OANDASAN, JAYJAY S.

BSBA-FMA III

KEY TERMS

[Link] level strategy

Specifies actions a firm takes to gain a competitive advantage by selecting and
managing a group of different businesses competing in different product markets.

[Link] of scopes
Are cost saving a firm creates by successful sharing resources and capabilities or
transferring one or more corporate level core competencies that were develop in
one of its businesses to another of its businesses.

[Link] level core competencies

Are complex sets of resources and capabilities that link different businesses
primarily through Managerial and technological, knowledge, experience and
expertise.

[Link] power
Exist when a firm is able to sell its product above existing competitive level or to
reduce the cost of its primary and support activities below the competitive level or
both.

5. Multipoint competition
exist when to or more diversified firm simultaneously compete in the same product
areas or geographical markets.

[Link] integration
Exist when a company produces input backward integration own its own source of
output distribution (forward integration)

7. Financial economies
cost saving realized through improved allocation financial resources based on
investment inside or outside firms.
[Link]
Exist when the value created by business unit working together exceeds the value
that those same units create working independently.

REVIEW QUESTIONS

[Link] 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 businesses competing in
different product markets. It is important because this will serve as strategy in
order to gain advantage in business world.

[Link] are the different levels of diversification firms can pursue using different
corporate - level strategies?

*Low Levels of Diversification ->A firm pursuing a low level of diversification uses
either a single- or a dominant-business, corporate-level diversification strategy. A
single-business diversification strategy is a corporate-level strategy wherein the
firm generates 95 percentage or more of its sales revenue from its core business
area. Furthermore, with the dominant-business diversification strategy, the firm
generates between 70 and 95 percentage of its total revenue within a single
business area
*Moderate and High Levels of Diversification ->A firm pursuing a moderate and
high level of diversification uses either a related constrained or a related linked,
corporate-level diversification strategy. A firm generating more than 30 percentage
of its revenue outside a dominant business and whose businesses are related to
each other in some manner uses a related diversification corporate-level strategy.
When the links between the diversified firm’s businesses are rather direct, meaning
they use similar sourcing, throughput and outbound processes, it is a related
constrained diversification strategy. Moreover, the diversified company with a
portfolio of businesses that have only a few links between them is called a mixed
related and unrelated firm and is using the related linked diversification strategy.
*Very High Levels of Diversification->A highly diversified firm that has no
relationships between its businesses follows an unrelated diversification strategy.

[Link] are 3 reason firms choose to diversify their operations?

*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 rest of its competitors which lead to sustainability
of the business.
*To decrease a company's value: Here the main motive behind use of such strategy
is not the organizational growth, instead increased compensation and reduced
managerial risk.
*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.

[Link] do firm create value when using diversification strategy?

Value is created through related or unrelated diversification when the strategy

allows a company's business to increase revenues or reduce costs while
implementing their business-level strategies.

[Link] are the 2 ways to obtain financial economies using an unrelated

diversification strategy?

A. Efficient Internal Capital Market Allocation

In a market economy, capital markets are believed to efficiently allocate capital.
Efficiency results as investors take equity positions (ownership) with high expected
future cash-flow values. Capital is also allocated through debt as shareholders and
debt holders try to improve the value of their investments by taking stakes in
businesses with high growth and profitability prospects. In large diversified firms,
the corporate headquarters office distributes capital to its businesses to create
value for the overall corporation. Firms have used this approach to internal capital
allocation among its unrelated business units. The nature of these distributions can
generate gains from internal capital market allocations that exceed the gains that
would accrue to shareholders as a result of capital being allocated by the external
capital market.
B. Restructuring of Assets
Financial economies can also be created when firms learn how to create value by
buying, restructuring, and then selling the restructured companies’ assets in the
external market. As in the real estate business, buying assets at low prices,
restructuring them, and selling them at a price that exceeds their cost generates a
positive return on the firm’s invested capital. This is a strategy that has been taken
up by private equity firms, who buy, restructure and then sell, often within a four
or five year period. Unrelated diversified companies that pursue this strategy try to
create financial economies by acquiring and restructuring other companies’ assets.

6. What incentives and resources encourage diversification?

• Value-Creating Incentives to Diversify
Value-creating incentives are single-business and dominant-business
diversification strategies. I mentioned about what they are in the answer of second
question.
•Value-Neutral Incentives to Diversify
Incentives to diversify come from both the external environment and a firm’s
internal environment. External incentives include antitrust regulations and tax
laws. Internal incentives include low performance, uncertain future cash flows, and
the pursuit of synergy, and reduction of risk for the firm.
•Antitrust Regulation and Tax Laws
Government antitrust policies and tax laws provided incentives for firms to
diversify. Antitrust laws prohibiting mergers that created increased market power
(via either vertical or horizontal integration) were stringently enforced. Moreover,
the tax effects of diversification stem not only from corporate tax changes, but also
from individual tax rates. Some companies (especially mature ones) generate more
cash from their operations than they can reinvest profitably.
•Low Performance
Some research shows that low returns are related to greater levels of
diversification. If high performance eliminates the need for greater diversification,
then low performance may provide an incentive for diversification.
• Uncertain Future Cash Flows
As a firm’s product line matures or is threatened, diversification may be an
important defensive strategy. Small firms and companies in mature or maturing
industries sometimes find it necessary to diversify for long-term survival.
Diversifying into other product markets or into other businesses can reduce the
uncertainty about a firm’s future cash flows.
•Synergy and Firm Risk Reduction
Diversified firms pursuing economies of scope often have investments that are too
inflexible to realize synergy among business units. As a result, a number of
problems may arise. Synergy exists when the value created by business units
working together exceeds the value that those same units create working
independently. However, as a firm increases its relatedness among business units,
it also increases its risk of corporate failure because synergy produces joint
interdependence among businesses that constrains the firm’s flexibility to respond.
• Resources
A firm must have the types and levels of resources and capabilities needed to
successfully use a corporate-level diversification strategy. Although both tangible
and intangible resources facilitate diversification, they vary in their ability to create
value. Tangible resources usually include the plant and equipment necessary to
produce a product and tend to be less-flexible assets. Any excess capacity often can
be used only for closely related products, especially those requiring highly similar
manufacturing technologies. On the other hand, intangible resources are more
flexible than tangible physical assets in facilitating diversification. Although the
sharing of tangible resources may induce diversification, intangible resources could
encourage even more diversification.

7. What motives might encourage managers to over diversity their firms?

Increased compensation – through diversification the company can generate more
revenue which will enable them to increase the compensation level of their
employees, resulting in better employee satisfaction and an increased level of
motivation. The desire for increased compensation and reduced managerial risk
are two motives for top-level executives to diversify their firm. In slightly different
words, top-level executives may diversify a firm in order to spread their own
employment risk, as long as profitability does not suffer excessively.

CASE DISCUSSION
[Link] corporate diversification strategy id being pursued by Sany? What
evidence do you have that supports your position?

The corporate diversification strategy Sany was 1. Cranes 2. Road Construction

Machinery [Link] Machinery [Link] Machinery while each is distinct some
similar technologies are used in the production and equipment, furthermore
similar technologies allow similarities in production and equipment furthermore,
similar technologies allow similarities in production processes and equipment for
certain parts. Therefore there is a transfer of knowledge across the businesses.

[Link] does the level of change in gross domestic products indicator of country
economic health influence a firm like Sany?

The change of gross domestic product means a lot of goods and services are
produced within the country wherein it influenced Sany to more products to import
to other countries.

[Link] does a firm such as Sany (in the heavy equipment industry) spend so much
of its revenue on R&D and innovation?

It is because for them to continuously improve the quality of their existing products.
Identify new technologies and develop new products.

[Link] that it is now seeking international expansion, how do you expect the
judgement against it (patent and trade secret infringement case) to affect its
growth prospects outside of china?

At first it will affect the business. It is just an accusations therefore nothing to worry
unless it is proven by the law.