BUSA 4980 STUDY GUIDE
corporate level strategy - Answers - -specifies actions a firm takes to gain a competitive
advantage by selecting and managing a group of different businesses competing in
different product markets.
-Reasons for Diversification include:1. Benefits (Value-Creation): increased economies
of scope (by sharing activities to reduce costs or by transferring core competencies),
gain market power through vertical integrations or multipoint competition), achieving
financial economies through efficient capital allocation, or business restructuring.
-2. Incentives (Value-Neutral): diminishing market opportunities and stagnating sales in
principle business (i.e. low performance), Spread risk across various industries, Exploit
valuable tangible or intangible resources, and changes in antitrust regulation or tax.
-3. Managerial motives (Value-Reducing) reduce employment risk through
diversification and use diversification to achieve larger organizational size & hence
increase compensation.
-Merits and standard vehicles for diversifying are Diversification merits strong
consideration whenever a single-business company is faced with diminishing market
opportunities and stagnating sales. Vehicles include acquisition (industry attractiveness-
industry chosen must be attractive enough to yield a consistently good return on
investment), Internal development (cost of entry-cost to enter target industry must not
be so high as to erode returns), and joint ventures (better off-businesses must perform
better together than as independent entities).
Related diversification - Answers - -All businesses share product, technological &
distribution linkages. The value chain activities across business possess strong linkages
or similarities. Benefits are economies of scale ( cost savings that accrue directly from a
larger-sized operation) and economies of scope ( e.g. synergies; stem directly from
cost-savings resulting from a firm successfully leveraging, either through sharing
resources or transferring knowledge, some of its capabilities developed in one business
to another business).
-Operational relatedness: sharing either a primary or a support activity to reduce
duplicate efforts.
-Corporate relatedness: transfer competitively valuable resources and capabilities.
-Related diversification can also enhance value through greater market power. Avenues
of market power are multi-point competition = economies of scale and vertical
integration.
-Data support related and not unrelated diversification because you build no joint
competitiveness because you can't share resources or jointly conduct activities.
Unrelated businesses is a weaker foundation for enhancing shareholder value over the
long term.
Unrelated diversification - Answers - -a growth strategy whereby a new
business/industry where there is potential to realize good financial results is realized.
, -Financial economies are a. efficient internal capital allocation (cost savings realized
through improved allocations of financial resources through informational asymmetries
and poor incentives.) and b. asset restructuring (financial economies accrue to firms
expert at purchasing undervalued assets, restructuring operations, and selling at a
premium). Financial economies through unrelated diversification typically entail more
efficient capital allocation and the potential for asset restructuring.
- General problems include that during the process, companies often become targets of
asset restructuring, demanding managerial time requirements, without providing cross-
business strategic fits and hence economies of scope.
-Add more value: A firm practicing unrelated diversifications can make a better capital
allocation to its businesses than the external market because corporate hq can allocate
capital according to more specific criteria than is possible with external market
allocations, corporate hq has more complete info about the subsidiary businesses than
the external capital market, a corporate can more effectively discipline underperforming
mgmt teams through resource allocation than can the external market.
Strategies for managing a group of businesses - Answers - 1. stick with the current
business lineup
2.broaden the company's base by developing products for new industries
3. Divest certain businesses and retrench to a narrower base
4. Restructure the company's business lineup
5. Strive to globalize the operations of several business units
Active Portfolio Management - Answers - -Actively manage and monitor the broad asset
allocation and security selection of the portfolio
-When markets are at equilibrium, asset prices equal their fair value
-Markets reach eq. because investors constantly seek out an exploit profit opportunities
from mis_pricings
-Equilibrium comes from active portfolio management
-RESTRUCTURING IS CAPITAL
International strategy - Answers - -a strategy through which a firm sells its goods or
services outside its domestic market. General incentives for a company to expand into
the markets of foreign countries are to gain access to new customers, to achieve lower
costs and enhance the firm's competitiveness, to capitalize on core competencies, and
to spread business risk across a wider geographic base.
-Basic benefits are a. increased market size = domestic market may lack the size to
support efficient scale manufacturing facilities, economies of scale = expanding the size
of markets helps to achieve economies of scale in manufacturing, R&D, or distribution;
location advantages = certain countries may aid in developing competitive advantage
and improving access to critical resources.
-Risks are a. political risks, b. economic risks, and c. the complexity of managing
international strategy.
corporate level strategy - Answers - -specifies actions a firm takes to gain a competitive
advantage by selecting and managing a group of different businesses competing in
different product markets.
-Reasons for Diversification include:1. Benefits (Value-Creation): increased economies
of scope (by sharing activities to reduce costs or by transferring core competencies),
gain market power through vertical integrations or multipoint competition), achieving
financial economies through efficient capital allocation, or business restructuring.
-2. Incentives (Value-Neutral): diminishing market opportunities and stagnating sales in
principle business (i.e. low performance), Spread risk across various industries, Exploit
valuable tangible or intangible resources, and changes in antitrust regulation or tax.
-3. Managerial motives (Value-Reducing) reduce employment risk through
diversification and use diversification to achieve larger organizational size & hence
increase compensation.
-Merits and standard vehicles for diversifying are Diversification merits strong
consideration whenever a single-business company is faced with diminishing market
opportunities and stagnating sales. Vehicles include acquisition (industry attractiveness-
industry chosen must be attractive enough to yield a consistently good return on
investment), Internal development (cost of entry-cost to enter target industry must not
be so high as to erode returns), and joint ventures (better off-businesses must perform
better together than as independent entities).
Related diversification - Answers - -All businesses share product, technological &
distribution linkages. The value chain activities across business possess strong linkages
or similarities. Benefits are economies of scale ( cost savings that accrue directly from a
larger-sized operation) and economies of scope ( e.g. synergies; stem directly from
cost-savings resulting from a firm successfully leveraging, either through sharing
resources or transferring knowledge, some of its capabilities developed in one business
to another business).
-Operational relatedness: sharing either a primary or a support activity to reduce
duplicate efforts.
-Corporate relatedness: transfer competitively valuable resources and capabilities.
-Related diversification can also enhance value through greater market power. Avenues
of market power are multi-point competition = economies of scale and vertical
integration.
-Data support related and not unrelated diversification because you build no joint
competitiveness because you can't share resources or jointly conduct activities.
Unrelated businesses is a weaker foundation for enhancing shareholder value over the
long term.
Unrelated diversification - Answers - -a growth strategy whereby a new
business/industry where there is potential to realize good financial results is realized.
, -Financial economies are a. efficient internal capital allocation (cost savings realized
through improved allocations of financial resources through informational asymmetries
and poor incentives.) and b. asset restructuring (financial economies accrue to firms
expert at purchasing undervalued assets, restructuring operations, and selling at a
premium). Financial economies through unrelated diversification typically entail more
efficient capital allocation and the potential for asset restructuring.
- General problems include that during the process, companies often become targets of
asset restructuring, demanding managerial time requirements, without providing cross-
business strategic fits and hence economies of scope.
-Add more value: A firm practicing unrelated diversifications can make a better capital
allocation to its businesses than the external market because corporate hq can allocate
capital according to more specific criteria than is possible with external market
allocations, corporate hq has more complete info about the subsidiary businesses than
the external capital market, a corporate can more effectively discipline underperforming
mgmt teams through resource allocation than can the external market.
Strategies for managing a group of businesses - Answers - 1. stick with the current
business lineup
2.broaden the company's base by developing products for new industries
3. Divest certain businesses and retrench to a narrower base
4. Restructure the company's business lineup
5. Strive to globalize the operations of several business units
Active Portfolio Management - Answers - -Actively manage and monitor the broad asset
allocation and security selection of the portfolio
-When markets are at equilibrium, asset prices equal their fair value
-Markets reach eq. because investors constantly seek out an exploit profit opportunities
from mis_pricings
-Equilibrium comes from active portfolio management
-RESTRUCTURING IS CAPITAL
International strategy - Answers - -a strategy through which a firm sells its goods or
services outside its domestic market. General incentives for a company to expand into
the markets of foreign countries are to gain access to new customers, to achieve lower
costs and enhance the firm's competitiveness, to capitalize on core competencies, and
to spread business risk across a wider geographic base.
-Basic benefits are a. increased market size = domestic market may lack the size to
support efficient scale manufacturing facilities, economies of scale = expanding the size
of markets helps to achieve economies of scale in manufacturing, R&D, or distribution;
location advantages = certain countries may aid in developing competitive advantage
and improving access to critical resources.
-Risks are a. political risks, b. economic risks, and c. the complexity of managing
international strategy.
