MGMT 490: Ch. 8 – Flashcards

1. picking new industries to enter and deciding on the means of entry: starting from the ground-up; acquisition; joint-venture or strategic alliance 2. pursuing opportunities to leverage cross business value chain relationships and strategic fit into competitive advantage 3. establishing investment priorities and steering corporate resources into the most attractive business units 4. initiating actions to boost the combined performance of the corporations collection of businesses

Diversifying into new industries always merits strong consideration whenever a single business company encounters diminishing market opportunities and stagnating sales in its principal business.

1. When it spots opportunities for expanding into industries whose technologies and products complement its present business. 2. When it can leverage its collection of resources and capabilities by expanding into businesses where these resources and capabilities are valuable competitive assets. 3. When diversifying into additional businesses opens new avenues for reducing costs. 4. When it has a powerful and well-known brand name that can be transferred to the products of other businesses.

1. diversify into closely related or totally unrelated businesses 2. diversify its present revenue and earnings base to a small of major extent 3. move into 1 or 2 large new businesses or a greater number of small ones 4. by acquiring an existing company, starting up a new business from scratch, or forming a joint venture with one or two companies to enter new businesses

Diversification cannot be considered a success unless it results in added long-term economic value for shareholders; must satisfy all 3 tests.

1. the industry attractiveness test 2. the cost-of-entry test 3. the better-off test

The industry to be entered must offer an opportunity for profits and return on investment that is equal to or better than that of the company's present business.

The cost to enter the target industry must not be so high as to exceed the potential for good profitability.

The new business must offer potential for the company's existing businesses and the new business to perform better together under a single corporate umbrella than they would perform operating as independent, stand-alone businesses - an effect known as synergy.

1. Acquisition 2. Internal startup 3. Joint venture

The amount by which the price offered exceeds the preacquisition market value of the target company.

The process of developing new businesses as an outgrowth of a company's established business operations.

1. high integration costs 2. excessive price premiums

Advantages: 1. effective way to hurdle entry barriers, tech know-how, supplier relationships, achieving economies of scale, building brand awareness 2. access resources and capabilities complementary to those of acquiring firm 3. allows acquirer to move directly to the task of building strong market position in target industry Disadvantages: 1. expensive: acquisition premium 2. successful integration of acquired company into the culture, systems, and structure can be costly and time consuming.

1. when the parent company already has in-house skills and resources to compete effectively 2. ample time 3. internal cost of entry is lower than cost of entry via acquisition 4. target industry is populated with many relatively small firms 5. adding new production capacity will not adversely impact supply and demand balance 6. incumbent firms are likely to be slow or ineffective in responding to new entrants

Advantages: 1. good for pursuing opportunity that is too complex, uneconomical, or risky to pursue alone 2. when opportunities in new industry require broader range of competencies and know-how 3. diversify into new industry that entails having operation in foreign countries Disadvantages: 1. potential for conflicting objectives, operations, culture clash

Related businesses possess competitively valuable cross-business value chain and resource matchups; unrelated businesses have dissimilar value-chains and resource requirements, with no competitively important cross-business relationships at the value chain level.

Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar as to present opportunities for cross-busniess sharing or transferring of the resources and capabilities that enable these activities.

Related diversification involves sharing or transferring specialized resources and capabilities, which have very specific applications and their use is limited to a restricted range of industry and business types.

Resources and capabilities that can be widely applied and can be deployed across a broad range of industry and business types.

Economies of scope are cost reductions that flow from operating in multiple businesses (a larger scope of operation), whereas economies of scale accrue from a larger-size operation.

Refers to the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and other types of generalized resources and capabilities such as long term planning systems, business development skills, management development process, and incentive systems.

A corporate brand name that can be applied to a wide assortment of business types. It is a generalized resource that can be leverages in unrelated diversification.

Refers to overhauling and streamlining activities of business - combining plants with excess capacity, selling off underutilized assets, reducing unnecessary expenses, and otherwise improving the productivity and profitability of a company.

When it is more able than other companies to boost the combined performance of its individual businesses through high-level guidance, general oversight, and other corporate-level contributions.

Only profitable growth - the kind that comes form creating value for shareholders - can justify unrelated diversification.