Podcast
Questions and Answers
A firm may diversify into related businesses, where benefits derive from ______ relationships.
A firm may diversify into related businesses, where benefits derive from ______ relationships.
horizontal
When a firm diversifies into unrelated businesses, benefits derive from ______ relationships.
When a firm diversifies into unrelated businesses, benefits derive from ______ relationships.
hierarchical
Related diversification enables a firm to benefit from horizontal relationships across different ______.
Related diversification enables a firm to benefit from horizontal relationships across different ______.
businesses
Economies of ______ allow businesses to leverage core competencies and sharing related activates.
Economies of ______ allow businesses to leverage core competencies and sharing related activates.
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Sharing ______ is a primary advantage of diversification.
Sharing ______ is a primary advantage of diversification.
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Core ______ reflect the collective learning in organizations.
Core ______ reflect the collective learning in organizations.
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Corporations can achieve ______ by sharing activities across their business units.
Corporations can achieve ______ by sharing activities across their business units.
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Sharing tangible and value-creating activities can provide ______.
Sharing tangible and value-creating activities can provide ______.
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Market power can lead to the creation of value and synergy through pooled ______ power.
Market power can lead to the creation of value and synergy through pooled ______ power.
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When a firm becomes its own supplier, it is called ______ integration.
When a firm becomes its own supplier, it is called ______ integration.
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When a firm becomes its own distributor, it is called ______ integration.
When a firm becomes its own distributor, it is called ______ integration.
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Every market transaction involves some transaction ______.
Every market transaction involves some transaction ______.
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Unrelated diversification enables a firm to benefit from vertical or hierarchical relationships between the corporate office and individual business units through corporate ______ advantage.
Unrelated diversification enables a firm to benefit from vertical or hierarchical relationships between the corporate office and individual business units through corporate ______ advantage.
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Asset, capital, and management ______ is a way a company can restructure to redistribute assets.
Asset, capital, and management ______ is a way a company can restructure to redistribute assets.
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In restructuring the parent ______.
In restructuring the parent ______.
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Transaction costs include search costs, negotiating costs, contract costs, monitoring costs and ______ costs.
Transaction costs include search costs, negotiating costs, contract costs, monitoring costs and ______ costs.
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______ involve a combination or consolidation of two firms to form a new legal entity.
______ involve a combination or consolidation of two firms to form a new legal entity.
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______ involve one firm buying another either through stock purchase, cash, or the issuance of debt.
______ involve one firm buying another either through stock purchase, cash, or the issuance of debt.
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Acquiring valuable resources can expand product offerings and services and/or enter new ______ segments.
Acquiring valuable resources can expand product offerings and services and/or enter new ______ segments.
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Mergers and acquisitions help a firm develop ______.
Mergers and acquisitions help a firm develop ______.
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______ premiums for acquisitions are typically very high.
______ premiums for acquisitions are typically very high.
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A common result of an acquisition can be ______.
A common result of an acquisition can be ______.
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Divestment objectives include cutting the financial losses of a failed ______.
Divestment objectives include cutting the financial losses of a failed ______.
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Strategic alliances and joint ventures are cooperative relationships between two or more firms with potential ______.
Strategic alliances and joint ventures are cooperative relationships between two or more firms with potential ______.
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Asset restructuring involves the sale of ______ assets.
Asset restructuring involves the sale of ______ assets.
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______ restructuring involves changes in the top management team.
______ restructuring involves changes in the top management team.
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Portfolio management involves a better understanding of the ______ position of an overall portfolio.
Portfolio management involves a better understanding of the ______ position of an overall portfolio.
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The Boston Consulting Group's (BCG) growth/share matrix is used in ______ management.
The Boston Consulting Group's (BCG) growth/share matrix is used in ______ management.
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One limitation of portfolio models is that SBUs are compared on only ______ dimensions.
One limitation of portfolio models is that SBUs are compared on only ______ dimensions.
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Diversification can reduce variability in ______ and profits over time.
Diversification can reduce variability in ______ and profits over time.
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Diversification can be accomplished via mergers and ______.
Diversification can be accomplished via mergers and ______.
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Internal development through corporate ______ is a means of diversification.
Internal development through corporate ______ is a means of diversification.
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The graphic is divided into four sections: stars, question marks, cash cows, and ______.
The graphic is divided into four sections: stars, question marks, cash cows, and ______.
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The y axis is industry growth rate divided into ______ from 2 to 22.
The y axis is industry growth rate divided into ______ from 2 to 22.
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The x axis is the relative market share 10 x to ______ x.
The x axis is the relative market share 10 x to ______ x.
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The size of the ______ represents the relative size of the business unit in terms of revenues.
The size of the ______ represents the relative size of the business unit in terms of revenues.
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As the text says, market ______ is central to the B C G matrix.
As the text says, market ______ is central to the B C G matrix.
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Greater marketing ______ is a benefit of strategic alliances.
Greater marketing ______ is a benefit of strategic alliances.
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The ability to reduce manufacturing costs is a benefit in the ______ chain
The ability to reduce manufacturing costs is a benefit in the ______ chain
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Partners should have ______ strengths.
Partners should have ______ strengths.
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Corporate ______ is one of the reasons companies internally develop new products
Corporate ______ is one of the reasons companies internally develop new products
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Managers may act in their own self interest, eroding rather than enhancing value ______
Managers may act in their own self interest, eroding rather than enhancing value ______
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______ are an example of antitakeover tactics
______ are an example of antitakeover tactics
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Firms can create value through ______
Firms can create value through ______
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______ are a key component of corporate-level strategy.
______ are a key component of corporate-level strategy.
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Study Notes
Corporate-Level Strategy
- Corporate-level strategy focuses on what businesses a company should compete in, and how these businesses can be managed to create synergy. Synergy means creating more value by working together than if the businesses were independent.
Learning Objectives
- Identify the reasons for diversification failure.
- Explain how managers can create value through diversification initiatives.
- Explain how related diversification creates synergistic benefits and market power.
- Explain how unrelated diversification creates synergistic benefits.
- Describe methods of engaging in diversification (mergers, acquisitions, joint ventures, internal development).
- Identify managerial behaviors that hinder value creation.
Reasons for Diversification Failures
- Paying too much for the target firm.
- Failing to integrate acquired businesses into the corporate family.
- Undertaking diversification initiatives that are easily imitated by competitors.
Making Diversification Work
- Diversification initiatives must create value for shareholders. This can be through:
- Mergers and acquisitions
- Strategic alliances
- Joint ventures
- Internal development
- Diversification should produce synergy, meaning the combined value should be greater than the sum of individual business units.
Related Diversification
- Enables a firm to benefit from horizontal relationships across different businesses.
- Allows businesses to leverage core competencies.
- Enables sharing of activities, increasing revenue and differentiation.
- Creates market power through pooled negotiating power and vertical integration.
Related Diversification: Vertical Integration
- Questions for consideration include:
- Is the quality of current suppliers and distributors satisfactory?
- Are there activities in the industry's value chain that are currently outsourced that could be a source of profit?
- How stable is demand for the organization's products?
- Does the company have the necessary competencies to execute integration strategies?
- Are there potential negative impacts on stakeholders?
Related Diversification: Transaction Costs
- Every transaction has costs.
- Search costs
- Negotiating costs
- Contract costs
- Monitoring costs
- Enforcement costs
- Transaction-specific investments
- Administrative costs
Unrelated Diversification
- Enables a firm to benefit from vertical or hierarchical relationships between the corporate office and individual business units.
- Corporate parenting advantage, providing competent central functions.
- Restructuring to redistribute assets.
- Portfolio management, using tools like the BCG growth/share matrix.
Unrelated Diversification: Parenting and Restructuring
- Corporate office creates value through management expertise and competent functions.
- Restructuring:
- Asset restructuring: Sale of unproductive assets
- Capital restructuring: Changes in debt-equity mix
- Management restructuring: Changes in top management, organizational structure, and reporting relationships.
Unrelated Diversification: Portfolio Management
- Improves understanding of competitive position of a portfolio of businesses.
- Suggests strategic alternatives for each business.
- Identifies priorities for resource allocation.
- Uses the BCG growth/share matrix.
Unrelated Diversification: Portfolio Management BC G
- The BCG matrix graphically displays business units based on their industry growth rate and relative market share.
Unrelated Diversification: Portfolio Management - Limitations
- SBUs are compared on two dimensions only, considering each as a standalone entity.
- The graphical model is oversimplified and doesn't account for possible synergies.
- Strict rules for resource allocation can hinder long-term viability.
Goal of Diversification (Risk Reduction?)
- Diversification can reduce revenue and profit variability, but shareholders can diversify portfolios at lower costs.
- Economic cycles are difficult to predict hindering the value of diversification to reduce risk.
Means of Diversification
- Mergers and Acquisitions
- Divestment
- Pooling resources through strategic alliances and joint ventures
- Internal development through corporate entrepreneurship
Mergers and Acquisitions
- Mergers: Combination or consolidation of two firms.
- Acquisitions: One firm buying another. Motives include: acquiring valuable resources, expanding product/service offerings. Also:
- Leveraging core competencies
- Sharing Activities
- Building market power
- Limitations include high takeover premiums, imitation by competitors, managers' self-interest, and cultural issues
Divestment
- Divesting is the sale of a company or part of a business. Objectives include:
- Cutting losses from failed acquisitions
- Focusing on core businesses
- Generating funds to support existing operations
- Creating value through the sale of less profitable segments
Divestment Success
- Removing emotion
- Knowing business value
- Timing the deal
- Maintaining buyers
- Clearly communicating the process
Strategic Alliances and Joint Ventures
- Cooperative relationships between two or more firms with potential advantages.
- Motives include: Expanding into new markets, reducing costs, developing new technologies.
- Limitations include selecting compatible partners with unique strengths to foster synergy.
Internal Development
- Corporate entrepreneurship and new venture development.
- Motives include not needing external capital or partners which leads to quicker and simpler gains.
- Limitations include time-consuming processes and sustained capability development.
Managerial Motives
- Managers' self-interest can erode value creation.
- Growth for growth's sake, egotism, and seeking prestige/promotion.
- Tactics like antitakeover measures (greenmail, golden parachutes, poison pills) are often utilized.
Reflecting on Career Implications
- Focus on developing core competencies and skills applicable to diverse settings.
- Examine how competencies and value can be generated across units related to value chain activities.
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Description
This quiz covers key concepts related to diversification in business, focusing on the differences between related and unrelated diversification. It explores the benefits provided by relationships and activities shared across different business units. Test your understanding of how economies of scale and core competencies create value.
