Chapter 6

Bautista, Katleen Grace M.
BSBA III – Operations Management
KEY TERMS
1. Corporate-level Strategy – specifies actions a firm takes to gain a competitive advantage by

selecting and managing a group of different business competing in different product markets.
2. Economies of Scope – are cost savings that the firm creates by successfully sharing some of its
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.
3. Corporate-level Core Competencies – are complex sets of resources and capabilities that link
different businesses, primarily through managerial and technological knowledge, experience,
and expertise.
4. 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.
5. Multipoint Competition – exists when two or more diversified firms simultaneously compete in
the same product areas or geographical markets.
6. Vertical Integration – exists when a company produces its own inputs (backward integration) or
owns its own source of output distribution (forward integration).
7. Financial Economies – are cost savings realized through improved allocations of financial
resources based on investments inside or outside the firm.
8. Synergy – exists when the value created by business units working together exceeds the value
that those same units create working independently.
REVIEW QUESTIONS
1. What is corporate-level strategy and why is it important?

- Corporate-level Strategy specifies actions a firm takes to gain a competitive advantage by
selecting and managing a group of different business competing in different product
markets.
2. What are the different levels of diversification firms can pursue by using different corporate-
level strategies?
- A. Low Levels of Diversification
B. Moderate to High Levels of Diversification
C. Very High Levels of Diversification
3. What are three reasons firms choose to diversify their operations?
- A. Value-Creating Diversification
 Economies of Scope (related diversification)
o Sharing activities
o Transferring core competencies
 Market Power (related diversification)
o Blocking competitors through multipoint competition
o Vertical integration
 Financial Economies (unrelated diversification)
o Efficient internal capital allocation
o Business restructuring
B. Value-Neutral Diversification
 Antitrust regulation
 Tax laws
 Low performance
 Uncertain future cash flows
 Risk reduction for firm
 Tangible resources
 Intangible resources
C. Value-Reducing Diversification
 Diversifying managerial employment risk
 Increasing managerial compensation
4. How do firms create value when using a related diversification strategy?
- With the related diversification corporate-level strategy, the firm builds upon or extends its
resources and capabilities to create value.
5. What are the two ways to obtain financial economies when using an unrelated diversification
strategy?
- A. Efficient Internal Capital Market Allocation
B. Restructuring of Assets
6. What incentives and resources encourages diversification?
- A. External Incentives
1. Antitrust Regulation and Tax Laws
B. Internal Incentives
1. Low Performance
2. Uncertain Future Cash Flows
3. Synergy and Firm Risk Reduction
7. What motives might encourage managers to over diversify their firm?
- The desire for increased compensation and reduce managerial risk are two motives for top
level executives to diversify their firm beyond value-creating and value-neutral levels
CASE DISCUSSION
1. What corporate diversification strategy is being pursued by Sany? What evidence do you have
that supports your position?
-
2. How does the level of change in gross domestic product indicator of country economic health
influence a firm like Sany?
-
3. Why does a firm such as Sany (in the heavy equipment industry) spend so much of its revenue
on R&D and innovation?
-
4. Given that it is now seeking international expansion, how do you expect the judgment against it
(patent and trade secret infringement case) to affect its growth prospects outside of China?
-

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Bautista, Katleen Grace M.

BSBA III – Operations Management

1. Corporate-level Strategy – specifies actions a firm takes to gain a competitive advantage by

1. What is corporate-level strategy and why is it important?

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