ is related closely to that of the business --> family members prefer to provide quality goods and services, which a ____________ strategy better allows ---> some might consider this a strategy of ____________ level of diversification in the form of highly related ____________ diversification

(Resources & Diversification)

Intangible Resources are more flexible than tangible physical assets in facilitating diversification.

competitive advantage (value creation through corporate relatedness)

Intangible resources are difficult for competitors to understand and imitate. o Because of this difficulty, the unit receiving a transferred corporate-level competence often gains an immediate ______________ ______________ over its rivals.

(antitrust regulation incentives to diversify/value neutral)

Investment bankers became more open to the kinds of mergers facilitated by regulation changes ---> takeovers increased to unprecedented numbers

related linked diversification (value creating)

LOW Operational Relatedness (Sharing Activities between Businesses) HIGH Corporate Relatedness (Transferring Core competencies into Businesses) =

unrelated diversification

LOW Operational Relatedness (Sharing Activities between Businesses) LOW Corporate Relatedness (Transferring Core competencies into Businesses) =

shared

Less tangible resources such as manufacturing know-how and technological capabilities can also be ___________ .

related constrained (moderate to high levels of diversification)

Less than 70% of revenue comes from the dominant business, and all businesses share product, technological, and distribution linkages.

unrelated (very high levels of diversification)

Less than 70% of revenue comes from the dominant business, and there are no common links between businesses.

related linked (moderate to high levels of diversification)

Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses.

unrelated (Low Performance-Incentives to Diversify/value neutral)

Low Performance & High Level of Diversification =

dominant business (Low Performance-Incentives to Diversify/value neutral)

Low Performance & Low Level of Diversification =

(Resources & Diversification)

Picking the right target firm partner is critical to acquisition success.

corporate

Product diversification is a primary form of ______ level strategies

neutral; reduce

Reasons for diversification can have _______effects or even _______a firm's value

curvilinear (Low Performance-Incentives to Diversify/value neutral)

Research evidence and the experience of a number of firms suggest that an overall ____________ relationship may exists between diversification and performance

intangibility

Resource ______________ is a second source of value creation through corporate relatedness.

Efficient Internal Capital Market Allocation (large diversified companies, corporate headquarters office distributes capital to create value)

The nature of these distributions can generate gains from internal capital market allocations that excess the gains that would accrue to shareholders a result of capital being allocated by the external market · Because those in a firm's corporate headquarters generally have access to detailed and accurate information regarding the actual and potential future performance of the company's portfolio of business, they have the best information to make capital distribution decisions. Compared with corporate office personnel, external investors have relatively limited access to internal information and can only estimate the performances of individual businesses and their future prospects

no; low

The single or dominant- business categories denote ___ or relatively ___ levels of diversification

operational relatedness (Value-Creating Diversification)

The vertical dimension depicts opportunities to share operational activities between businesses

Both operational & Corporate Relatedness

This capability is located primary in the corporate headquarters office

economies of scope

To create ___________ ____ ___________ : tangible resources such as plant and equipment or other business-unit physical assets often must be shared.

Corporate level (company-wide)

concerned with 2 key issues: 1. what product markets and businesses the firm should compete 2. how ----- headquarters should manage those businesses

Product diversification

concerns the scope of the markets and industries in which the firm competes as well as "how managers buy, create, and sell different businesses to match skills and strengths with opportunities presented to the firm." o a primary form of corporate-level strategies

Restructuring of assets (financial economies- unrelated diversification)

o Diversified firm buys another company, restructures that company's assets in ways that allow it to operate more profitably, and then sells the company for a profit in the external market o Financial economies can be created when firms learn how to create value by buying, restructuring, and then selling the -------- companies' assets in the external market o As in the Real estate business, buying assets at low prices, restructuring them, and selling them at a price that exceeds their costs generates a positive return on the firm's invested capital o This strategy has been taken up by private equity firms, who buy, ------, the sell, often within a 4- or 5-year period o Firms try to create financial economies by acquiring and ---------- other companies' assets, but it involves significant trade-offs. o In high-technology businesses, resource allocation decisions are high complex, often creating information-processing overload on the small corporate headquarters offices that are common in unrelated diversified firms

Value-Creating Influences (Diversification Strategy)

o Economies of Scope o Market Power o Financial Economics

Financial economies (Value-Creating Diversification reason)

o Efficient internal capital allocation o Business restructuring

example (greenfield ventures)

o Ex: Alvarez & Marsal, a professional service firm that has focused on helping to restructure firms that experience financial distress, has diversified into several additional service businesses. It has a reputation (an intangible asset) in New York financial circles for its ability to do interim management for firms that are experiencing financial distress and often gone into bankruptcy. Alvarez & Marsal managed the largest U.S. bankruptcy in history, the wind-down of Lehman Bros. after it folded. As part of this massive wind down, it needed to manage the treasury and cash assets of the company in a way to realize the best returns possible for the remaining stakeholders and creditors who held right to debt secured assets. Through its experience over a number of bankruptcies, but in particular the Lehman Bros. bankruptcy, Alvarez & Marsal has gained a reputation and ability in investment management especially for short-term treasury deposits. These capabilities have led the firm to open a new business to manage treasury and cash assets for other companies, but also for endowments and local and state government entities. It also serves as a consultant for private equity firms that are closely associated with firms in financial distress and restructuring strategies. From its interim management business, it has moved into performance improvement consulting. Through its reputation and skills in serving private equity clients, Alvarez & Marsal also gained knowledge about investing in private equity businesses and have likewise started a private equity fund.

(Resources & Diversification)

o Excess capacity in a sales force is more effective with related diversification because it may be utilized to sell products in similar markets (same customers). The sales force would be more knowledgeable about related product characteristics, customers, and distribution channels.

(Tax laws incentives to diversify/value neutral)

o In the 1960s and 1970s, dividends were taxed more heavily than were capital gains. * Before 1980, shareholders preferred that firms use free cash flows to buy and build companies in high-performance industries. * If the firm's stock value appreciated over the long term, shareholders might receive a better return on those funds than if the funds had been redistributed as dividends because returns from stock sales would be taxed more lightly than would dividends.

(antitrust regulation incentives to diversify/value neutral)

o In the beginning of the 21st century, antitrust concerns emerged again with the large volume of mergers and acquisitions. *Mergers are now receiving more scrutiny than they did in the 1980s, 1990s, and the first decade of the 2000s.

Value-Neutral Influences (Diversification Strategy)

o Incentives o Resources

Value-Reducing Influences (Diversification Strategy)

o Managerial Motives to Diversify

(Synergy & Firm Risk Reduction-Incentives to Diversify/value neutral)

o Paying excessive acquisition premiums often causes managers to become more risk averse and focus on achieving short-term returns. *When this occurs, managers are less likely to be concerned about making long-term investments (developing innovation).

Efficient Internal Capital Market Allocation (financial economies- unrelated diversification)

o Reduce risk among firm's businesses o In a market economy, capital markets are believed to do this o Large diversified companies, corporate headquarters office distributes capital to its businesses to create value for the overall corporation

Economies of Scope (Value-Creating Diversification reason)

o Sharing activities o Transferring core competencies

(Tax laws incentives to diversify/value neutral)

o Some changes in the capital gains tax rates. -Corporate tax laws also affect diversification.

(Tax laws incentives to diversify/value neutral)

o Some companies (especially mature ones) generate more cash from their operations than they can reinvest profitably. -Some argue that free cash flows should be redistributed to shareholders as dividends.

(Tax laws incentives to diversify/value neutral)

o Under the 1986 Tax Reform Act, the top individual ordinary income tax rate was reduced from 50 to 28%, and the special capital gains tax was changed to treat capital gains as ordinary income. * These changes created an incentive for shareholders to stop encouraging firms to retain funds for purposes of diversification.

(Tax laws incentives to diversify/value neutral)

o Under the 1986 Tax Reform Act, the top individual ordinary income tax rate was reduced from 50 to 28%, and the special capital gains tax was changed to treat capital gains as ordinary income. *Also, these changes influenced an increase in divestitures of unrelated business units after 1984. · While individual tax rates for capital gains and dividends created a shareholder incentive to increase diversification before 1986, they encouraged lower diversification after 1986, unless the diversification was funded by tax-deductible debt.

unrelated (level of diversification)

refers to the absence of direct links between businesses.

Corporate Level Strategy

specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets

organization; incentive (Simultaneous Operational Relatedness & Corporate Relatedness)

the cost of _________________ and _____________ structure is very expensive

Dominant business diversification strategy (low diversification)

the firm generates between 70 and 95 percent of its total revenue within a single business area

examples (Picking the right target firm partner is critical to acquisition success)

· Ex: Sara Lee Corporation executives found that they could not realized synergy between elements of their company's diversified portfolio, and subsequently shed businesses account for 40% of company revenue to focus on food and food related products and more readily achieve synergy. Ultimately, Sara Lee split into 2 companies: Hillshire Brands which focuses on meat and food products, and D.E. Master Blenders 1753, a beverage and bakery company. Incidentally, Hillshire Brands was purchased by Tyson Foods in 2014 and Sara Lee no longer exists as a separate company, although the brand is part of Tyson Foods. · Ex: Paris listed Kering has spent the past decade and a half transforming itself from a retail conglomerate into a luxury group anchored by the Florence-based Gucci brand. It purchased a majority stake in Puma, an athletic shoe and clothing brand in competition with Nike and others. It is seeking to offload its "long suffering" position in Puma and hoping to get back the $4.8 billion it paid for the brand over a decade ago.

(Resources & Diversification)

· Free cash flows are a tangible financial resource that may be used to diversify the firm. o Compared with diversification that is grounded in intangible resources, diversification based on financial resources only is more visible to competitors --> more imitable and less likely to create value on a long-term basis.

(Value-Reducing Diversification: Managerial Motives to Diversify)

· Governance mechanisms may limit managerial tendencies to over diversify. o should be designed to deal with exceptions to the managerial norms of making decisions and taking actions that increase the firm's ability to earn above-average return *it is overly pessimistic to assume that managers usually act in their own self-interest as opposed to their firm's interest o Ex: The board of directors, monitoring by owners, executive compensation practices, and the market for corporate control

(Value-Reducing Diversification: Managerial Motives to Diversify)

· Managerial motives to diversify can exist independent of value-neutral reasons and value-creating reasons o Value-Neutral Reasons: incentives and resources o Value-Creating Reasons: economies of scope

Vertical integration ( used in firm's core business to gain market power over rivals)

· Market power is gained as the firm develops the ability to save on its operations, avoid sourcing and market costs, improve quality, possibly protect its technology from imitation by rivals, and potentially exploit underlying capabilities in the marketplace. o are better able to improve product quality and improve or create new technologies than specialized firms because they have access to more information and knowledge that is complementary · Market power is also created when firms have strong ties between their productive assets for which no market prices exists o Establishing a market price would result in high search and transaction costs, so firms seek to --------- -------- rather than remain separate businesses.

(Value-Reducing Diversification: Managerial Motives to Diversify)

· Most large publicly held firms are profitable because the managers leading them are positive stewards of firm resources, and many of their strategic actions, including those related to selecting a corporate-level diversification strategy, contribute to the firm's success.

Corporate Level Strategy (in detail)

· Strategies firm use to diversify their operations from a single business competing in a single market into several product markets ---> most commonly, into several businesses · Helps companies to select new strategic positions—positions that are expected to increase the firm's value (& growth). o firms can purse defensive or offensive strategies that realize growth but have different strategic intents o Firms can also pursue market development by entering different geographic markets o Firms can acquire competitors (horizontal integration) or buy a supplier or customer (vertical integration)

(Value-Reducing Diversification: Managerial Motives to Diversify)

· The desire for increased compensation and reduced managerial risk are 2 motives for top-level executives to diversify their firm beyond value-creating and value-neutral levels. o Top-level executives may diversify a firm in order to spread their own employment risk, as long as profitability does not suffer excessively.

(Value-Reducing Diversification: Managerial Motives to Diversify)

· Top-level executives' diversification decisions may also be held in check by concerns for their reputation. o If a positive reputation facilitates development and use of managerial power, a poor reputation can reduce it. o Likewise, to reputation effect, a strong external market for managerial talent may deter managers from pursuing inappropriate diversification.

incentives to Diversify (value neutral)

· come from both external environment and a firm's internal environment

lower; reducing; corporate headquarters

· firms with closely related businesses have __________ risk = gaining economies of scope by sharing activities across a firm's businesses may be important in __________ risk and in creating value. o More attractive results are obtained through activity sharing when a strong __________ __________ office facilitates it

free cash flows

· liquid financial assets for which investments in current businesses are no longer economically viable