Block 6 Flashcards
Strategy making in a diversified enterprise. Who starts the process?
The task of crafting a diversified company’s overall or
corporate strategy falls squarely on the shoulders of
corporate executives.
WHAT DOES CRAFTING A DIVERSIFICATION
STRATEGY ENTAIL? (3 distinct facets)
Step 1 Picking new industries to enter and deciding on the means of
entry: (How? by starting a new business from the ground up,
by acquiring a company already in the target industry, or by
forming a joint venture)
Step 2 Pursuing opportunities to leverage cross-business value chain
relationships, where there is strategic fit into competitive
advantage
(Determine: do opportunities exist to strengthen diversified
company’s business- transfer of competitively valuable
resources and capabilities, combining related value chain
activities, sharing knowledge and a powerful brand name)
Step 3 Initiating actions to boost combined performance of
corporation’s collection of businesses
STRATEGIC DIVERSIFICATION OPTIONS (4)
♦ Sticking closely with the existing business lineup and
pursuing opportunities presented by these businesses
♦ Broadening the current scope of diversification by
entering additional industries
♦ Retrenching to a narrower scope of diversification by
divesting poorly performing businesses
♦ Broadly restructuring the entire firm by divesting
some businesses and acquiring others to put a whole
new face on the firm’s business lineup
A firm should consider diversifying when: (2)
- Growth opportunities are limited as its principal
markets reach their maturity and buyer demand is
either stagnating or set to decline. - Changing industry conditions—(new technologies,
inroads being made by substitute products, fastshifting buyer preferences, or intensifying
competition)—are undermining the firm’s competitive
position.
How wide-ranging diversification should be? (6) 6 questions
- Diversify into closely related businesses or into
totally unrelated businesses? - Diversify present revenue and earnings base to a
small or major extent? - Move into one or two large new businesses or a
greater number of small ones? - Acquire an existing company?
- Start up a new business from scratch?
- Form a joint venture with one or more companies to
enter new businesses?
Test: Will Diversification
Add Long-Term Value
for Shareholders? (9)
The corporate advantage test
1 The industry
attractiveness
test
● Are the industry’s profits and return on investment
as good or better than present business(es)?
- Industry resource requirements match companies resources& capabilities
- The industry is structurally attractive based on the 5 forces
- The industry has good potential for growth and profitability
2 The
cost-of-entry
test
● Is the cost of overcoming entry barriers so great as
to long delay or reduce the potential for profitability?
-Catch 22 -> the greater the attractiveness of the industry the higher the cost of entry
3 The
better-off
test
● How much synergy (stronger overall performance)
will be gained by diversifying into the industry?
- 1+1=3 ?
To add shareholder value, diversification into
a new business must pass the three tests
of corporate advantage
3 ways of Diversifying into
New Businesses
Existing business
acquisition
Internal new
venture (start-up)
Joint
venture
Advantages of : DIVERSIFICATION BY ACQUISITION
OF AN EXISTING BUSINESS (3)
Quick entry into an industry
● Barriers to entry avoided (acquiring technology, establishing supplier
relationships, building brand awareness and securing adequate
distribution)
● Access to complementary resources and capabilities that are
complementary to those of the acquiring firm and that cannot be
developed readily internally.
Disadvantages of : DIVERSIFICATION BY ACQUISITION
OF AN EXISTING BUSINESS (3)
● Cost of acquisition—whether to pay a premium for a successful firm
or seek a bargain in a struggling firm
● Underestimating costs for integrating acquired firm
● Overestimating the acquisition’s potential to deliver added shareholder
value
What is Corporate Venturing ?
( also referred to as corporate
entrepreneurship or intrapreneurship )
The process of developing new
businesses as an outgrowth of a firm’s established
business operations.
Advantages of new venture development (2)
● Avoids pitfalls and uncertain costs of acquisition associated with entry
via acquisition
● Allows entry into a new or emerging industry where there are no
available acquisition candidates
Disadvantages of intrapreneurship (3)
● Must overcome industry entry barriers (production capacities and
competitive capabilities, sources of supply, hire and train employees,
build channels of distribution)
● Requires extensive investments in developing production capacities
and competitive capabilities, hire and train employees, build channels
of distribution
● May fail due to internal organizational resistance to change and
innovation (the culture, structures and organisational systems of some
companies may impede innovation and make it difficult for corporate
intrapreneurship to flourish)
Factors Favoring
Internal Development (5)
- The parent company already has in-house most or all of the skills
and resources it needs to piece together a new business and
compete effectively - There is ample time to launch the business
- Internal cost of entry is lower than the cost of entry via acquisition
- Adding new production capacity will not adversely impact the
supply-demand balance in the industry - Incumbent firms are likely to be slow or ineffective in responding to
a new entrant’s efforts to crack the market
Evaluating
the Potential
for a Joint
Venture (3)
1 Is the opportunity too complex, uneconomical,
or risky for one firm to pursue alone?
2 Does the opportunity require a broader range
of competencies and know-how than the firm
now possesses?
3 Will the opportunity involve operations in a
country that requires foreign firms to have a
local minority or majority ownership partner?
- If the answer is yes to each of these questions, then
engaging in a joint venture makes strategic sense.
In which three types of situations can a strategic partnership or joint venture be useful?
♦ a. To pursue an opportunity that is too complex, uneconomical, or
risky for a single organization to pursue alone
♦ b. When the opportunities in a new industry require a broader range
of competencies and know-how than any one organization can
marshal
♦ c. To diversify into a new industry when the diversification move
entails having operations in a foreign country.
Joint Venture drawbacks (4)
● Conflicting objectives and expectations of venture partners (when
partners have different priorities, strategies, or timelines for the
venture)
● Disagreements among or between venture partners over how
best to operate the venture (when partners have divergent
opinions on crucial aspects of the business)
● Cultural clashes among and between the partners (cultural
differences can lead to misunderstandings, communication
barriers, and clashes in management styles)
● Dissolution of the venture when one of the venture partners
decides to go their own way (due to strategic shifts, changes in
priorities, or disagreements between partners)
Name and explain each of the 4 important questions to choosing a mode of market entry (8)
1 The Question of Critical
Resources and Capabilities
-Does the firm have the
resources and capabilities
for internal development or
is it lacking some critical
resources?
2 The Question of Entry Barriers - Are there entry barriers to
overcome?
3 The Question of Speed
- Is speed of the essence in
the firm’s chances for
successful entry?
4 The Question of Comparative
Cost.
- Which is the least costly
mode of entry, given the
firm’s objectives?
Explain the options of market entry from the Question of Critical Resources and
Capabilities (2)
♦ If a firm has all the resources it needs to start up
a new business or will be able to easily purchase
or lease any missing resources, it may choose to
enter the business via internal development.
♦ If missing critical resources cannot be easily
purchased or leased, a firm wishing to enter a new
business must obtain these missing resources
through either acquisition or joint venture.
