CHAPTER 6 REVIEW QUESTIONS:

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

CORPORATELEVEL STRATEGY----SPECIFIES ACTIONS A FIRMS TAKES TO GAIN A COMPETITIVE

ADVANTAGE BY SELECTING AND MANAGING A GROUP OF DIFFERENT BUSINESSES COMPETING IN
DIFFERENT PRODUCTS MARKETS.

ECONOMIES OF SCOPE-----ARE COST SAVINGS FIRMS CREATE BY SUCESSFULLY SHARING RESOURCES

AND CAPABILITIES OR TRANSFERRING ONE OR MORE CORPORATE LEVEL CORE COMPETENCIES THAT
WERE DEVELOPED IN ONE OF ITS BUSINESSESS TO ANOTHER OF ITS BUSINESSESS.

CORPORATE LEVEL CORE COMPETENCIES---ARECOMPLEX SETS OF RESOURCES AND CAPABILITIES THAT

LINK DIFFEENT BUSINESSES, PRIMARILY THROUGH MANGERIAL AND TECHNOLOGICAL KNOWLEDGE,
EXPERIENCE AND EXPERTISE.

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.

MULTIPOINT COMPETITION---EXISTS WHEN TWO OR MORE DIVERSIFIED FIRMS SIMULTANEOUSLY

COMPETE IN THE SAME PRODUCTS AREAS OR GEOGRAPHICAL AREAS.

VERTICAL INTEGRATION--- EXISTS WHEN A COMPANY PRODUCES ITS OWN INPUTS(BACKWARD

INTEGRATION) OR ITS OWN SOURCE OF OUTPUT DISTRIBUTION(FORWARD INTEGRATION).
FINANCIAL ECONOMIES---ARE COST SAVINGS REALIZED THROUGH IMPROVED ALLOCATIONS OF
FINANCIAL RESOURCES BASED ON INVESTMENTS INSIDE OR OUTSIDE THE FIRM.

SYNERGY---- EXISTS WHEN THE VALUE CREATED BY BUSINESS UNITS WORKING TOGETHER EXCEEDS THE
VALUE THAT THOSE SAME UNITS CREATE WORKING INDEPENDENTLY.

CASE DISCUSSION QUESTIONS:

1. The corporate diversification strategy being pursued by Sany is

horizontal diversification strategy. Increase market share and reduce competition
in the industry.
*Further utilize economies of scale (thus reducing costs)
*Increase diversification.
*Reshape the company's competitive scope by reducing intense rivalry.
*Realize economies of scope.
*Share complementary skills and resources.

2. If GDP is slowing down, or is negative, it can lead to fears of a recession which

means layoffs and unemployment and declining business revenues and
consumer spending. The GDP report is also a way to look at which sectors of the
economy are growing and which are declining.
3. Sany invests 5 percent of its annual sales in R&D to continuously improve the
quality of existing products, identify new technologies, and develop new
products.
4. Each of these aspects speaks to a different body of law, with copyright covering
creative expression, patents covering functionality and trade secret law
protecting valuable confidential information.