Chapter 6 Flashcards
Diversification
The process of firms expanding their operations by entering new businesses
Related Businesses (Horizontal relationships)
Sharing tangible and intangible resources
Unrelated businesses (hierarchical relationships)
Value creation drives from corporate office. Leveraging support activities in the value chain
Related Diversification
A firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power
Economies of scope
Cost savings from leveraging core competencies or sharing related activities among businesses in a corporation. Leverage or reuse key resources Favorable reputation Expert staff Management skills Efficient purchasing operations Existing manufacturing facilities
Core competencies
A firms strategic resources that reflect the collective learning in the organization
Sharing activities
Having activities of two or more businesses value chains done by one of the businesses
Market Power
Firms abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment
Pooled negotiating power
The improvement in bargaining position relative to suppliers and customers
Vertical integration
An expansion or extension of the firm by integrating preceding or successive production processes
Forward/backward integration
Raw materials –> manufacturing of final product –> distribution
Stages in the Raw Material to Consumer Value Chain
Raw Materials –> intermediate manufacturer –> assembly –> distribution –> end user
Transaction Cost Perspective
The choice of transactions governance structure, is influenced by transaction costs, such as search, negotiating, contracting, monitoring
Unrelated Diversification
A firm entering a different business that has little horizontal interaction with other businesses of a firm. Primary drive to do this is to increase profits
Parenting Advantages
The positive contributions of the corporate office to a new business as a result of expertise and support provided
Restructuring
The intervention of the corporate office in a new business that substantially changes the assets, capital structure and/or management
Portfolio Management
Assessing the competitive position of a portfolio of businesses within a corporation, suggesting strategic alternatives for each business, identifying priorities for the allocation of resources across the businesses
Cash cows
Generate cash.
High market shares in low growth industries.
Fund investments in stars and question marks
Question marks
Compete in high growth industries but have low market share
Is it worth spending the cash to turn into star?
Stars
Businesses of the future
High growth rate, high market share
Dogs
Consume cash. Weak market share, low growth industries. Analysts suggest that these be divested
Market Entry Strategies
Acquisition:
A strategy through which one organization buys a controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own portfolio
Market Entry Strategies
Licensing:
A strategy where the organization purchases the right to use technology, process, etc.
Market Entry Strategies
Joint Venture:
A strategy where an organization joins with another organization to form a new organization
Reasons for making acquisitions
Increase market power Overcome Entry barriers Cost of new product development Increase speed to market Lower risk compared to developing new products Increase Diversification Reshape firms competitive scope Learn and develop new capabilities
Problems with Acquisitions
Integration difficulties (integrate culture)
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy (one of the biggest problems)
Too much Diversification
Managers overly focused on acquisitions
Resulting firm is too large
