This video of our study with Timothy B. Folta continues the discussion of what determines value of a multi-business, or a multi-product, firm. The response to this question is of great importance to managers, investors, and researchers. Although two types of economies of scope, synergy and redeployability, were discussed in previous research; the understanding of the latter economy remained incomplete. This presentation raises two miscalculations that were often committed with regard to the option for a multi-business firm to redeploy its resources between its businesses. First, this economy does not add to synergy -- the two types of economies of scope, while both are enhanced by relatedness of the firm's businesses to each other, are mutually exclusive. Second, redeployment of resources between the firm's businesses shouldn't happen just when one of the firm's businesses strongly outperforms another. If such redeployment rule is used, the multi-business firm likely destroys, rather than adds, value. The results of this research should facilitate better decision-making by corporate managers, better valuation of multi-business firms by their investors, and better empirical tests by corporate strategy researchers.
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Gies College of Business
University of Illinois at Urbana-Champaign
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