Summary Corporate Level Strategy

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• 2 WEEK 2 DIVERSIFICATION BENEFITS AND COSTS

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• What does the paper examine regarding diversification choices?

  • The pursuit of synergy explaining limits to related diversification and the choice for unrelated diversification
  • The role of actively managing interdependencies between new and existing businesses in realizing potential synergy
  • The impact of rising coordination costs on net synergy

• What is the main contribution of the paper?

  • Operationalizing a mechanism showing that synergy benefits and coordination costs rise with related diversification through input sharing
  • Discussing how input sharing between business lines affects entry into new businesses based on synergy and coordination costs
  • Specifying circumstances where coordination costs surpass synergistic benefits due to corporate-level complexity

• What circumstance does the paper specify where marginal coordination costs surpass marginal synergistic benefits?

  • Corporate-level complexity in existing business lines or the extent of their interdependence
  • Increased demand for coordination and worsened coordination problem associated with input sharing due to complexity

• How does the paper link the indivisibility of inputs to coordination costs and diversification choices?

  • Firms seek synergy through input sharing within a firm due to the indivisibility of inputs between firms
  • Indivisibility creates coordination costs within diversified firms, affecting the potential for input sharing and entry into new businesses
  • Divisible inputs could be shared through contracting, reducing coordination costs

• What role does complexity in existing business lines play in the synergy and diversification framework?

  • Complexity at the corporate level increases the demand for coordination and worsens the coordination problem associated with input sharing
  • Firms with greater complexity in their existing business mix are more likely to see coordination costs surpass synergistic benefits
  • The extent of interdependencies within complex existing business lines sets constraints on input sharing through diversification

• How does the paper suggest coordination costs limit related diversification choices?

  • Increasing coordination costs moderate the impact of synergy on industry choice and set a limit to related diversification
  • Rising costs of coordinating interdependencies across related business lines reduce net synergy benefits
  • Decreasing synergistic benefits and rising coordination costs restrict the degree of input sharing and diversification

• What are the challenges posed by interdependencies in diversification?

  • Joint designing, joint scheduling, and mutual adjustments are required
  • Setting transfer prices and designing incentive schemes for cooperation is necessary
  • Communication, information processing, and joint decision making are affected

• How do coordination costs evolve at firm level with increased coordination demand?

  • Coordination costs increase exponentially as the firm's overall coordination demand approaches its coordination capacity
  • It becomes challenging to manage interdependent activities within the firm
  • Transaction costs between firms are lower than managing interdependent activities within an integrated firm

• What is the impact of complex existing business lines on the likelihood of diversifying into a new business?

  • A firm is less likely to diversify if its existing business lines are more complex
  • High transaction/coordination costs due to increased complexity discourage diversification

• Why do coordination costs pose a higher challenge for firms pursuing more related diversification?

  • More input sharing between a firm’s existing business lines and a new business
  • Coordination costs are higher for firms with more related diversification