Gladys C.

Canteros
BSA41

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

A 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 concerned with strategic decisions that affect an entire organization. It is important because it
helps companies select new strategic positions–positions that are expected to increase the firm’s
value. It plans the future of the company and taking advantages of opportunities that may be
available in the market. It directs the business to serve their customers in an efficient and effective
manner. To become more diversified is to create additional value. Using a single or a dominant
business corporate level strategy is preferable to a more diversified strategy unless economies of
scope or financial economics or additional market power.

2. What are the different levels of diversification firms can pursue by using different corporate-
level strategies?
The different levels of diversification are:
a. Low level diversification – Single or dominant business diversification strategy helps a
firm pursue low levels of diversification. A single corporate level strategy helps a firm
generate their sales revenue. However, a dominant business strategy allows the firm to
generate 70-95% of revenue.
b. Moderate level of diversification – A firm is said to utilize related constrained
diversification strategy if it generates more than 30% of the business revenue. Where there
is a mixed related and unrelated link, less than 70% of revenue comes from the dominant
business, and there are only limited links between businesses.
c. High level of diversification – Unrelated diversification strategy is followed by the
organization if it wishes to have a highly diversified firm where less than 70% of revenue
comes from the dominant business, and there are no common links between businesses.

3. What are three reasons causing firms to diversify their operations?

The reasons for diversification are:
a. Value-creating diversification
a. Economies of scope (related diversification)
i. Sharing activities
ii. Transferring core competencies
b. Market power (related diversification)
i. Blocking competitors through multipoint competition
ii. Vertical integration
c. Financial economies (unrelated diversification)
i. Efficient internal capital allocation
ii. Business restructuring
b. Value-neutral diversification
a. Antitrust regulation
b. Tax laws
c. Uncertain future cash flows
d. Risk reduction for firm
 e. Tangible resources
f. Intangible resources
c. Value-reducing diversification
a. Diversifying managerial employment risk
b. Increasing managerial compensation

4. What incentives and resources encourage diversification?

The external incentives that encourage diversification are antitrust regulations and tax laws while
for the internal incentives are low performance, uncertain future cash flows, and synergy and firm
risk reduction. However, even when incentives to diversify exist, 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. Indeed, the degree to which resources are valuable, rare, difficult to
imitate, and non-substitutable influence their ability to create value through diversification.

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

The motives that might encourage managers to over diversify their firm are managerial risk
reduction and desire for increased compensation.