Chapter 9 - Diversifying, Acquiring, and Restructuring Flashcards
Business-level strategy
is a strategy that builds competitive advantages in a discrete and identifiable market
Corporate-level strategy (corporate strategy)
is a strategy about how a firm creates value through the configuration and coordination of its multimarket activities
Diversification
adding new businesses to the firm that are distinct from its existing operations
Product diversification
entries into new product markets and/or business activities that are related to a firm’s existing markets and/or activities
Geographic diversification
entries into new geographic markets – when companies are entering a new geographic market
Product-related diversification
entry into new product markets and/or business activities that are related to a firm’s existing markets and/or activities.
What is the focus on product-related diversification?
- Emphasis is on operational synergy (economies of scale): - Sources of operational synergy: *Common technologies *Marketing *Manufacturing - Focus on “core competence”
Product-unrelated diversification
entry into industries that have no obvious product-related connections to the firm’s current lines of business.
What is another name for firms in product-unrelated diversification?
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).
Economies of scope –
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
The role of corporate headquarters in product unrelated diversification:
Internal capital market channels financial resources to high-potential high-growth areas
Diversification premium
(conglomerate advantage) – product-unrelated diversification adds value
Diversification discount (conglomerate disadvantage)
– conglomerate units are better off competing as standalone entities
Product diversification and firm performance graph. What are the caveats?
- 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.
International diversification
the number and diversity of countries in which a firm competes
Limited international scope:
-Geographically and culturally adjacent countries -Advantage: Reduces the liability of foreignness – more familiar with the culture, country…
Extensive international scope:
-Beyond geographically and culturally neighboring countries -Requires firms to compensate for the liability of foreignness
Geographic Diversification Firm Performance Graph:
(slide 11) An S curve: highest performance is the extensive level of geographic diversification
Four ways of combining product and geographic diversification:
-Anchored replicators -Multinational replicators -Far-flung conglomerates -Classic conglomerates
Anchored replicators
focus on product-related diversification and a limited geographic scope
Multinational replicators
focus on product-related diversification on the one hand and far-flung multinational expansion on the other hand
Far-flung conglomerates
focus on both product-unrelated diversification and extensive geographic diversification
Classic conglomerates
focus on product-unrelated diversification within a small set of countries centered on the home country
Motivations for diversification:
- 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
Institution-Based Considerations when it comes to diversification:
-Formal institutions: promote product unrelated diversification by banning intraindustry mergers -Informal institutions: normative pressures to jump on the diversification
The Scope of the Firm :
Determined by a comparison between marginal economic benefits (MEB) and the marginal bureaucratic costs (MBC).
MEB are:
the various forms of synergy (operational or financial) gained from the last unit of growth— e.g., the last acquisition.
MBC are:
additional costs associated with a larger, more diversified organization—e.g., more headcounts, more expensive information systems.
Why does conglomeration add value in emerging economies?
At a given level of diversification: *MEB EmergingEcon > MEB DevelopedEcon -At a given level of diversification: *MBC EmergingEcon < MBC DevelopedEcon
Acquisition:
transfer of the control of assets, operations, and management from one firm (target) to another (acquirer), the former becoming a unit of the latter.
Merger:
the combination of assets, operations, and management of two firms to establish a new legal entity.
Horizontal catergory of M&A
deals involving competing firms in the same industry
Vertical category of M&A:
deals that allow the focal firms to acquire (upstream) suppliers and/or (downstream) buyers
Conglomerate category of M&A:
transactions involving firms in product-unrelated industries.
Strategic fit:
The complementarity of partner firms’ “hard’ skills and resources, such as technology, capital, and distribution channels
Organizational fit:
The complementarity of partner firms’ “soft’ organizational traits, such as goals, experiences, and behaviors, that facilitate cooperation
Restructuring refers to:
- Adjustments to firm size and scope through either diversification (expansion or entry), divestiture (contraction or exit), or both - Reducing firm size and scope
2 types of restructuring:
- Downsizing: Reducing the number of employees through lay-offs, early retirements and outsourcing
- Downscoping: Reducing the scope of the firm through divestitures and spinoffs
