# Corporate Strategy Concept Card: [Company or case name] > A concept card for the corporate strategy elective of a leading MBA programme: how a multi-business company creates > (or destroys) value above what its businesses would earn alone. It covers corporate advantage as a fit between > resources, businesses and organisation; economies of scope and when they need common ownership; the four ways a > corporation adds value (portfolio management, restructuring, transferring skills, sharing activities); parenting fit; > internal capital markets; the evidence on the diversification discount and its critics; and the tools a corporate > centre uses: sum-of-the-parts valuation, economic profit by business, capital reallocation and portfolio > restructuring (sale, spin-off, carve-out). It builds on the core card `mba/mba-growth-strategy-card` (Ansoff, Porter's > three tests, parenting advantage, the BCG matrix and build, borrow or buy) and does not re-teach it. It is for MBA > students in a corporate strategy or M&A elective, consulting and corporate development candidates, and managers at a > group centre. Worked example A (Group D, a diversified group) is fully solved, Worked example B (Northfield Outdoor > Co. adding rental and repair) is half solved and Exercise C (a capital allocation round) is left to you; the self-test > answers sit in a separate key. > Source basis: Porter (1987), Goold, Campbell and Alexander (1994), Collis and Montgomery (1998), Teece (1980), Panzar > and Willig (1981), Prahalad and Bettis (1986), Lang and Stulz (1994), Berger and Ofek (1995), Stein (1997), > Scharfstein and Stein (2000), Campa and Kedia (2002) and Villalonga (2004), written up in original words. Group D and > Northfield Outdoor Co. are fictional, and every number was computed in Python. > Replace every [bracketed] value and every row marked *Example*. ## Document control | Field | Value | |---|---| | Course or project | [Corporate strategy elective, session 5 / group strategy review / case] | | Learner or team | [Your name or learning team] | | Company analysed | [Group D (fictional) / your company] | | Businesses in scope | [List of segments or business units] | | Currency and unit | [USD m] | | Valuation date and peer set date | YYYY-MM-DD | | Evidence sources | [Segment reporting, peer multiples, internal ROIC data, capex history] | | Reviewed by | [Instructor, mentor or head of strategy] | | Version | [0.1] | ## Contents 1. When to use it 2. The idea in plain language 3. Formulas and notation 4. Assumptions and limits 5. How corporate centres use it in practice 6. Dated reporting facts 7. Worked example A (fully solved): Group D portfolio review 8. Worked example B (half solved): Northfield Outdoor Co. rental and repair 9. Exercise C (unsolved): Group D capital allocation round 10. Connections to other cards 11. Common mistakes and misconceptions 12. Self-test questions 13. My notes and next steps 14. Sources and further reading 15. Answer key ## When to use it **One-sentence rule:** use this card when the question is which businesses a company should own, how the centre adds value to them, and whether the group is worth more than the sum of its parts. | Use it when | Use something else when | |---|---| | A diversified group trades below its sum of the parts and an activist asks for a break-up | One business must decide where to grow next (`mba/mba-growth-strategy-card`) | | The centre must allocate capital between businesses with different returns | You must value one investment project (`mba/mba-npv-irr-card`, `finance/investment-appraisal`) | | A business is a candidate for sale, spin-off or carve-out | You must structure the sale itself (`mba/mba-deal-structuring-card`) | | Management argues that a new business "fits" the group | The question is industry attractiveness (`mba/mba-five-forces-card`) | | You review how much the corporate centre costs and what it adds | The question is international configuration (`mba/mba-international-strategy-card`) | | A case asks about make or buy across the value chain at group level | The question is make or buy for one activity (`mba/mba-value-chain-card`) | ## The idea in plain language **The corporate question.** Investors can diversify cheaply by holding a portfolio of shares, so a company does not create value by diversifying for its own sake. A multi-business firm must show that its businesses are worth more together under this parent than they would be alone or under another owner. The growth card introduced Porter's (1987) three tests and the idea of parenting advantage (Goold, Campbell and Alexander 1994). This card turns them into measurement and action. **Four ways a corporation adds value.** Porter (1987) described four concepts of corporate strategy: | Concept | How the centre adds value | Condition for it to work | |---|---|---| | Portfolio management | Buys good, undervalued businesses and funds them | Rare in efficient capital markets: the centre must spot value others miss and pay less than it is worth | | Restructuring | Buys underperforming businesses, fixes them, then sells or keeps them | The centre has turnaround skill and sells when the work is done | | Transferring skills | Moves know-how between businesses with similar activities | Skills are important to competitive advantage and can actually move | | Sharing activities | Businesses share a sales force, plant, logistics or brand | Shared costs fall by more than the coordination and compromise costs | Porter argued that the first two concepts had become harder to sustain as capital markets improved, and that the last two, which depend on relatedness, offered the more reliable path. **Corporate advantage as fit.** Collis and Montgomery (1998) describe a corporate strategy as a system of three elements: the **resources** the firm builds and shares (brands, technology, know-how), the **businesses** it competes in, and the **organisation** (structure, systems, processes, the size and role of the centre). Advantage comes from the fit between them. A centre that adds value by sharing a scarce resource needs a hands-on organisation; a centre that owns unrelated businesses can only add value through financial control and capital allocation and should be small. **Economies of scope, and why they are not enough.** Economies of scope exist when producing two products together costs less than producing them separately (Panzar and Willig 1981). Teece (1980) pointed out that scope economies alone do not require one firm to own both businesses: a shared input such as a warehouse can often be rented or contracted. Common ownership is needed when the shared input is know-how or a specialised asset that markets handle badly because of transaction costs (Coase 1937; Williamson 1975). So the real question is not "is there a synergy?" but "can only common ownership capture it?". **Parenting fit.** Goold, Campbell and Alexander (1994) asked two questions of each business: do the parent's characteristics (skills, resources, systems) fit the business's critical success factors, and does the business offer opportunities the parent can improve (parenting opportunities)? Their answers place each business in one of five areas: **heartland** (high fit on both: the core of the group), **edge of heartland** (fit on some dimensions, care needed), **ballast** (the parent understands it but adds little: often a candidate to release over time), **value trap** (opportunities exist, but the parent's style fits badly, so its attempts to help destroy value) and **alien territory** (no fit: exit). **Dominant logic and core competence.** Prahalad and Bettis (1986) argued that top managers run a group through a **dominant logic**, a shared mental model of how to compete; diversity beyond what that logic can handle hurts performance. Prahalad and Hamel (1990) asked groups to organise around core competences that feed several businesses rather than around stand-alone units. **Internal capital markets.** A group allocates capital internally. Stein (1997) showed that headquarters can create value by **winner picking**: moving funds from weaker to stronger projects using information outside investors lack. Scharfstein and Stein (2000) showed the opposite risk: divisional managers lobby, and the centre may subsidise weak divisions at the expense of strong ones (**corporate socialism**). Rajan, Servaes and Zingales (2000) linked such inefficient transfers to the diversity of divisions' investment opportunities. **The diversification discount and its critics.** Lang and Stulz (1994) found that highly diversified US firms had lower Tobin's q than portfolios of single-segment firms in the same industries. Berger and Ofek (1995) estimated that diversified firms were valued about 13% to 15% below the imputed value of their segments in their 1986 to 1991 sample, with overinvestment and cross-subsidies as part of the explanation. Comment and Jarrell (1995) found that increases in focus were associated with higher stock returns. Later work questioned the cause: Campa and Kedia (2002) and Villalonga (2004) argued that firms that diversify differ systematically from those that do not, and that once this self-selection or measurement is addressed, much of the discount disappears and can even become a premium. The lesson for a manager: a discount to sum of the parts is a question to answer business by business, not proof that the group should break up. **Portfolio restructuring.** When a business does not belong, the group can fix it, harvest it, sell it to a better parent, spin it off to shareholders as an independent listed company, sell a minority stake in an IPO (carve-out) or offer shareholders an exchange of shares (split-off). Schipper and Smith (1983) found positive announcement returns for voluntary spin-offs. Each option has different proceeds, tax, stranded-cost and control consequences, which is why the corporate centre models them side by side. ## Formulas and notation **Degree of economies of scope (two products):** $$ SC = \frac{C(q_1, 0) + C(0, q_2) - C(q_1, q_2)}{C(q_1, q_2)}, \qquad SC > 0 \text{ means scope economies} $$ **Sum of the parts (SOTP) and imputed value:** $$ I = \sum_{j=1}^{J} m_j \times \text{EBITDA}_j, \qquad I^{\text{adj}} = I - m_c \times C_{\text{centre}} $$ **Excess value (Berger and Ofek 1995) and the discount to the adjusted SOTP:** $$ EXV = \ln\!\left(\frac{V}{I}\right), \qquad D = \frac{V}{I^{\text{adj}}} - 1, \qquad V = \text{market capitalisation} + \text{net debt} $$ **Economic profit by business:** $$ EP_j = (ROIC_j - WACC_j) \times IC_j $$ **Value change from selling a business:** $$ \Delta V = \text{Proceeds}_{\text{after tax}} - m_c \times C_{\text{stranded}} - \text{Separation costs} - V_j^{\text{in group}} $$ | Symbol | Meaning | Unit | |---|---|---| | $C(q_1, q_2)$ | Total cost of producing quantities $q_1$ and $q_2$ in one firm | USD m a year | | $SC$ | Degree of economies of scope | % | | $m_j$ | Peer median EV/EBITDA multiple for business $j$ | x | | $\text{EBITDA}_j$ | EBITDA of business $j$ (segment report) | USD m | | $I$, $I^{\text{adj}}$ | Imputed (sum of the parts) enterprise value, before and after capitalised centre costs | USD m | | $C_{\text{centre}}$, $m_c$ | Unallocated corporate centre costs and the multiple used to capitalise them | USD m a year, x | | $V$ | Market enterprise value of the group | USD m | | $EXV$ | Excess value: negative means a discount | log ratio | | $D$ | Discount (negative) or premium to the adjusted sum of the parts | % | | $ROIC_j$, $WACC_j$ | Return on invested capital and cost of capital of business $j$ | % | | $IC_j$ | Invested capital of business $j$ | USD m | | $EP_j$ | Economic profit of business $j$ | USD m a year | | $C_{\text{stranded}}$ | Centre costs that stay after a business leaves | USD m a year | | $V_j^{\text{in group}}$ | Value of business $j$ inside the group (its SOTP value) | USD m | ## Assumptions and limits - **Peer multiples carry the answer.** The imputed value depends on which peers you choose and on whether they are truly comparable in growth, margins and risk (`finance/valuation-report`). Show a range, not one number. - **Segment data are management's view.** Segment boundaries, transfer prices and allocations of shared costs follow internal reporting; they can flatter or hide a business. - **A discount is not a cause.** The evidence on the diversification discount is contested (Campa and Kedia 2002; Villalonga 2004). Explain where the discount comes from before proposing a break-up. - **Break-ups have costs.** Stranded centre costs, dis-synergies (lost purchasing scale, shared services), separation costs, tax on a sale and management distraction all reduce the gain. - **Economic profit uses accounting capital.** Acquired goodwill, leases and old assets distort invested capital; agree definitions before comparing businesses. - **Scope economies need a mechanism.** A saving on paper becomes value only if the organisation actually shares the activity; coordination costs are real (Goold and Campbell 1998 warned against chasing synergies that do not exist). - **Tax and legal form of restructuring** (for example whether a spin-off can be tax-free for shareholders) depend on the jurisdiction and the facts: questions for tax counsel, not for this card. ## How corporate centres use it in practice 1. **Define the businesses** at the level where strategy is set and data exist (segments or business units). 2. **Measure each business:** ROIC against WACC and economic profit; growth; capital consumed over the last five years. 3. **Value the parts:** peer multiples or DCF per business, centre costs capitalised, compare with the market value. 4. **Test fit:** parenting fit, sharing and skill transfer actually happening, scope economies that need common ownership. 5. **Assign a role** to each business: invest to grow, fix, harvest, or release (sale, spin-off, carve-out). 6. **Reallocate capital** in line with roles; check that last year's allocation did not simply follow last year's. 7. **Model the restructuring options** with stranded costs, separation costs and tax. 8. **Decide and communicate** the group's logic: why these businesses, and what the centre does for them. ```mermaid flowchart TD A["Business j in the portfolio"] --> B{"Economic profit positive or credible plan to get there?"} B -- No --> C{"Can this parent fix it better than another owner?"} C -- No --> D["Release: sale to a better parent, spin-off or carve-out"] C -- Yes --> E["Fix: turnaround plan with milestones"] B -- Yes --> F{"Parenting fit: heartland or edge of heartland?"} F -- No --> G{"Worth more to another owner than to us?"} G -- Yes --> D G -- No --> H["Hold as ballast, harvest cash, review yearly"] F -- Yes --> I["Invest to grow, share resources and skills"] E --> J["Allocate capital by role, not by history"] H --> J I --> J D --> K["Model proceeds, stranded costs, separation costs, tax"] ``` ## Dated reporting facts As of October 2026 (checked 2026-10-28; check before you rely on them): | Topic | Dated fact | Official source | |---|---|---| | Segment reporting (IFRS) | IFRS 8 *Operating Segments*, issued November 2006 to replace IAS 14, applies to entities whose debt or equity is publicly traded and requires information on operating segments, products and services, geographical areas and major customers. IFRS 18 *Presentation and Disclosure in Financial Statements* (issued April 2024) made minor consequential amendments. | ifrs.org, IFRS 8 page | | Statement of profit or loss (IFRS) | IFRS 18 replaces IAS 1 for annual periods beginning on or after 1 January 2027, with defined subtotals (operating profit) and disclosure of management-defined performance measures with a reconciliation; it will change how group and segment profit measures are reported. | ifrs.org, IFRS 18 | | Segment reporting (US GAAP) | ASC 280 applies a similar management approach. ASU 2023-07 (November 2023) added disclosure of significant segment expenses regularly provided to the chief operating decision maker, for public entities from fiscal years beginning after 15 December 2023. Checked against the ASU wording quoted in SEC filings, because the fasb.org pages could not be opened at the check date: confirm in the Codification. | fasb.org | ## Worked example A (fully solved): Group D portfolio review **Situation (*Example*, fictional).** Group D is a listed diversified group with 100m shares at USD 26.00 (market capitalisation USD 2,600m) and net debt of USD 900m, so its market enterprise value is USD 3,500m. It has four segments and an unallocated corporate centre costing USD 30m a year. An activist investor says the group trades at a large discount and should break up. The board asks for a portfolio review. **Step 1: measure and value each business** (USD m; peer multiples are medians of listed single-business peers). | Segment | EBITDA | Peer EV/EBITDA | SOTP value | Invested capital | ROIC | WACC | Economic profit | Share of capex, last 5 years | |---|---|---|---|---|---|---|---|---| | Industrial automation *(Example)* | 180 | 12.0x | 2,160.0 | 1,200 | 14% | 9% | 60.0 | 25% | | Packaging *(Example)* | 140 | 7.5x | 1,050.0 | 1,100 | 7% | 8% | -11.0 | 40% | | Outdoor consumer brands *(Example)* | 60 | 9.0x | 540.0 | 450 | 10% | 9% | 4.5 | 15% | | Facilities services *(Example)* | 45 | 6.5x | 292.5 | 400 | 6% | 8% | -8.0 | 20% | | **Sum of segments** | 425 | | **4,042.5** | 3,150 | | | **45.5** | 100% | Excel: SOTP value `=B2*C2`; economic profit `=(F2-G2)*E2`; sum `=SUM(D2:D5)`. **Step 2: compare with the market.** | Item | Value | Excel | |---|---|---| | Sum of segments $I$ | 4,042.5 | `=SUM(D2:D5)` | | Centre costs capitalised at 8.0x | -240.0 | `=-30*8` | | Adjusted SOTP $I^{\text{adj}}$ | 3,802.5 | `=4042.5-240` | | Market enterprise value $V$ | 3,500.0 | `=2600+900` | | Discount to adjusted SOTP $D$ | -7.96% | `=3500/3802.5-1` | | Excess value against the unadjusted sum, $EXV$ | -0.1441 | `=LN(3500/4042.5)` | | Excess value against the adjusted SOTP | -0.0829 | `=LN(3500/3802.5)` | | SOTP equity value per share | USD 29.03 | `=(3802.5-900)/100` | ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "description": "Group D (fictional): sum of the parts against market enterprise value, USD m", "width": 360, "height": 220, "data": {"values": [ {"item": "1 Industrial automation", "value": 2160.0, "kind": "Segment"}, {"item": "2 Packaging", "value": 1050.0, "kind": "Segment"}, {"item": "3 Outdoor brands", "value": 540.0, "kind": "Segment"}, {"item": "4 Facilities services", "value": 292.5, "kind": "Segment"}, {"item": "5 Centre costs", "value": -240.0, "kind": "Centre"}, {"item": "6 Adjusted SOTP", "value": 3802.5, "kind": "Total"}, {"item": "7 Market EV", "value": 3500.0, "kind": "Total"} ]}, "mark": "bar", "encoding": { "x": {"field": "item", "type": "nominal", "title": null, "sort": null, "axis": {"labelAngle": -30}}, "y": {"field": "value", "type": "quantitative", "title": "USD m"}, "color": {"field": "kind", "type": "nominal", "title": null} } } ``` Reading the numbers: once centre costs are counted, the discount is about 8%, not the 13% the activist quotes from the unadjusted sum. Part of the "discount" is simply the cost of the centre. The rest needs an explanation. **Step 3: where does the value go?** Economic profit is concentrated in Industrial automation (USD 60m). Packaging and Facilities services destroy value (USD -19m together) yet received 60% of capex over five years. This is the pattern Scharfstein and Stein (2000) describe: capital follows size and lobbying, not returns. **Step 4: parenting fit.** Group D's centre is strong in engineering, lean operations and industrial procurement. | Segment | Fit of parent skills with the business's success factors | Parenting opportunities | Area | Role | |---|---|---|---|---| | Industrial automation | High: engineering, operations | High: shared procurement, automation know-how | Heartland | Invest to grow | | Packaging | High: process manufacturing | Low: mature, commoditised | Ballast | Fix returns, then decide (hold or sell) | | Outdoor consumer brands | Low: success depends on brand and consumer marketing | Some: sourcing and logistics | Value trap | Sell to a consumer-brand owner or manage hands-off | | Facilities services | Low: people-intensive services | Low | Alien territory | Release | **Step 5: model the release of Facilities services.** Stranded centre costs USD 4m a year, capitalised at 8.0x; one-off separation costs USD 10m; tax on the sale assumed nil because both prices are below an assumed tax basis of USD 400m (the segment's invested capital; a question for tax counsel). Value inside the group: USD 292.5m. | Item | Sale at 7.0x | Sale at 8.0x | Excel (8.0x) | |---|---|---|---| | Proceeds | 315.0 | 360.0 | `=45*8` | | Stranded centre costs, capitalised | -32.0 | -32.0 | `=-4*8` | | Separation costs | -10.0 | -10.0 | input | | Less value inside the group | -292.5 | -292.5 | `=-45*6.5` | | **Value change** | **-19.5** | **25.5** | `=360-32-10-292.5` | A sale at the peer multiple of 6.5x, or even at 7.0x, loses value once stranded and separation costs are counted: the break-even multiple is 7.43x (`=(292.5+32+10)/45`). A sale creates value only if a buyer with real synergies (for example a facilities services consolidator) pays well above the peer multiple, or if the centre removes the stranded costs. **Step 6: recommendation (*Example*).** (1) Do not break up the group wholesale: the adjusted discount is about 8% and part of it is explained by two value-destroying segments that the centre can address. (2) Cut capex to Packaging to maintenance level until ROIC exceeds WACC (each point of ROIC on USD 1,100m is USD 11m of economic profit a year). (3) Run a sale process for Facilities services aimed at strategic buyers and remove the USD 4m of stranded costs as part of the plan. (4) Test the market for Outdoor consumer brands with consumer-goods owners. (5) Reallocate capital towards Industrial automation with stage gates, and publish the logic so investors can track it. ## Worked example B (half solved): Northfield Outdoor Co. rental and repair **Situation (*Example*, fictional).** Northfield Outdoor Co. considers adding gear rental and repair counters to its stores. Annual costs (USD m): retail alone 410.0; a stand-alone rental and repair business of the same size 18.0; both run together in Northfield stores 420.0 (shared space, staff, systems and customer data). Tax 25%, cost of capital 9%, cash flows treated as perpetuities. Set-up cost if Northfield builds it: USD 25.0m. The rental business on its own would earn USD 2.4m a year after tax. | Item | Value | Excel | |---|---|---| | Annual cost saving from joint operation | [ ] | `=410+18-420` | | Degree of scope economies $SC$ | 1.90% | `=(410+18-420)/420` | | After-tax saving per year | [ ] | `=8*(1-25%)` | | PV of the saving | 66.67 | `=8*(1-25%)/9%` | | NPV of a separate rental firm (no shared costs) | [ ] | `=2.4/9%-25` | | NPV if Northfield builds it in its stores | 68.33 | `=(2.4+6)/9%-25` | | NPV if Northfield buys an existing rental chain at standalone value plus a premium of 20 and integration costs of 5 | [ ] | `=66.67-20-5` | 1. Apply Porter's better-off test: who is better off, and by how much? [ ] 2. Following Teece (1980), could Northfield capture the saving by leasing store space to an independent rental firm instead of owning the business? What would be lost? [ ] 3. Where does this move sit on Goold, Campbell and Alexander's parenting fit map, and why? [ ] 4. Name one coordination cost that the saving ignores. [ ] ## Exercise C (unsolved): Group D capital allocation round Group D has a growth capital budget of USD 300m for next year. Requests (USD m, expected return on the project and the business's WACC): | Request | Business | Amount | Expected return | WACC | |---|---|---|---|---| | R1 *(Example)* | Automation capacity | 120 | 15.0% | 9% | | R2 *(Example)* | Packaging line upgrade | 90 | 7.5% | 8% | | R3 *(Example)* | Outdoor brand e-commerce | 50 | 12.0% | 9% | | R4 *(Example)* | Facilities contracts bid | 40 | 6.5% | 8% | | R5 *(Example)* | Automation software | 60 | 18.0% | 10% | 1. Rank the requests by spread over WACC and allocate the budget. What happens to the money left over? 2. Compare with a pro-rata allocation (each request cut by the same percentage). Which businesses gain and lose? 3. The head of Packaging argues that the upgrade is needed to "stay competitive". What evidence would change your decision? 4. Which of Stein's (1997) and Scharfstein and Stein's (2000) mechanisms is at work in each allocation? 5. What should the centre do with unspent capital, and what does that say about the group's role? ## Connections to other cards - `mba/mba-growth-strategy-card`: Ansoff, Porter's three tests, parenting advantage, BCG and build, borrow or buy. - `mba/mba-resource-based-view-card` and `mba/mba-competitive-advantage-card`: resources that can be shared across businesses, and whether each business has an advantage of its own. - `mba/mba-value-chain-card`: which activities can be shared and the make-or-buy logic behind vertical scope. - `mba/mba-dcf-valuation-card` and `mba/mba-capm-wacc-card`: valuing each business and its own cost of capital. - `mba/mba-deal-structuring-card` and `mba/mba-synergy-valuation-card`: buying and selling businesses. - `mba/mba-corporate-governance-card`: why weak boards let empires grow and how activists challenge a group. - `mba/mba-international-strategy-card`: adding countries rather than businesses. - `mba/mba-pe-value-creation-card`: private equity as an alternative parent. - `mba/mba-strategy-guide`: the core course sessions on corporate strategy and vertical integration. ## Common mistakes and misconceptions 1. **Diversifying to reduce risk.** Shareholders can diversify themselves at almost no cost; risk reduction at group level is not value creation (it may help creditors and managers). 2. **Calling any shared feature a synergy.** A shared logo or headquarters city is not a scope economy; ask what cost falls or what revenue rises, and whether a contract could deliver it. 3. **Ignoring centre costs in the sum of the parts.** It overstates the discount and the gain from a break-up. 4. **Treating the diversification discount as proof of value destruction.** Selection and measurement explain part of it (Campa and Kedia 2002; Villalonga 2004). 5. **Allocating capital by size or history.** Large divisions that destroy value keep getting funded; allocate by expected return over WACC and strategic role. 6. **Forgetting stranded costs and dis-synergies** when modelling a sale or spin-off. 7. **Applying one parenting style to every business.** A hands-on industrial centre can harm a consumer brand (value trap). 8. **Using one group WACC for all businesses.** It overfunds risky businesses and starves safe ones (`mba/mba-capm-wacc-card`). 9. **Confusing a good business with a good fit.** A profitable business can still be worth more to another owner. 10. **Breaking up without a logic for what remains.** The remaining group still needs a reason to exist. ## Self-test questions 1. Name the three elements of a corporate strategy in Collis and Montgomery (1998) and explain why fit between them matters. 2. Why, according to Teece (1980), do economies of scope not by themselves justify owning two businesses? 3. $C(q_1, 0)$ = 100, $C(0, q_2)$ = 60 and $C(q_1, q_2)$ = 145. Compute the degree of economies of scope. 4. A group's market enterprise value is USD 900m and the sum of its segments' imputed values is USD 1,000m. Compute the excess value and interpret it. 5. Unit A has EBITDA of USD 50m (peers 10x), unit B USD 30m (peers 6x); centre costs USD 5m a year capitalised at 8x; net debt USD 200m. What is the SOTP equity value? 6. A business has ROIC 6%, WACC 9% and invested capital USD 500m. What is its economic profit? 7. Distinguish winner picking (Stein 1997) from corporate socialism (Scharfstein and Stein 2000). 8. Name the five areas of the parenting fit map and the usual action for each. 9. Give two reasons the measured diversification discount may not show that diversification destroys value. 10. When might a spin-off be preferred to a sale, and when a sale to a spin-off? ## My notes and next steps | Date | Note or action | Done | |---|---|---| | YYYY-MM-DD | *Example:* Build the sum of the parts for the group in next week's case with a low and high peer multiple | [ ] | | YYYY-MM-DD | *Example:* Compare five years of capex by segment with each segment's economic profit | [ ] | | YYYY-MM-DD | [Your action] | [ ] | ## Sources and further reading - Coase, R. H. (1937). The nature of the firm. *Economica*, 4(16), 386-405. - Williamson, O. E. (1975). *Markets and Hierarchies: Analysis and Antitrust Implications*. Free Press. - Teece, D. J. (1980). Economies of scope and the scope of the enterprise. *Journal of Economic Behavior and Organization*, 1(3), 223-247. - Panzar, J. C., and Willig, R. D. (1981). Economies of scope. *American Economic Review*, 71(2), 268-272. - Schipper, K., and Smith, A. (1983). Effects of recontracting on shareholder wealth: the case of voluntary spin-offs. *Journal of Financial Economics*, 12(4), 437-467. - Prahalad, C. K., and Bettis, R. A. (1986). The dominant logic: a new linkage between diversity and performance. *Strategic Management Journal*, 7(6), 485-501. - Porter, M. E. (1987). From competitive advantage to corporate strategy. *Harvard Business Review*, 65(3), 43-59. - Prahalad, C. K., and Hamel, G. (1990). The core competence of the corporation. *Harvard Business Review*, 68(3), 79-91. - Goold, M., Campbell, A., and Alexander, M. (1994). *Corporate-Level Strategy: Creating Value in the Multibusiness Company*. John Wiley and Sons. - Lang, L. H. P., and Stulz, R. M. (1994). Tobin's q, corporate diversification, and firm performance. *Journal of Political Economy*, 102(6), 1248-1280. - Berger, P. G., and Ofek, E. (1995). Diversification's effect on firm value. *Journal of Financial Economics*, 37(1), 39-65. - Comment, R., and Jarrell, G. A. (1995). Corporate focus and stock returns. *Journal of Financial Economics*, 37(1), 67-87. - Stein, J. C. (1997). Internal capital markets and the competition for corporate resources. *The Journal of Finance*, 52(1), 111-133. - Collis, D. J., and Montgomery, C. A. (1998). Creating corporate advantage. *Harvard Business Review*, 76(3). - Goold, M., and Campbell, A. (1998). Desperately seeking synergy. *Harvard Business Review*, 76(5). - Rajan, R., Servaes, H., and Zingales, L. (2000). The cost of diversity: the diversification discount and inefficient investment. *The Journal of Finance*, 55(1), 35-80. - Scharfstein, D. S., and Stein, J. C. (2000). The dark side of internal capital markets: divisional rent-seeking and inefficient investment. *The Journal of Finance*, 55(6), 2537-2564. - Campa, J. M., and Kedia, S. (2002). Explaining the diversification discount. *The Journal of Finance*, 57(4), 1731-1762. - Villalonga, B. (2004). Diversification discount or premium? New evidence from the business information tracking series. *The Journal of Finance*, 59(2), 479-506. - IFRS Foundation. IFRS 8 *Operating Segments* and IFRS 18 *Presentation and Disclosure in Financial Statements*, https://www.ifrs.org (checked 2026-10-28). - Textbooks (further reading, by name only): Collis and Montgomery, *Corporate Strategy: A Resource-Based Approach*; Grant, *Contemporary Strategy Analysis*; Besanko, Dranove, Shanley and Schaefer, *Economics of Strategy*; Koller, Goedhart and Wessels, *Valuation*. - Open resource: OpenStax, *Principles of Management*, chapters on strategy, https://openstax.org/details/books/principles-management (check the licence on the book page). ## Answer key **Worked example B.** Annual saving USD 8.0m; after-tax USD 6.0m a year; separate rental firm NPV $2.4/0.09 - 25 = $ USD 1.67m; buy route NPV $66.67 - 20 - 5 = $ USD 41.67m. (1) The combination passes the better-off test: a separate firm would barely cover its set-up cost (USD 1.67m), while inside Northfield's stores the same business is worth USD 68.33m because of USD 66.67m of shared-cost savings. Building beats buying because a purchase pays away part of the gain as a premium. (2) Partly: leasing space and sharing some services by contract would capture the space saving. What is lost is what contracts handle badly: shared customer data and loyalty, coordinated staffing, and the know-how of linking rental to later sales; these favour common ownership. (3) Edge of heartland or heartland: the business shares Northfield's customers, stores and brand (fit with success factors), and Northfield's retail systems can improve it (parenting opportunities); repair skills are new, so it is not fully heartland. (4) Staff time and floor space diverted from retail selling, more complex store management, brand risk from poor repairs, or IT integration. **Exercise C.** (1) Ranking by spread: R5 (8.0 points), R1 (6.0), R3 (3.0), R2 (-0.5), R4 (-1.5). Fund R5 60, R1 120 and R3 50 = USD 230m; R2 and R4 are below WACC and get nothing; USD 70m is left unallocated. (2) Pro rata (300/360 = 83.3% of each request): R1 100.0, R2 75.0, R3 41.7, R4 33.3, R5 50.0. Packaging and Facilities gain USD 108.3m that would destroy value; the best projects are cut. (3) Evidence that the upgrade protects existing cash flows (lost volume without it), a credible plan to raise Packaging ROIC above 8%, or a lower risk-adjusted WACC. Measure the return against the do-nothing case, not against today. (4) Ranking by spread is winner picking; pro rata, or funding Packaging because it is large and lobbies, is corporate socialism. (5) Return it to shareholders or reduce debt, unless the group has better uses; a centre that cannot find returns above WACC should not keep the capital. **Self-test.** 1. Resources, businesses and organisation. Advantage comes from their consistency: the businesses must be ones where the shared resources matter, and the organisation (centre size, controls, systems) must suit the way resources are shared. 2. Because the shared input can often be traded or contracted; common ownership is needed only when transaction costs (know-how, specialised assets, hold-up risk) make contracting inefficient. 3. $(100 + 60 - 145)/145 = 10.34\%$. 4. $\ln(900/1000) = -0.1054$: the group trades about 10% below the imputed value of its segments, before any adjustment for centre costs or selection. 5. $50 \times 10 + 30 \times 6 - 5 \times 8 - 200 = $ USD 440m. 6. $(6\% - 9\%) \times 500 = $ USD -15m a year. 7. Winner picking: the centre uses its information to move capital from weaker to stronger projects, creating value. Corporate socialism: weak divisions are subsidised by strong ones because of lobbying or influence, destroying value. 8. Heartland (invest and keep), edge of heartland (keep with care, adapt parenting), ballast (hold while it pays, release when a better owner appears), value trap (usually exit or change the parenting approach), alien territory (exit). 9. Self-selection (firms that diversify were already different or worse performers) and measurement (single-segment peers are not true comparables, segment data are noisy); also acceptable: accounting allocations, sample period. 10. A spin-off can suit a business with no buyer willing to pay full value, where tax on a sale would be high, or where shareholders want to keep the upside; a sale suits a business worth more to a buyer with synergies, or when the group needs cash. ## Revision history | Version | Date | Author | Change summary | |---|---|---|---| | 0.1 | YYYY-MM-DD | [Your name] | First draft from the template | | 0.2 | YYYY-MM-DD | [Your name] | *Example:* Updated peer multiples and moved Outdoor brands from value trap to release | ## Standard and licence note Based on the published corporate strategy and corporate finance literature (Porter 1987; Goold, Campbell and Alexander 1994; Collis and Montgomery 1998; Teece 1980; Panzar and Willig 1981; Prahalad and Bettis 1986; Lang and Stulz 1994; Berger and Ofek 1995; Stein 1997; Scharfstein and Stein 2000; Campa and Kedia 2002; Villalonga 2004), described in own words; reporting facts are dated 2026-10-28 and must be checked on the official pages. The text, examples and numbers are original, and all companies are fictional. The card has no affiliation with any school, consulting firm, standard setter, publisher or author named. It is not investment, tax or legal advice. Template licence: MIT.