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Bus 478 > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

What is a diversification strategy

A

Based on a company’s decision to enter one or more new industries to take advantage of its existing distinctive competencies and business models

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1
Q

What are the affects of diversification

A

Can create or destroy value

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2
Q

What does a diversified strategy enable a company to do

A
  1. Lower cost
  2. Greater differentiation
  3. Manage industry Rivalry
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3
Q

What are three different ways a company can implement a diversification strategy

A
  1. Internal new ventures
  2. Acquisitions
  3. Joint ventures
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4
Q

What is a diversified company

A

One that makes and sells products in 2 or more different distinct industries

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5
Q

How is a company successful

A

Generating cash flow and profits

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6
Q

What does management do with cashflow

A

Decide whether their cash can be a form of a higher dividends or invest in diversification

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7
Q

What is the expected outcome on diversification opportunities

A

Future ROIC must exceed the value of shareholders

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8
Q

What is a better off test

A

Company must be more valuable than it was before the diversification

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9
Q

How can diversification increase profitability

A
  1. Transfer competencies between business units in different industries
  2. Leverages competencies to create business units in new industries
  3. Shares resources between business units to realize synergies or economies of scope
  4. Utilizes general organizational competencies that increase the performance of all company’s business units
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10
Q

What are leveraging competencies

A

Company can develop a new business in a different industry

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11
Q

What are utilizes general or organizational competencies

A
  1. Entrepreneurial capabilities
  2. Organizational Design capabilities
  3. Strategic capabilities
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12
Q

What are the steps of transferring competencies

A
  1. R&D
  2. Production
  3. Marketing and sales
  4. Customer Service
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13
Q

How can diversification increase profits

A
  1. Transfer competencies between business units in different industries
  2. Leverage competencies to create business units in new industries
  3. Share resources between business units to realize synergies or economies scope
  4. Utilize general organizational competencies that increase performance of all company’s business units
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14
Q

What is economies of scope

A

One or more business units are able to realize cost savings because they can effectively pool, share and utilize expensive resources or capabilities

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15
Q

What are transferring competencies

A

Process of taking distinctive competency developed by a business unit in one industry and implanting it in a business unit

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16
Q

What are commonality

A

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

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17
Q

How can companies obtain economies of scope

A

Must be a significant commonalities between one or more value chain functions in a company’s business unit to increase profits

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18
Q

What is product bundling

A
  1. Allows a company to satisfy customers needs for a complete package of related products
  2. Customers want convenience
  3. Often does not require joint ownership
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19
Q

What are the ways to improve the performance of an acquired company

A
  1. Top managers of the acquired company are replaced with a more aggressive top management team
  2. New top management team sells off expensive assets
  3. 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
  4. 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
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20
Q

How can companies promote entrepreneurship

A
  1. Encourage managers to take risks
  2. Give managers time and resources to pursue novel ideas
  3. Not punish managers when a new idea fails
  4. Make sure that the companies free cash flow is not wasted in pursuing too many risky ventures that have lower probability in generating profit
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21
Q

What are the organizational design skills

A

A result of managers ability to create a structure, culture and control systems that motivate and coordinate employees to perform at a higher level

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22
Q

What are strategic capabilities

A

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

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23
Q

What is a turnaround strategy

A

Improve the performance of an acquired company

24
Q

What are the several ways to improve the performance of an acquired company

A
  1. Sr managers of the acquired company are replaced with a more aggressive top management team
  2. New team sells off expensive assets
  3. New team devises new strategies to improve the performance of the operations`
25
Q

What is related diversification

A

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 `

26
Q

What is unrelated diversification

A

Corporate level strategy where a company owns unrelated businesses and attempts to increase their value through internal capital market, use of general organizational competencies

27
Q

What is an internal capital market

A

Refers to a situation where head office assess the performance of business units and allocates money across them

28
Q

What are the three principal reasons why a business model based on diversification may lead to a loss of competitive advantage

A
  1. Changes in the industry or inside a company that occur over time
  2. Diversification pursued for the wrong reasons
  3. Excessive diversification that results in increasing bureaucratic costs
29
Q

What are the changes in the industry or company

A
  1. Senior management often decides to leave, retire or step down and make visions with them
  2. 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
30
Q

How can you diversify wrong

A

When obtaining risk pooling

31
Q

Do you risk pooling

A

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

32
Q

What are bureaucratic costs

A
  1. Costs associated with solving the transition difficulties that rise between a company’s business units and corporate head quarters
  2. Include costs of with general organizational competencies t solve managerial and functional inefficiencies
33
Q

How can we choose a strategy

A

Depends upon the comparison of the benefits of each strategy against the bureaucratic costs

34
Q

What is related diversification

A
  1. Companys competencies can be applied greater in a number of industries
  2. Companies have superior strategic capabilities that allow bureaucratic costs under control
35
Q

What is unrelated diversification

A
  1. Companys top managers are skilled at raising the profitability of poorly run business
  2. Companys managers use their strategic management competencies
    1. Improve competitive advantages
    2. Keep bureaucratic costs under control
36
Q

What are the three main methods of management to employ new industries

A
  1. Internal Joint Ventures
  2. Acquisitions
  3. Joint Ventures
37
Q

What are internal new ventures

A

Process of transferring resources to business units in a new related market or industry

38
Q

What are the pitfalls of new ventures

A
  1. Market entry on too small a scale
  2. Poor commercialization of the new ventures
  3. Poor corporate management of the new ventures
39
Q

What is large scale entry

A

Substantial capital investment must be made but there is a risk of major loss fails

40
Q

What is a small scale entrant

A

May find itself handicapped by high costs due to the lack of scale economies and a lack of market presence

41
Q

What is commercialization

A

Products under development must be tailored to meet the needs of customers

42
Q

What is poor implementation

A
  1. Management attempts to spread the risks of failure by having many divisions which place a large demand upon a company’s cash flow
  2. Reduce funding to keep the entire company profitable
  3. Failure to do the extensive advanced planning necessary
43
Q

What are the guidelines for success

A
  1. Place the funding for research in the hands of the unit managers
  2. Executives must work with R&D scientists to advance competencies
  3. Foster close links between R&D and marketing to increase success
  4. Think big manufacturing facilities and large budgets
44
Q

What can companies gain through identification and screening

A
  1. Increases company’s knowledge about a potential takeover target and lessens the risk of purchasing a company
  2. Leads to more realistic assessment
45
Q

What are the acquisitions

A

A company uses its financials resources to purchases an established company that have distinctive competencies

46
Q

What are the benefits of acquisitions

A
  1. Able to move fast to establish a presence in an industry
  2. Able to purchase a leading company with strong competitive positions
  3. Less risky because it involves less commercial uncertainty
  4. Attractive way to enter an industry protected by high barriers
47
Q

What are the acquisition pitfalls

A
  1. Company experiences management problems when it tries to integrate the companys structure and culture into its own
  2. Company often overestimates the potential economic benefits
  3. Can be expensive that it does not increase future profitability
  4. Company can be negligent in screening its acquisitions, targets and fail to recognize problems with their business models
48
Q

What are the successful acquisition guidelines

A
  1. Target identification and pre-acquisition screening
  2. Bidding strategy
  3. Integration
  4. Learning from experience
49
Q

What is the screening process

A

Detailed assessment of the strategic rationale for making the acquisition

50
Q

What are the acquiring company criteria to look for

A
  1. Financial position
  2. Distinctive competencies and competitive advantage
  3. Changing industry boundaries
  4. Management capabilities
  5. Corporate culture
51
Q

What is the bidding strategy

A

Reduces the price that a company must pay for the target company

52
Q

What is friendly takeover bid

A

This satisfies the needs of both companies and prevents speculators from bidding stock prices

53
Q

What is integration and experience

A

Company possess the essential organizational design skill to integrate the acquired company into its operations and quickly develop a viable multi-business model

54
Q

What are joint ventures

A

2 or more companies agree to pool their resources to create a new business to enter an embryonic or growth industry

55
Q

What are the benefits of joint ventures

A
  1. Risks and costs shared
  2. Complementary skills or distinctive competencies
  3. Profits
56
Q

What are the restructuring process

A

To refocus a company’s core business and rebuild its distinctive competencies

57
Q

Why restructure

A
  1. Stock market has valued their stock at a diversification discount; investors see highly diversified companies as less attractive investments
  2. Companies are perceived as more risky
  3. Diversification discount is leads to investors having learned from experience that managers often have a tendency to pursue too more diversification
  4. Not actually taking advantage of vertical integration or diversification

Bus 478 (12 decks)

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