Chapter 8 Flashcards
Why do firms diversify?
Picking new industries to enter and deciding on means of entry (partnering up or creating new business)
Pursuing opportunities to leverage cross business value chain relationships and strategic fit into competitive advantage.
Establishing investment priorities and steering resources into the most attractive business units (where to invest)
Sticking closely with the existing business lineup and pursuing opportunities presented by these business (apple with certain tech products)
Broadening the current scope of diversification by entering additional industries. (Google going into another product outside of tech products)
Retrenching to a narrower scope of diversification by divesting poorly performing businesses (selling them off and making it smaller)
Broadly restructuring the entire firm by divesting some businesses and acquiring others to put a whole new face on the firm’s business lineup
When should firms consider diversification?
Growth opportunities are limited as its principal markets reach their maturity and buyer demand is either stagnating or set to decline. (Outdoor furniture versus indoor furniture)
Changing industry conditions—new technologies, inroads being made by substitute products, fast-shifting buyer preferences, or intensifying competition—are undermining the firm’s competitive position.
Making another restaurant and plopping it far away from the original and making it different. (Outback with bonefish)
What is a cash cow business?
A cash cow business generates cash flows over and above its internal requirements, thus providing a corporate parent with funds for investing in cash hog businesses, financing new acquisitions, or paying dividends.
What is a cash hog business?
A cash hog business generates cash flows that are too small to fully fund its operations and growth and requires cash infusions to provide additional working capital and finance new capital investment.
What is a star business?
Star businesses generate large cash flows but because of their high growth typically consume the cash they generate.
Why and how do firms divest businesses?
Factors motivating business divestitures
Long-term performance can be improved by concentrating on stronger positions in fewer core businesses and industries.
Business is in a once-attractive industry where market conditions have badly deteriorated
Business has either failed to perform as expected or is lacking in cultural, strategic, or resource fit.
Business has become more valuable if sold to another firm or as an independent spin-off firm.