Chapter 6 Corporate-Level Strategy

Flashcards covering key vocabulary terms and definitions related to corporate-level strategy and diversification, including different types of diversification, reasons for diversifying, and how value is created or affected.

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. It helps firms diversify operations and select new strategic positions to increase firm value and earn above-average returns.

Product Diversification

Concerns the scope of the markets and industries in which the firm competes, and how managers buy, create, and sell different businesses to match skills and strengths with opportunities.

Diversification

Successful when it reduces variability in a firm's profitability by generating earnings from different businesses, providing flexibility to shift investments to markets with the greatest returns.

Single-business Diversification Strategy

A firm generates 95 percent or more of its sales revenue from its core business area.

Dominant-business Diversification Strategy

A firm generates between 70 and 95 percent of its total revenue within a single business area, indicating a small amount of diversification.

Related Diversification Strategy

A firm generates more than 30 percent of its revenue outside a dominant business, and its businesses are related to each other in some manner.

Related Constrained Diversification Strategy

Links between the diversified firm’s businesses use similar sourcing, throughput, and outbound processes, resulting in sharing resources and activities across businesses.

Related Linked Diversification Strategy

The firm’s portfolio of businesses has only a few links between them, concentrating on transferring knowledge and core competencies across businesses.

Unrelated Diversification Strategy

A highly diversified firm has no relationships between its businesses; commonly, firms using this strategy are called conglomerates and make no effort to share activities or transfer core competencies.

Synergy

Exists when the value created by business units working together exceeds the value that those same units create working independently, often through economies of scope.

Economies of Scope

Economic factors that lead to cost savings through successfully sharing resources and capabilities or transferring corporate-level core competencies between different businesses.

Market Power (Diversification)

Increased through diversification by reducing costs below competitors or increasing the firm’s ability to charge higher prices, often achieved via multipoint competition or vertical integration.

Multipoint Competition

Rival firms experience pressure to diversify because other firms in their dominant industry segment have made acquisitions to compete in a different market segment, fostering increased market power for a diversifier.

Vertical Integration

Exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration), allowing gains in market power, savings on operations, and improved product quality.

Operational Relatedness

Provides opportunities to share resources among the operational activities of a firm, typically associated with a related constrained diversification strategy.

Corporate Relatedness

Provides opportunities for transferring corporate-level core competencies across businesses of the firm, primarily through managerial and technological knowledge, experience, and expertise.

Financial Economies

Cost savings realized through improved allocations of financial resources based on investments inside or outside the firm, often exploited by unrelated diversification strategies.

Efficient Internal Capital Market Allocation

Value creation in diversified firms where corporate headquarters distributes capital to its businesses, leveraging superior internal information compared to external capital markets.

Asset Restructuring

A financial economy created when firms buy assets at a low cost, restructure them, and then sell them at a price that exceeds their cost in the external market.

Value-Neutral Diversification

Diversification driven by external incentives like antitrust regulations and tax laws, or internal incentives such as low performance, uncertain future cash flows, the pursuit of synergy, and reduction of firm risk without necessarily creating additional value.

Value-Reducing Diversification

Diversification driven by managerial motives, such as diversifying managerial employment risk or increasing managerial compensation, which may not benefit shareholders or firm value.

Empire Building (Managerial Motive)

A situation where executives diversify a firm to spread their own employment risk or increase compensation, even if it leads to unprofitable diversification and excessive drops in profits.

Capital Market Intervention

The loss of adequate internal governance, which may result in relatively poor firm performance and trigger the threat of a takeover, forcing managerial changes.