Chapter 10 Flashcards
What is a diversification strategy
Based on a company’s decision to enter one or more new industries to take advantage of its existing distinctive competencies and business models
What are the affects of diversification
Can create or destroy value
What does a diversified strategy enable a company to do
- Lower cost
- Greater differentiation
- Manage industry Rivalry
What are three different ways a company can implement a diversification strategy
- Internal new ventures
- Acquisitions
- Joint ventures
What is a diversified company
One that makes and sells products in 2 or more different distinct industries
How is a company successful
Generating cash flow and profits
What does management do with cashflow
Decide whether their cash can be a form of a higher dividends or invest in diversification
What is the expected outcome on diversification opportunities
Future ROIC must exceed the value of shareholders
What is a better off test
Company must be more valuable than it was before the diversification
How can diversification increase profitability
- Transfer competencies between business units in different industries
- Leverages competencies to create business units in new industries
- Shares resources between business units to realize synergies or economies of scope
- Utilizes general organizational competencies that increase the performance of all company’s business units
What are leveraging competencies
Company can develop a new business in a different industry
What are utilizes general or organizational competencies
- Entrepreneurial capabilities
- Organizational Design capabilities
- Strategic capabilities
What are the steps of transferring competencies
- R&D
- Production
- Marketing and sales
- Customer Service
How can diversification increase profits
- Transfer competencies between business units in different industries
- Leverage competencies to create business units in new industries
- Share resources between business units to realize synergies or economies scope
- Utilize general organizational competencies that increase performance of all company’s business units
What is economies of scope
One or more business units are able to realize cost savings because they can effectively pool, share and utilize expensive resources or capabilities
What are transferring competencies
Process of taking distinctive competency developed by a business unit in one industry and implanting it in a business unit
What are commonality
A skill or competency that when shared by two or more business units allows them to operate more effectively and create more value for customers
How can companies obtain economies of scope
Must be a significant commonalities between one or more value chain functions in a company’s business unit to increase profits
What is product bundling
- Allows a company to satisfy customers needs for a complete package of related products
- Customers want convenience
- Often does not require joint ownership
What are the ways to improve the performance of an acquired company
- Top managers of the acquired company are replaced with a more aggressive top management team
- New top management team sells off expensive assets
- New management team devises new strategies to improve the performance of the operations of the acquired business and improve its efficiency, quality, innovativeness and customer responsiveness
- Motivate the new top management team and other employees of the acquired company to work towards goals, companywide, pay for performance bonus system linked to profits
How can companies promote entrepreneurship
- Encourage managers to take risks
- Give managers time and resources to pursue novel ideas
- Not punish managers when a new idea fails
- Make sure that the companies free cash flow is not wasted in pursuing too many risky ventures that have lower probability in generating profit
What are the organizational design skills
A result of managers ability to create a structure, culture and control systems that motivate and coordinate employees to perform at a higher level
What are strategic capabilities
Important governance skill to diagnose the underlying source of the problems of a poorly performing business unit and understand how to proceed to solve problems
What is a turnaround strategy
Improve the performance of an acquired company
What are the several ways to improve the performance of an acquired company
- Sr managers of the acquired company are replaced with a more aggressive top management team
- New team sells off expensive assets
- New team devises new strategies to improve the performance of the operations`
What is related diversification
A corporate level strategy based on goal of establishing a business unit in a new industry that is related to a company’s existing business units by some form of commonality to link between value chain functions of the existing and new business units `
What is unrelated diversification
Corporate level strategy where a company owns unrelated businesses and attempts to increase their value through internal capital market, use of general organizational competencies
What is an internal capital market
Refers to a situation where head office assess the performance of business units and allocates money across them
What are the three principal reasons why a business model based on diversification may lead to a loss of competitive advantage
- Changes in the industry or inside a company that occur over time
- Diversification pursued for the wrong reasons
- Excessive diversification that results in increasing bureaucratic costs
What are the changes in the industry or company
- Senior management often decides to leave, retire or step down and make visions with them
- New technology can destroy the source of a company’s competitive advantage and saddled it with business that poor performers bc they are not based on the new technology
How can you diversify wrong
When obtaining risk pooling
Do you risk pooling
Risk pooling is the idea that the company could reduce the risk of its revenues and profits rising and falling sharply by acquiring and operating companies in several industries
What are bureaucratic costs
- Costs associated with solving the transition difficulties that rise between a company’s business units and corporate head quarters
- Include costs of with general organizational competencies t solve managerial and functional inefficiencies
How can we choose a strategy
Depends upon the comparison of the benefits of each strategy against the bureaucratic costs
What is related diversification
- Companys competencies can be applied greater in a number of industries
- Companies have superior strategic capabilities that allow bureaucratic costs under control
What is unrelated diversification
- Companys top managers are skilled at raising the profitability of poorly run business
- Companys managers use their strategic management competencies
- Improve competitive advantages
- Keep bureaucratic costs under control
What are the three main methods of management to employ new industries
- Internal Joint Ventures
- Acquisitions
- Joint Ventures
What are internal new ventures
Process of transferring resources to business units in a new related market or industry
What are the pitfalls of new ventures
- Market entry on too small a scale
- Poor commercialization of the new ventures
- Poor corporate management of the new ventures
What is large scale entry
Substantial capital investment must be made but there is a risk of major loss fails
What is a small scale entrant
May find itself handicapped by high costs due to the lack of scale economies and a lack of market presence
What is commercialization
Products under development must be tailored to meet the needs of customers
What is poor implementation
- Management attempts to spread the risks of failure by having many divisions which place a large demand upon a company’s cash flow
- Reduce funding to keep the entire company profitable
- Failure to do the extensive advanced planning necessary
What are the guidelines for success
- Place the funding for research in the hands of the unit managers
- Executives must work with R&D scientists to advance competencies
- Foster close links between R&D and marketing to increase success
- Think big manufacturing facilities and large budgets
What can companies gain through identification and screening
- Increases company’s knowledge about a potential takeover target and lessens the risk of purchasing a company
- Leads to more realistic assessment
What are the acquisitions
A company uses its financials resources to purchases an established company that have distinctive competencies
What are the benefits of acquisitions
- Able to move fast to establish a presence in an industry
- Able to purchase a leading company with strong competitive positions
- Less risky because it involves less commercial uncertainty
- Attractive way to enter an industry protected by high barriers
What are the acquisition pitfalls
- Company experiences management problems when it tries to integrate the companys structure and culture into its own
- Company often overestimates the potential economic benefits
- Can be expensive that it does not increase future profitability
- Company can be negligent in screening its acquisitions, targets and fail to recognize problems with their business models
What are the successful acquisition guidelines
- Target identification and pre-acquisition screening
- Bidding strategy
- Integration
- Learning from experience
What is the screening process
Detailed assessment of the strategic rationale for making the acquisition
What are the acquiring company criteria to look for
- Financial position
- Distinctive competencies and competitive advantage
- Changing industry boundaries
- Management capabilities
- Corporate culture
What is the bidding strategy
Reduces the price that a company must pay for the target company
What is friendly takeover bid
This satisfies the needs of both companies and prevents speculators from bidding stock prices
What is integration and experience
Company possess the essential organizational design skill to integrate the acquired company into its operations and quickly develop a viable multi-business model
What are joint ventures
2 or more companies agree to pool their resources to create a new business to enter an embryonic or growth industry
What are the benefits of joint ventures
- Risks and costs shared
- Complementary skills or distinctive competencies
- Profits
What are the restructuring process
To refocus a company’s core business and rebuild its distinctive competencies
Why restructure
- Stock market has valued their stock at a diversification discount; investors see highly diversified companies as less attractive investments
- Companies are perceived as more risky
- Diversification discount is leads to investors having learned from experience that managers often have a tendency to pursue too more diversification
- Not actually taking advantage of vertical integration or diversification
