Different Types of Diversification

Question 1

Diversification by acquisition of an existing business

Answer 1

This is like a move in home that is ready to go in 30 days
Advantages:
Quick entry to an industry

Barriers to entry avoided (a company already has a name and it’s built up)

Access to complementary resources and capabilities (related to your company you already own)

Disadvantages:
Cost of acquisition—whether to pay a premium for a successful firm or seek a bargain in a struggling firm

Underestimating costs for integrating acquired firm

Overestimating the acquisition’s potential to deliver added shareholder value

Question 2

Entering a new line of business through internal development

Answer 2

This is like having to build a house from the ground up and having to jump from house to house
Advantages of new venture development:
Avoids pitfalls and uncertain costs of acquisition

Allows entry into a new or emerging industry where there are no available acquisition candidates

Disadvantages of entrepreneurship:
Must overcome industry entry barriers
Requires extensive investments in developing production capacities and competitive capabilities

May fail due to internal organizational resistance to change and innovation

Question 3

Using joint ventures to achieve diversification

Answer 3

You have a partner in your business (like a marriage two business own one together) (good for international businesses with us businesses)

Joint ventures are advantageous when diversification opportunities:
Are too large, complex, uneconomical, or risky for one firm to pursue alone

Require a broader range of competencies and know-how than a firm possesses or can develop quickly

Are located in a foreign country that requires local partner participation or ownership
Diversification by joint venture

Joint ventures have the potential for developing serious drawbacks due to:
Conflicting objectives and expectations of venture partners

Disagreements among or between venture partners over how best to operate the venture

Cultural clashes among and between the partners

Dissolution of the venture when one of the venture partners decides to go their own way

Question 4

Diversification into related businesses

Answer 4

Strategic fit opportunities
Transferring specialized expertise, technological know-how, or other resources and capabilities from one business’s value chain to another’s (like outback’s management style went into its other companies)

Sharing costs by combining related value chain activities into a single operation

Exploiting common use of a well-known brand name

Sharing other resources (besides brands) that support corresponding value chain activities across businesses
(USF BEING KNOWN AROUND FLORIDA AND WE ACQUIRE A SMALLER SCHOOL AND THEY GET WRAPPED INTO OUR SCHOOL AND THEIR REP GOES THROUGH THE ROOF)

Engaging in cross-business collaboration and knowledge sharing to create new competitively valuable resources and capabilities (diapers with toothpaste)