Block 6 Flashcards
Strategy making in a diversified enterprise. Who starts the process?
Top-level corporate executives have the task of crafting a diversified company’s overall corporate strategy.
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 options for improving the corporation’s overall performance include? (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?
What are the tests of Corporate Advantage?
- 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
- 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
- The better-off test
- How much synergy (stronger overall performance)
will be gained by diversifying into the industry? 1+1=3 Scenario
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 Aquisition?(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 Aquisition? (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 Internal Development ? (also referred to as corporate venturing or intrapreneurship)
Involves starting a new business subsidiary from scratch and is often referred to as corporate venturing or new venture development.
Advantages of Internal 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 Internal Development (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
- Established firms are likely to be slow or ineffective in responding to a new entrant’s efforts to crack the market
Define Joint Venture?
is a cooperative arrangement between two or more business entities, often for the purpose of starting a new business activity.
Evaluating
the Potential
for a Joint
Venture (3)
- Is the opportunity too complex, uneconomical,
or risky for one firm to pursue alone? - Does the opportunity require a broader range
of competencies and know-how than the firm
now possesses? - 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?
- To pursue an opportunity that is too complex, uneconomical, or risky for a single organization to pursue alone
- When the opportunities in a new industry require a broader range of competencies and know-how than any one organization can marshal
- 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)
-
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? -
The Question of Entry Barriers
Are there entry barriers to overcome? -
The Question of Speed
Is speed of the essence in the firm’s chances for successful entry? -
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.
Explain the options of market entry from the Question of Entry Barriers(2)
- If entry barriers are low and the industry is
populated by small firms, internal development
may be the preferred mode of entry. - If entry barriers are high, the company may still
be able to enter with ease if it has the requisite
resources and capabilities for overcoming high
barriers. Firms should then opt for joint venture
or acquisition as a mode of entry
Explain the options of market entry from the Question of Speed (2)
- Acquisition is a favored mode of entry when
speed is of the essence, as is the case in rapidly
changing industries where fast movers can
secure long-term positioning advantages. - In other cases it can be better to enter a market
after the uncertainties about technology or
consumer preferences through joint venture or
internal development.
Explain the options of market entry from the Question of Comparative cost (3)
- Acquisition can be a high-cost mode of entry due
to the need to pay a premium over the share
price of the target company. - Whether it is worth it to pay that high a price will
depend on how much extra value will be created
by the new combination of companies in the form
of synergies. - Joint ventures may provide a way to conserve
on such entry costs.
Define Transaciton Costs
are the costs of completing a business agreement or deal, over and above the price of the deal. They can include the costs of searching for an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of completing the transaction.
What are related and unrelated businesses ?
Related businesses are businesses that possess competitively valuable cross-business value chain and resource matchups. There is a close correspondence between the businesses in terms of how they perform key value chain activities and the resources and capabilities each needs to perform those activities.
Unrelated businesses are businesses that possess dissimilar value chains and resource requirements, with no competitively important cross-business commonalities at the value chain level.
