Corporate Level Strategy: Related And Unrelated Diversification Flashcards
Describe how transferring competencies can increase profitability
- lowering the cost structure of one or more of the company’s diversified business units
- enables better differentiation in one or more of the business units
- competencies being transferred must have strategic value and should include value chain activities
Discuss the leveraging of business competencies
- Taking distinctive competency developed by one business unit in one industry and using it to create a new business unit in a different industry
- Basis of the model involves:
- using competitive advantage in one industry to create differentiation of new industry
- cost based competitive advantage for a new business unit in a new industry
Discuss advantages of sharing resources and capabilities
- Economies of scope: synergy when one or more diversified business units are able to lower costs or increase differentiation
- more effectively pool, share and utilise expensive resources capabilities
- Sources of cost reductions
- sharing lowers costs
- marketing function does the differentiation of products leading to higher ROIC
Discuss the benefits of product bundling
- products that are connected which is able to give consumer the full package
- offer customers:
- lower prices
- superior set of services
- does not always require joint venture:
- can be done through market contracts
Discuss the relevance of general org competencies
-help business units in the org perform more efficiently than what they would have operating alone
-originates from skills of the top managers
-types:
*entrepreneurial capabilities
Org design capabilities
*strategic capabilities
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Define and discuss related diversification
A corporate level strategy based on the goal of creating a business unit in a new industry that is similar or related to a company’s existing business unit
- connected by some commonality or linkage in their value-chain functions
- basis of multi-business model
- utilises commonalities to share and create comp advantage
- allows company to use any general org competency it possesses
Define and discuss unrelated diversification
Corp level strategy that uses general org competencies to increase performance of all business units. Companies who pursue this known as conglomerates
- internal capital market: corp level strategy where headquarter assesses performance of all business units and allocates money to them
- benefits of internal capital market are limited by the effeciency of external capital market
- reasons for efficiency of capital markets in U.S.
- reporting requirements mandated by security and exchange commission (SEC)
- large number of research analysts
- large and active investment community
- strong comm systems
- strong contract law
What are the disadvantages of diversification
- Changes in industry or company
- Diversification for the wrong reasons
- Bureaucratic costs: transaction difficulties between units
Compare Related vs unrelated diversification
Related
-company competencies can be applied through greater number of industries
-superior strategic capabilities that keep bureaucratic costs under control
Unrelated
-top managers effective at creating profit from failing business units
-use strategic management competencies to increase competitive advantage and control bureaucratic costs
Define and discuss internal new venturing
Transferring resources to create anew business unit in a new industry to innovate a new kind of product
- used by companies that are tech-based and pursue diversification or companies that venture to newly emerging industries
- downfalls:
- market entry on too small a scale
- poor commercialisation of new venture product
- poor corp management of new venture division
List the Guidelines for successful internal venturing
-understand and base venture on RnD
*sufficient funding for RnD department to narrow down best research projects
-continuos work with RnD scientists to improve business model and strategy
-fostering link between RnD and Marketing and RnD and manufacturing
Efficient scale manufacturing facilities and large budget for marketing
Define acquisitions
- Main way companies enter industry for vertical integration and diversification
- pitfalls
- overestimating economic value of acquired company
- expense of acquisition and inadequate pre-acquisition screening
- Tips for success
- target identification and pre-acquisition screening
- bidding strategy, integration and learn from experience
Define and discuss Joint ventures
Two or more companies pull resources together to create new business. Companies share risks and costs associated with business unit
- problems
- partner with better skills gives away profits
- business models and time horizons lead to conflict on how to run venture
Define and discuss restructuring
Reorganising and divesting business units and existing industries to focus on company core business and rebuild distinctive competencies
-reason being:
*investors feeling that the org no longer possesses multi-business models
*complexity of financial plan for highly diversified enterprises can hide individual business unit performance
*response to declining profit from over-diversification
*reduced advantages from vertical integration or diversification from innovations in strategic management
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How can profitability be increased through diversification
- The transferring of competencies between business units in different industries
- Leveraging competencies to create business units in new industries
- Sharing resources between business units to realise synergies or economies of scope
- Product bundling
- Utilise general org competencies that increase performance
