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CHAPTER 6 REVIEW QUESTIONS - Docx STRATEGIC MANGEMENT
CHAPTER 6 REVIEW QUESTIONS - Docx STRATEGIC MANGEMENT
CHAPTER 6 REVIEW QUESTIONS - Docx STRATEGIC MANGEMENT
6-1. A corporate-level strategy is an action taken to gain a competitive advantage through the
selection and management of a mix of businesses competing in several industries or product
markets. A corporate-level strategy affects a company's finances, management,
human resources, and where the products are sold. The purpose of a corporate-level strategy is
to maximize its profitability and maintain its financial success in the future.
6.2. Low Levels of Diversification. A firm pursuing a low level of diversification uses either a
single- or a dominant-business, corporate-level diversification strategy. Moderate and
High Levels of Diversification. Very High Levels of Diversification.
Different levels of diversification
Levels of diversification
The nature of diversification in groups of companies takes on many forms. Some diversified
group have little connection across parts of the group. For example is Samsung, it has
construction and electronics businesses.
For the purposes of strategy development, 3 main levels of diversification are identified.
1) Close-related diversification
The different companies within the group may have different products or services but have
some form of close affinity such as common customers, common suppliers or common
overheads.
2) Distant-related diversification
The different companies in the group are more diversified with quite different products or
services using wholly different technologies. However, they may share the same underpinning
core competencies or some other area technology or services that would benefit from co-
ordination by a central headquarters.
3) Unrelated Diversification
The different companies in the group have little in common with regard to products, customers
or technologies. However, they benefit from the resources of the headquarters with regard to
the availability of lower-cost finance, quality of management direction and other related
matters.
6.3. the primary reasons why a firm pursues increased value-
creating diversification. Firms increase their diversification when they can create value
through economies of scope, financial economies or market power. here are four most
often cited reasons for diversification: the internal capital market, agency problems,
increased interest tax shield and growth opportunities. ... For example, diversified
firms may have lower pay-to-performance sensitivity due to their lower firm-specific risk
and larger firm size.
6.4. A company can create value by using what is called a related diversification strategy.
This will include operational relatedness and also corporate relatedness. Through
operational relatedness the company shares its activities. ... The strategy also helps
in creating a very high level of market power for the organization.
6.5. Unrelated diversification can create value through two types of financial economies:
efficient internal capital market allocation and restricting a firm's assets. If firms have limited
funds available for investment because external funds are more expensive
than internal funds, an efficient internal capital market allocates these funds to maximize
shareholder wealth. For a company, a restricted asset can take the form of collateral for a
loan. ... In the nonprofit world, restricted assets are funds that must be used for purposes
specified by donors. Restricted assets would fund an endowed chair or department at a
university
6.6. Diversification incentives come both in the internal and external business environment.
Some external incentives are possible antitrust or tax laws. Such laws
provide incentives to various firms to diversify their businesses. These laws create
increased market powers. Diversification incentives come both in the internal and
external business environment. Some external incentives are possible antitrust or tax
laws. Such laws provide incentives to various firms to diversify their businesses.
6.7. What motives might encourage managers to overdiversify their firm? Increased
compensation: Through over diversification the company may generate more and more
revenue which will enable them to increase the compensation level of their employees
resulting in better employee satisfaction and increased level of motivation.
KEY TERMS
MARKET POWER---EXISTS WHEN A FIRM IS ABLE TO SELL TO ITS PRODUCTS ABOVE THE EXISTING
COMPETITIVE LEVEL OR TO REDUCE THE COST OF ITS PRIMARY AND SUPPORT ACTIVITIES BELOW THE
COMPETITIVE LEVEL OR BOTH.
SYNERGY---- EXISTS WHEN THE VALUE CREATED BY BUSINESS UNITS WORKING TOGETHER EXCEEDS THE
VALUE THAT THOSE SAME UNITS CREATE WORKING INDEPENDENTLY.