Lesson 3: Formulating Strategies and Corporate Diversification Strategy PDF

LESSON 3: FORMULATING STRATEGIES AND CORPORATE DIVERSIFICATION STRATEGY To create and sustain a competitive advantage, companies need to stay focused on their customers’ evolving wants and needs and not sacrifice their strategic position as STRATEGY AT THE BUSINESS LEVEL...

LESSON 3: FORMULATING STRATEGIES AND CORPORATE DIVERSIFICATION STRATEGY To create and sustain a competitive advantage, companies need to stay focused on their customers’ evolving wants and needs and not sacrifice their strategic position as STRATEGY AT THE BUSINESS LEVEL Michael E. Porter described three generic strategies that a firm can use to achieve a competitive advantage. The first of these strategies is overall cost leadership, which is based on appeal to the industry-wide market using a competitive advantage based on low cost. To generate above-average performance, a firm that uses this strategy must attain competitive parity based on differentiation relative to its competitors. There are a number of potential pitfalls that a cost leadership strategy encounter: (a) too much focus on one or a few value-chain activities; (b) all rivals share a common input or raw material; (c) the strategy is imitated too easily; (d) a lack of parity on differentiation; and (e) erosion of cost advantages when the pricing information available to customers increases. Three Generic Strategies The second generic strategy is a differentiation strategy. As the name implies, this strategy consists of creating differences in the firm’s product or service offering by creating something that is perceived industry wide as unique and valued by customers. Firms create sustain- able differentiation advantages and attain above average performance when their price premiums exceed the extra costs incurred in being unique. Pitfalls of the differentiation strategy include: (a) uniqueness that is not valuable; (b) too much differentiation; (c) the price premium is too high; (d) differentiation that is too easily imitated; (e) dilution of brand identification through product- line extensions; and (f) perceptions of differentiation may vary between buyers and sellers. The third and final generic strategy, the focus strategy, is based on a narrow competitive scope within an industry. Essentially this strategy is about the exploitation of a market niche. Focus strategy has two variants: cost focus (creating a cost advantage in the target segment) and differentiation focus (differentiate in the target market). Potential pitfalls of focus strategies are: (a) erosion of cost advantages within the narrow segment; (b) even product and service offerings that are highly focused are subject to competition from new entrants and from imitation; and (c) focusers can become too focused to satisfy buyer needs. High performers are firms that attain both cost and differentiation advantages. This strategy allows a firm to provide two types of value to customers: differentiated attributes and lower prices. There are three approaches to combining overall low-cost and differentiation: (1) automated and flexible manufacturing systems; (2) exploiting the profit pool concept for sustainable competitive advantage; and (3) coordinating the “extended” value chain by way of information technology. Pitfalls of this integrated approach are: (a) failing to attain both strategies may result in ending up with neither one – i.e. being stuck in the middle; (b) underestimating the challenges and expenses associated with coordinating value- creating activities in the extended value chain; and (c) miscalculating sources of revenue and profit pools in the firm’s industry. INDUSTRY ENVIRONMENT AND BUSINESS-LEVEL STRATEGY The industry life cycle refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry. Stages of the Industry Life Cycle The first stage of the industry life cycle is the introduction stage. It is characterized by new products that are not yet known to customers, poorly defined market segments, unspecified product features, low sales growth, rapid techno- logical change, operating losses, and a need for financial support. The challenge that firms face in the introduction stage becomes one of: (a) developing the product and finding ways to get users to try it; and (b) generating enough exposure so the product emerges as the standard by which all other rivals’ products are evaluated. The second stage is the growth stage. This stage is characterized by strong increases in sales, growing competition, developing brand recognition, and a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development. The primary key to success in this stage is to build consumer preferences for specific brands. In this stage, revenues increase at an accelerating pace because: (a) new consumers are trying the product; and (b) a growing proportion of satisfied customers are making repeat purchases. The third stage, the maturity stage, is characterized by slowing demand growth, saturated markets, direct competition, price competition, and strategic emphasis on efficient operations. By (re)positioning their products in unexpected ways, firms can change how customers mentally categorize them. This can be done using one of two strategies: reverse positioning, which strips away product attributes while adding new ones, resulting in a lower price, and breakaway positioning, which associates the product with a radically different category. Like reverse positioning, this strategy permits the product to shift backward on the life-cycle curve, moving from the dismal maturity phase to a growth opportunity. The final stage of the industry life cycle is the decline stage. This stage is characterized by falling sales and profits, increasing price competition,and industry consolidation. Firms must face up to the strategic choices of either exiting or staying and attempting to consolidate their position in the industry. Four basic strategies are available in the decline phase: (1) maintaining; (2) harvesting; (3) exiting the market; and (4) consolidation. A turnaround strategy is a strategy that reverses a firm’s decline in performance and returns it to growth and profitability. A need for turnaround may occur in any stage of the life cycle but is most prevalent in the maturity and decline stage. There are three basic turnaround strategies: (1) asset and cost surgery; (2) selective product and market pruning; and (3) piecemeal productivity improvements. TECHNOLOGY Entrepreneurial Strategy and Competitive Dynamics Broadly defined, entrepreneurship refers to the creation of value by an existing organization or new venture that involves the assumption of risk. Three factors must be present for value creation: (1) an entrepreneurial opportunity; (2) the resources to pursue the opportunity; and (3) an entrepreneur or entrepreneurial team willing and able to take the opportunity. Opportunity Analysis Framework The process of discovering and evaluating changes in the business environment (such as new technology, socio-cultural trends, or shifts in consumer demand) that can be exploited is referred to as opportunity recognition. Viable opportunities have four qualities: (1) they must be attractive in the marketplace; (2) they must be practical and physically possible, i.e. achievable; (3) they must be durable, i.e. they must be attractive long enough for the development and deployment to be successful; and (4) they must be value-creating, which means the opportunity must be potentially profitable. If an opportunity meets the previously defined four criteria, there are two other factors that must be considered. These are entrepreneurial resources and entrepreneurial leadership. Resources will be discussed first, followed by entrepreneurial leadership. There are numerous types of resources available to entrepreneurs: Financial resources are equity (i.e. funds invested in ownership shares such as stock; the value of equity funding decreases or increases depending on firm performance; obtaining equity requires business founders to give up some ownership and control of the firm) and debt (i.e. borrowed funds such as interest- bearing loans; in general, debt funding must always be repaid regardless of performance; obtaining debt requires some business of personal assets to be used as collateral). Human capital encompasses skilled and strong management. Many regard this as the most important asset an entrepreneurial firm can have. Entrepreneurial firms are more likely to succeed if the owner has extensive social contacts or social capital than firms started without the support of a social network. Finally, start-up firms can be supported with government resources. This not only encompasses funding, but also government contracting. Successful entrepreneurs should embody three characteristics of leadership: (1) vision, (2) dedication and drive, and (3) commitment to excellence. These thee characteristics should be cohesive and passed on to all those who work with the entrepreneurs. To be successful, new ventures should evaluate the industry conditions, the competitive environment, and market opportunities. First, a new entrant should examine the entry barriers, followed by the threat of retaliation by incumbents. There are three types of entry strategies: The first entry strategy is pioneering new entry, which refers to a firm’s entry into an industry with a radical new product or highly innovative service that changes the way business is conducted. The second entry strategy is imitative new entry. This strategy refers to a firm’s entry into an industry with products or services that capitalize on proven market successes, and that has a strong market orientation. The third and final entry strategy is adaptive new entry, which refers to a firm’s entry into an industry by offering a product or service that is somewhat new and sufficiently different to create value for customers by capitalizing on current market trends. This strategy holds the middle between imitative new entry and pioneering new entry. Competitive dynamics refers to intense rivalry, involving actions and responses, among similar competitors vying for the same customers in a marketplace. New entrants may, for example, be forced to change their strategies or develop new ones to survive competitive challenges by incumbent rival firms. Firms launch new competitive actions for a number of reasons, including: (a) improve market position; (b) capitalize on growing demand; (c) expand production capacity; (d) provide an innovative new solution; and (e) obtain first-mover advantage. Under all these reasons lies a desire to strengthen financial outcomes, capture some of the extraordinary profits that industry leaders enjoy and grow the business. Firms need to be aware of their competitors and the kinds of competitive actions they might be planning. This is known as threat analysis. Two factors are used to determine whether or not firms are close competitors: market commonality, i.e. whether or not competitors are vying for the same customers and how many markets they share in common, and resource similarity, i.e. the degree to which rivals draw on the same types of resources to compete. Once a firm has determined if it is motivated and capable to respond with competitive action, it needs to assess what type of action is appropriate. There are two types of competitive action: (1) strategic action, which represents major commitments of distinctive and specific resources (e.g. entering new markets, introduce new products, changing production capacity, or engaging in a merger or alliance), and (2) tactical action, which includes refinements or extensions of strategies (e.g. price cutting or increasing, enhancing products or services, increase marketing efforts, or establish new distribution channels). The final step before initiating new competitive action is to evaluate the likelihood of competitive reaction. The response of a competitor will depend on three factors: (1) market dependence (single-industry firms or those where one industry dominates its activities are more likely to give competitive response); (2) the competitor’s resources (firms with lots of resources are more likely to mount a competitive response than firms with little resources); and (3) the actor’s reputation. Firms may decide to not respond to or initiate an attack (known as forbearance) or go for a mix of cooperating and competing with rival firms (which is described by the term ‘co-opetition’). Managing Innovation and Fostering Corporate Entrepreneurship Innovation is the use of new knowledge to transform organizational processes or create commercially viable products and services. Innovation can be radical, or incremental. Radical innovations are innovations that fundamentally change existing practices. They usually occur because of technological change. Incremental innovations, on the other hand, are innovations that enhance existing practices or make small improvements to products and processes. Another distinction often used when discussing innovation is between product innovations, which refers to efforts to create product designs and applications of technology to develop new products for end users, and process innovations, which is typically associated with improving the efficiency of an organizational process, especially manufacturing systems and operation. Innovation is essential to sustainable competitive advantage but comes with a lot of difficulties. There are five dilemmas that firms must wrestle with when pursuing innovation: Seeds vs. Weeds – identifying the most promising innovative ideas and casting aside those ideas that are not very likely to bear fruit. Experience vs. Initiative – who will lead an innovation project? Experienced but risk- averse managers or the actual innovators, often midlevel workers? Internal vs. External Staffing – staff sourced internally can possess a lot of social capital but may be incapable of thinking outside the box. Building Capabilities vs. Collabo- rating – innovations often require a new skill set, which can be sourced out- side or learned by experience. Incremental vs. Preemptive Launch – incremental launches have less risk but can undermine credibility. Large scale launches are more expensive but can preempt a competitive response. The scope of innovation is defined by four questions. How much will the innovation initiative cost? How likely is to become commercially viable? How much value will it add if it works? What will be learned if it does not pan out? The pace of innovation must also be regulated. The project timeline of incremental innovations is often between six months and two years, while radical innovations are typically long term, often having a time span of ten years or more. Central to innovation are people. Four practices are very important when creating staffs to engage in business venturing: (1) creating innovation teams with experienced players who know how to deal with uncertainty and can help the learning process of new staff members; (2) require employees that seek career advancement to serve in the new venture as part of their career climb; (3) once experienced, transfer staff members from the new venture to mainstream management positions where they can revitalize the firm’s core business; and (4) separate the performance of individuals from the innovation’s performance. Often, companies do not possess all the required resources to carry an innovative idea from concept to commercialization. In this case, innovation partners can provide the missing skills and insights. Innovation partners should be chosen on the basis of required competencies and the possible contributions they can offer to the innovation process. Corporate entrepreneurship refers to the creating of new value for a corporation, through investments that create either new sources of competitive advantage or renewal of the value proposition. Two distinct approaches to corporate entrepreneurship are found among firms that pursue innovation: focused corporate venturing and dispersed corporate venturing. A focused approach typically separates the corporate venturing activity from the firm’s other ongoing operations. One of the most common types of a focused approach is the new venture group (NVG), which is a group of individuals or a division within a corporation that identifies, evaluates, and cultivates venture opportunities. Another common type of focus approach are business incubators, corporate new ventures that support and nurture fledging entrepreneurial ventures until they can thrive on their own as independent businesses. Business incubators typically provide funding, physical space, business services, mentoring, and networking functions to the venture group. The dispersed approach entails that dedication to the principles and practices of entrepreneurship is spread throughout the organization. One aspect related to the dispersed approach is entrepreneurial culture. In companies with such a culture, everyone in the organization is attuned to opportunities to help create new businesses. Another related aspect is product champions, which are individuals that work within a corporation and bring entrepreneurial ideas forward. The success of a corporate venture initiative is judged by several important criteria, including financial and strategic goals. Three questions should be asked to assess the effectiveness of a corporation’s ventures: (1) are the products or services offered by the venture accepted in the marketplace? (2) Are the contributions of the venture to the corporation’s internal competencies and experience valuable? And (3) is the venture able to sustain its basis of competitive advantage? Corporate venture initiatives do not always pay off. Costly and discouraging defeats can be avoided by appointing an exit champion, an individual who works within a corporation and is willing to question the viability of a venture project by demanding hard evidence of venture success and challenge the belief system that carries a venture forward. As unappealing as this role may seem, it could save a corporation both financially and in terms of its reputation. Another way to minimize failure and avoid losses from pursuing faulty ideas is real options analysis. Real options analysis is an investment analysis tool that looks at an investment or an activity as a series of sequential steps and for each step the investor has the option to (a) invest additional funds to grow or accelerate, (b) delay, (c) shrink the scale of, or (d) abandon the activity. There are, however, three major issues with using real options analysis. First, managers may have an incentive to propose not only projects that should be successful, but also projects that might be successful. Because of the subjectivity involved in formally modeling a real option, managers may have an incentive to choose variables that increase changes of approval. Second is the issue of managerial conceit. It occurs when decision makers who made successful choices in the past come to believe they have superior judgment skills. Using ROA may furthermore encourage decision makers toward a bias for action. And finally, managers’ commitment to a project may be irrationally escalated. Firms that want to engage in successful corporate entrepreneurship need to have an entrepreneurial orientation, which refers to the strategy-making practices that businesses use to identify and launch corporate ventures. Entrepreneurial orientation has five dimensions: Autonomy – independent action by individuals or teams aimed at bringing forth a business concept or vision and carrying it through to completion. Innovativeness – the willingness to introduce novelty through creative processes and experimentation aimed at developing new products and services Proactiveness – a forward-looking perspective characteristic of a marketplace leader that has the foresight to seize opportunities in anticipation of future demand Competitive aggressiveness – An intense effort to outperform rivals characterized by a combative posture or an aggressive response aimed at improving position or overcoming threats Risk taking – making decisions and taking action without certain knowledge of probable outcomes; some under- takings may also involve making substantial resource commitments. Risk can be business, financial, and personal. GLOBAL STRATEGY International Strategies: Creating Value in Global Market Four forces impact a nation’s competitiveness: Factor conditions are the nation’s position in factors of production (infrastructure, labor, etc.) necessary to compete in each industry. Factor conditions are a national advantage. Demand conditions are the nature of home-market demand for the service or product of the industry. This is also a national advantage. Related and supporting industries entail the presence of absence in the nation of related industries that are internationally competitive. Again, this is a national advantage. The final force is firm strategy structure, and rivalry, i.e. the conditions in the nation that govern how firms are created, organized, and managed, and the nature of domestic rivalry. This too is a national advantage. One of the most obvious motivations for international expansion is to increase the size of potential markets for a firm’s products and services, which will also potentially result in the ability to attain economies of scale. Another reason is to reduce the costs of research and development and operating costs, or to extend the life cycle of a product. Finally, international expansion can enable a firm to optimize the physical location for activities in its value chain. Four types of risk are associated with expanding internationally. Political risk is the potential threat to a company’s operations in a country due to ineffectiveness of the domestic political system; economic risk is the potential threat to a company’s operations in a country due to economic policies and conditions (such as property right laws and enforcement mechanics); currency risk is the possible threat to a firm’s activities in a country due to fluctuations in the local currency’s exchange rate; finally, management risk is the potential threat to a company’s operations in a country due to the problems that managers have in making decisions in the context of foreign markets. When looking at the global dispersion of value chains, there are two interrelated trends that are increasingly witnessed: outsourcing, i.e. using other firms to perform value- creating activities that were previously performed in-house, and offshoring, i.e. shifting a value-creating activity from a domestic location to a foreign location. Firms that enter international markets are faced with two opposing forces: cost reduction and adaptation to local markets. These two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace: international, multi- domestic, global, and transnational. An international strategy is based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets. This strategy is most successful when pressures for local adaptation and to lower costs are low. Strengths of this strategy include leverage and diffusion of a parent firm’s knowledge and core competencies, and lower costs because of less need to tailor products and services; limitations are the limited ability to adapt to local markets and an inability to take advantage of new ideas and innovations occurring in local markets. A global strategy emphasizes economies of scale due to standardization of services and products, and the centralization of operations in a few locations. This strategy is most successful when pressure to lower cost is high, while the pressure for local adaptation is low. Strengths include strong integration across various businesses, higher economies of scale and lower costs due to standardization, and the creating of uniform quality standards throughout the world; limitations are the limited ability to adapt to local markets, concentration of activities may increase the dependence on a single facility, and single facilities may lead to higher transportation costs and higher tariffs. Multidomestic strategies emphasize on the differentiation of products and service offerings to adapt to local markets. This strategy is most successful when pressures to lower costs are low, but pressures for local adaptation are high. Strengths of this strategy are the ability to adapt products and services to local market conditions and the ability to detect potential opportunities for attractive niches in a given market, enhancing revenue; limitations are the decreased ability to realize cost savings through economies of scale, greater difficulty in transferring knowledge across countries, and a risk of “over- adaptation” as conditions change. Finally, a transnational strategy strives to optimize the trade-offs associated with local adaptation, efficiency, and learning. This strategy is most successful when pressures for local adaptation and cost reductions are high. Strengths of transnational strategies are the ability to attain economies of scale, the ability to adapt to local markets, the ability to locate activities in optimal locations, and the ability to increase knowledge flows and learning; limitations include unique challenges in determining optimal locations of activities to ensure cost and quality, and unique managerial challenges in fostering knowledge transfer. When a firm decides to expand into international markets, there are six modes of entry it can follow, listed from low - high in terms of the extent of investment and risk, and the degree of ownership and control: exporting, licensing, franchising, strategic alliances, joint ventures, and wholly owned subsidiaries. As usual, a riskier endeavor is also more likely to yield high returns. Entry Modes for International Expansion Exporting refers to producing goods in one country to sell to residents in another country. Licensing is a contractual arrangement in which a company receives a fee or royalty in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property. Franchising is, like licensing, a contractual agreement in which a company receives a fee or royalty in exchange for the right to use its intellectual property. However, it usually involves a longer time period and includes other factors, such as monitoring of operations, training, and advertising. Strategic alliances and joint ventures have recently become increasingly popular. These forms of partnership differ in two ways: joint ventures entail the creation of a third-party legal entity, and strategic alliance initiatives generally are smaller in scope than joint ventures. Finally, a wholly owned subsidiary is a business in which a multinational company owns all of its stocks. A firm can establish a wholly owned subsidiary either by acquiring an existing company in the home country, or develop a totally new operation (which is often referred to as a “greenfield venture”) resulting in a lower price, and breakaway positioning, which associates the product with a radically different category. Similar to reverse positioning, this strategy permits the product to shift backward on the life-cycle curve, moving from the dismal maturity phase to a growth opportunity. The final stage of the industry life cycle is the decline stage. This stage is characterized by falling sales and profits, increasing price competition, and industry consolidation. Firms must face up to the strategic choices of either exiting or staying and attempting to consolidate their position in the industry. Four basic strategies are available in the decline phase: (1) maintaining; (2) harvesting; (3) exiting the market; and (4) consolidation. A turnaround strategy is a strategy that reverses a firm’s decline in performance and life cycle but is most prevalent in the maturity and decline stage. There are three basic turnaround strategies: (1) asset and cost surgery; (2) selective product and market pruning; and (3) piecemeal productivity improvements. STRATEGY AT THE CORPORATE LEVEL: CORPORATE DIVERSION STRATEGY Firms diversify to achieve synergy. There are two meanings to this term: related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities. This allows a firm to benefit from economies of scope, i.e. cost savings that arise because of this leveraging. Firms generate value by leveraging their core competencies. Core competencies are a firm’s strategic resources that reflect the collective learning in the organization. Core competencies must meet three criteria to generate value: (1) they must enhance competitive advantage by creating superior customer value; (2) different businesses in the corporation must be similar in at least one important way related to them; and they must be difficult to imitate or substitute. Organizations can also achieve synergy by sharing activities, i.e. having activities of two or more businesses’ value chains done by one of the businesses. The most common types of synergy that result from sharing activities are cost reductions. Furthermore, sharing activities can also lead to enhanced revenues. Firms can also achieve related diversification through market power, which entails the firm’s ability to profit through restricting or controlling supply to a market (vertical integration, i.e. an extension of the firm by integrating preceding or successive production processes) or coordinating with other firms to reduce investments (pooled negotiation power). Benefits of vertical integration include: a. secure source of raw materials or distribution channels. b. protection of and control over valuable asses. c. access to new business opportunities; and d. simplified procurement and administrative procedures. There are also risks that need to be considered: a. costs and expenses associated with increased overhead and capital expenditures. b. loss of flexibility resulting from large investments c. problems associated with unbalanced capacities along the value chain; and d. additional administrative costs associated with managing a more complex set of activities. In making vertical integration decisions, the following six issues should be considered: 1. Is the company satisfied with the quality of the value that its present suppliers and distributors are providing? 2. Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? 3. Is there a high level of stability in the demand for the products of the organization? 4. How high is the pro- portion of additional production capacity that is absorbed by existing products or by the prospects of new and similar products? 5. Does the company have the required competencies to execute the vertical integration strategies? 6. Will the vertical integration initiative have potential negative impacts on the firm’s stakeholders? Another approach that prove to be very useful in understanding vertical integration is the transaction cost perspective, which is a perspective that the choice of a transaction’s governance structure (such as vertical integration or market transaction) is influenced by transaction costs, including search, negotiation, contracting, monitoring, and enforcement costs, associated with each choice. Vertical integration, however, gives rise to a different set of costs referred to as administrative costs. Contrary to in related diversification, potential benefits in unrelated diversification can be gained from vertical relationships, i.e. creation of synergies from the interaction of the corporate office with the individual business units. There are two main sources of such synergies: parenting and restructuring, and portfolio management. The positive contributions of the corporate office to a new business as a result of expertise and support provided and not as a result of substantial changes in assets, capital structure, or management is referred to as the parenting advantage. Another means by which the corporate office can add substantial value to a business is by restructuring, which is defined as the intervention of the corporate office in a new business that substantially changes the assets, capital structure (capital restructuring), and/or management, including selling off parts of the business (asset restructuring) changing management (management restructuring), reducing payroll and unnecessary sources of expenses, changing strategies, and infusing the new business with new technology, processes, and reward systems. Portfolio management is a method of (a) assessing the competitive position of a business within a corporation, (b) suggesting strategic alternatives for each business, and (c) to identify priorities for the allocation of resources between the businesses. The key purpose of portfolio management is to assist a firm in achieving a balanced portfolio of businesses. The Boston Consultancy Group has identified four types of strategic business units: Stars are competing in high-growth industries; relatively high market shares; long- term growth potential; should continue to receive substantial funding. Question marks are competing in high growth industries; relatively low market shares; invest resources to enhance their competitive positions Cash cows have high market shares; low-growth industry; limited long-run potential; present source of current cash flows to support stars/question marks Dogs have weak market share; low- growth industries; limited potential; recommend divesting. In using portfolio management, a firm tries to create synergies and value in several ways: First, portfolio analysis gives a snapshot of the businesses in a corporation’s portfolio, enabling more effective resource allocation. Second, the expertise and analytical resources in the corporate office provide guidance in determining what firms may be (un)attractive acquisitions. Third, the corporate office can provide financial resources to the business units on favorable terms that reflect the corporation’s overall ability to raise funds. There are, however, a number of limitations to portfolio analysis: (1) they are overly simplistic, because they consists only of the dimensions of growth and market share; (2) they view each business as separate, ignoring potential synergies; (3) the process may become overly mechanical, ignoring judgment and expertise; (4) the reliance on strict rules for resource distribution across strategic business units can be detrimental to a firm’s long-term viability; and (5) the imagery (cash cows, question marks, stars and dogs) may lead to overly simplistic prescriptions. There are three basic means of diversification. Through mergers (the combining of two or more firms into one new legal entity) and acquisitions (the incorporation of one firm into another through purchase), corporations can directly acquire a firm’s assets and competencies. Motives and benefits of mergers and acquisitions include: (a) obtaining valuable resources that can help an organization expand its product offerings and services; (b) provide firms with the opportunity to attain the three bases of synergy, i.e. leveraging core competencies, sharing activities, and building market power; (c) consolidation within an industry and forcing other players to merge. There are also limitations to mergers and acquisitions: (a) the takeover premium that is paid for an acquisition is very high; (b) competing firms can often imitate any advantages realized or copy synergies that result from the merger and/or acquisition; (c) managers’ credibility and ego might get in the way of sound business decisions; and (d) there can be many cultural issues that may doom the intended benefits from M&A endeavors. The other side of the “M&A coin” are divestments, which entails the exit of a business from the firm’s portfolio. Divesting a business can accomplish many objectives, including: (1) enabling managers to focus more directly on the firm’s core businesses; (2) providing the firm with more resources to spend on attractive alternatives; and (3) raising cash to fund existing businesses. A strategic alliance is a cooperative relation- ship between two or more firms. Joint ventures represent a special case of alliances, where two or more firms contribute equity to establish a new legal entity. Both play a prominent role in leading firms’ strategies, because they have many potential advantages, including entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.