Chapter 9 - Diversifying, Acquiring, and Restructuring

Question 1

Business-level strategy

Answer 1

is a strategy that builds competitive advantages in a discrete and identifiable market

Question 2

Corporate-level strategy (corporate strategy)

Answer 2

is a strategy about how a firm creates value through the configuration and coordination of its multimarket activities

Question 3

Diversification

Answer 3

adding new businesses to the firm that are distinct from its existing operations

Question 4

Product diversification

Answer 4

entries into new product markets and/or business activities that are related to a firm’s existing markets and/or activities

Question 5

Geographic diversification

Answer 5

entries into new geographic markets – when companies are entering a new geographic market

Question 6

Product-related diversification

Answer 6

entry into new product markets and/or business activities that are related to a firm’s existing markets and/or activities.

Question 7

What is the focus on product-related diversification?

Answer 7

• Emphasis is on operational synergy (economies of scale): - Sources of operational synergy: *Common technologies *Marketing *Manufacturing - Focus on “core competence”

Question 8

Product-unrelated diversification

Answer 8

entry into industries that have no obvious product-related connections to the firm’s current lines of business.

Question 9

What is another name for firms in product-unrelated diversification?

Answer 9

These firms are also called conglomerates, and their strategy is known as conglomeration—the intent is to obtain financial (not operational) synergies (economies of scope).

Question 10

Economies of scope –

Answer 10

reduction per unit costs and increases in competitiveness for each individual unit financially controlled by the corporate headquarters beyond what can be achieved by each unit competing independently as stand-alone firms

Question 11

The role of corporate headquarters in product unrelated diversification:

Answer 11

Internal capital market channels financial resources to high-potential high-growth areas

Question 12

Diversification premium

Answer 12

(conglomerate advantage) – product-unrelated diversification adds value

Question 13

Diversification discount (conglomerate disadvantage)

Answer 13

– conglomerate units are better off competing as standalone entities

Question 14

Product diversification and firm performance graph. What are the caveats?

Answer 14

• slide 6: Graph - Product related diversification performance is higher than single business and product unrelated diversification -Not all product related diversifiers outperform unrelated diversifiers (the GE exception) -In emerging economies, the conglomeration strategy seems to be persisting.

Question 15

International diversification

Answer 15

the number and diversity of countries in which a firm competes

Question 16

Limited international scope:

Answer 16

-Geographically and culturally adjacent countries -Advantage: Reduces the liability of foreignness – more familiar with the culture, country…

Question 17

Extensive international scope:

Answer 17

-Beyond geographically and culturally neighboring countries -Requires firms to compensate for the liability of foreignness

Question 18

Geographic Diversification Firm Performance Graph:

Answer 18

(slide 11) An S curve: highest performance is the extensive level of geographic diversification

Question 19

Four ways of combining product and geographic diversification:

Answer 19

-Anchored replicators -Multinational replicators -Far-flung conglomerates -Classic conglomerates

Question 20

Anchored replicators

Answer 20

focus on product-related diversification and a limited geographic scope

Question 21

Multinational replicators

Answer 21

focus on product-related diversification on the one hand and far-flung multinational expansion on the other hand

Question 22

Far-flung conglomerates

Answer 22

focus on both product-unrelated diversification and extensive geographic diversification

Question 23

Classic conglomerates

Answer 23

focus on product-unrelated diversification within a small set of countries centered on the home country

Question 24

Motivations for diversification:

Answer 24

• Growth opportunities in an industry (e.g., typewriters) - Structural attractiveness *Interfirm rivalries based on cost leadership and may not deter new entrants. differentiation and high entry barriers - Bargaining power of suppliers and buyers * Firms broaden their scope by acquiring suppliers upstream and/or buyers downstream. - The threat of substitute products * Kodak and Fuji threatened by digital camera makers which produce substitute products

Question 25

Institution-Based Considerations when it comes to diversification:

Answer 25

-Formal institutions: promote product unrelated diversification by banning intraindustry mergers -Informal institutions: normative pressures to jump on the diversification

Question 26

The Scope of the Firm :

Answer 26

Determined by a comparison between marginal economic benefits (MEB) and the marginal bureaucratic costs (MBC).

Question 27

MEB are:

Answer 27

the various forms of synergy (operational or financial) gained from the last unit of growth— e.g., the last acquisition.

Question 28

MBC are:

Answer 28

additional costs associated with a larger, more diversified organization—e.g., more headcounts, more expensive information systems.

Question 29

Why does conglomeration add value in emerging economies?

Answer 29

At a given level of diversification: *MEB EmergingEcon > MEB DevelopedEcon -At a given level of diversification: *MBC EmergingEcon < MBC DevelopedEcon

Question 30

Acquisition:

Answer 30

transfer of the control of assets, operations, and management from one firm (target) to another (acquirer), the former becoming a unit of the latter.

Question 31

Merger:

Answer 31

the combination of assets, operations, and management of two firms to establish a new legal entity.

Question 32

Horizontal catergory of M&A

Answer 32

deals involving competing firms in the same industry

Question 33

Vertical category of M&A:

Answer 33

deals that allow the focal firms to acquire (upstream) suppliers and/or (downstream) buyers

Question 34

Conglomerate category of M&A:

Answer 34

transactions involving firms in product-unrelated industries.

Question 35

Strategic fit:

Answer 35

The complementarity of partner firms’ “hard’ skills and resources, such as technology, capital, and distribution channels

Question 36

Organizational fit:

Answer 36

The complementarity of partner firms’ “soft’ organizational traits, such as goals, experiences, and behaviors, that facilitate cooperation

Question 37

Restructuring refers to:

Answer 37

• Adjustments to firm size and scope through either diversification (expansion or entry), divestiture (contraction or exit), or both - Reducing firm size and scope

Question 38

2 types of restructuring:

Answer 38

• Downsizing: Reducing the number of employees through lay-offs, early retirements and outsourcing
• Downscoping: Reducing the scope of the firm through divestitures and spinoffs