Tutorial 2 : review questions | PCS

1. Corporate-level strategy specifies actions a firm take to gain a competitive advantage by

selecting and managing a group of different businesses competing in different product
market.
The importance of corporate level strategy is as follows:

These types of strategies will help companies decide what strategic positions to use

depending on each market is doing during a specified time period.

They play a vital role in deciding the competitive position of the firm in the market.
They help in retaining the customer base.
If properly taken, reduce the level of risk to be faced by the firm.
They are very helpful in the organizations sustainability.

2. There are three different levels of diversification that firms may pursue by using different
corporate-level strategies.
1. Low level diversification:
i. Single business
ii. Dominant business
In such business strategies companies generate their maximum revenue from their core
business areas. For e.g. Frito Lay
2. Moderate to high level diversification:
i. Related constrained
ii. Related linked
All the businesses in these cases are linked to each other. For e.g. GE
3. Very high level diversification:
i. Unrelated
Companies that generally use such strategy are known as corporations/MNC. For e.g.
Samsung

3. What are three reasons causing firms choose to diversify their operations?
a) To increase a company's value: This is one of the major reasons why a company
may choose to diversify its operations. Diversifying its business will lead to the
company creating an edge over the rest of its competitors which lead to the
sustainability of the business.

b) To decrease a company's value: Here the main motive behind the use of such
strategy is not the organizational growth, instead increased compensation and reduced
managerial risk.
c) To neutralize another company's strengths: Very important as neutralizing
competitor's strengths will prove to be a major achievement for the business. This will
highly contribute to the profitability and growth of the organization.
4. How do firms create value when using a related diversification strategy?
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This will include operational relatedness and also corporate relatedness.

Through operational relatedness the company shares its activities.
Through corporate relatedness the company transfers its core competencies.
Core competencies generally are made up of managerial and technical knowledge,

experiences, and expertise.

Transferring/sharing resources between business units may result in reduced costs and an

increase in the firms overall strategic competitiveness

The strategy also helps in creating a very high level of market power for the organization
E.g :
Virgin has been able to transfer its marketing skills across travel, cosmetics,
music, and drinks and a number of retail businesses.
Coopers Industries has been able to manage a number of manufacturing related
businesses.
Honda has developed and transferred across its businesses its expertise in small
and now larger engines for a number of vehicle typesfrom motorcycles and
lawn mowers to its range of automotive products.
Williams Companies have shown that it was able to transfer its skills in building
and operating natural-gas pipelines to building and operating fiber-optic Internet
pipelines.

5. What are the two ways to obtain financial economies when using an unrelated
diversification strategy?
Efficient Internal Capital Market Allocation
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Capital can be allocated in various ways like through debt and shares, etc. the holders of
such debt or shares will put efforts to enhance the value of their investments by taking
interests in other businesses with high growth and profitability prospects.

Restructuring (acquired assets)

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Involves the buying and selling of other firms (and their assets) in the external market.

Restructuring it for efficiency and profitability, and then reselling for a profit.

6. What incentives and resources encourage diversification?

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Diversification incentives come both in the internal and external business environment.
Some external incentives are possible antitrust or tax laws. Such laws provide
incentives for various firms to diversify their businesses. These laws create increased
market powers. These include conglomerate diversification. These incentives enhance
mergers and acquisitions. These activities ultimately are treated as an incentive because

they expand the market base for the concerned organization.

Lower performance is another incentive for the organization. The organizations that are

broadly diversified have a relatively lower performance level than its competitors.
Unpredictable cash flow is another kind of incentive that should be diversified by an
organization. Diversification into other product lines will lead to better cash flows of the

organization. It will also reduce the level of risk involved.

Mitigation of risk for the business is another area that could be diversified. When two
businesses tend to work together it is very important for them to generate synergy.
Synergy occurs when both firms are able to add up to the value of the business as
expected. Such situation reduces the risk involved in the individual businesses.

7. What motives might encourage managers to over-diversify their firm?

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Increased compensation:
Diversification increases firm size, and firm size has a direct effect on executive
compensation. Moreover, managing a highly diversified firm is more difficult; thus,
managerial compensation is generally higher in such a firm. Consequently, executives
may have selfish motives to diversify the company in ways which may actually reduce
corporate competitiveness.
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. All such factors will enhance the
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performance of the overall organization and increase the competitiveness of the firm.
Reduction of managerial risks:
A top-level manager may be motivated to pursue diversification because diversification
leads to greater job security for executives. In general, greater amounts of diversification
reduce managerial risk because if a particular business fails, the top executive remains
employed by the corporation.
It has another added benefit that with over diversification they get to explore more and
more markets. This leads to more and more ideas for businesses coming in.