Study sets, textbooks, questions
Upgrade to remove ads
BUSN 495 Exam 3 - Chapter 8
Terms in this set (43)
exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand sharing
Have value chains with competitively valuable cross-business relationships that present opportunities for the businesses to perform better operating under the same corporate umbrella than they could as stand-alone entities.
Value chains possess competitively valuable cross-business relationships and resource matchups
Have value chains and resource requirements that are so dissimilar no competitively valuable cross-business relationships are present.
Value chains and resources are so dissimilar that no competitively valuable cross-business relationships are present
- Exists whenever one or more activities comprising the value chains of different businesses are sufficiently similar to present opportunities for:
•Transferring competitively valuable resources, expertise, technological know-how, or other capabilities from one business to another.
•Cost sharing between separate businesses where value chain activities can be combined.
•Brand sharing between business units that have common customers or that draw upon common core competencies.
Reasons to diversify
- When a company encounters diminishing market opportunities and stagnant sales in its principal business
- When you spot opportunities to expand into industries with complementary products
- When you can leverage existing competencies into industries where this is valuable
- When diversifying reduces costs
- When you can transfer a powerful brand name
The Pitfalls of Unrelated Diversification
- Demanding managerial requirements:
1.Staying abreast of what is happening in each industry and each subsidiary.
2.Picking business-unit heads having the requisite combination of managerial skills and know-how to drive gains in performance.
3.Telling the difference between those strategic proposals of business-unit managers that are prudent and those that are risky or unlikely to succeed.
4.Knowing what to do if a business unit stumbles and its results suddenly head downhill.
Pitfalls of Unrelated Diversification
- Limited competitive advantage potential:
•Unrelated strategy offers limited competitive advantage beyond what each individual business can generate on its own.
•Without strategic fit, consolidated performance of an unrelated group of businesses is unlikely to be better than the sum of what the individual business units could achieve independently.
Misguided reasons for pursuing unrelated diversification
Building Shareholder Value through Unrelated Diversification
- Corporate executives must:
•Do a superior job of identifying and acquiring new businesses that can produce consistently good earnings and returns on investment.
•Do an excellent job of negotiating favorable acquisition prices.
•Do such a good job of overseeing and parenting the firm's businesses that they perform at a higher level than they would otherwise be able to do through their own efforts alone.
Types of Acquisition Candidates for Unrelated Diversification Strategies
•Firms with bright growth prospects but short on investment capital.
•Undervalued firms that can be acquired at a bargain price.
•Struggling firms that can be turned around with parent firm's financial resources and managerial know-how.
Diversifying into Unrelated Businesses
- Strategic approach:
•Growth through acquisition into any industry where potential exists for enhancing shareholder value through upward-trending corporate revenues and earnings and/or a stock price that rises yearly.
•While industry attractiveness and cost-of-entry tests important, better-off test secondary.
Diversifying into Unrelated business
- Involves diversifying into businesses with:
•No strategic fit.
•No meaningful value chain relationships.
•No unifying strategic theme.
Ability of Related Diversification to Deliver Competitive Advantage and Gains in Shareholder Value
- Cross-business strategic fit.
•Builds shareholder value in ways that shareholders cannot replicate by simply owning a diversified portfolio of stocks.
•Captures benefits that are possible only through related diversification.
•Does not automatically result in benefits; must be pursued by management in order to capture the greater profitability of cross-business benefits.
Diversifying into Related Businesses
- Strategic Fit
•Exists whenever one or more activities comprising the value chains of different businesses are sufficiently similar to present opportunities for:
- Transferring competitively valuable resources, expertise, technological know-how, or other capabilities from one business to another.
- Cost sharing between separate businesses where value chain activities can be combined.
- Brand sharing between business units that have common customers or that draw upon common core competencies.
1) better off test
2) cost of entry test
3) industry attractiveness test
3 tests to judge diversification
Industry Attractiveness Test
The target industry offers equal or better profit and return on investment opportunities.
Cost of Entry Test
The cost to enter the target industry does not erode its long-term profit potential
Better off test
The firm's businesses will perform better together than as stand-alone firms, producing a synergistic 1 + 1 = 3 effect on shareholder value.
2) internal development
3) joint ventures
3 options for entering new industries and lines of business (how to diversify)
Advantages of acquisition
- Quick and effective way to hurdle target market entry barriers related to:
•Acquiring technological know-how.
•Establishing supplier relationships.
•Achieving scale economies.
•Building brand awareness.
•Securing adequate distribution access.
Disadvantage of acquisition
The big dilemma is whether to pay a premium price to buy a successful firm or to buy a struggling firm at a bargain price
- Is more attractive when:
•The parent firm already has the in-house skills and resources needed to compete effectively.
•There is ample time to launch a new business.
•Start-up cost is lower than cost of entry via acquisition.
•The start-up will not compete against powerful rivals.
•Adding capacity will not adversely impact supply-demand balance in industry.
•Incumbent firms are likely to be slow or ineffective in responding to an entrant's efforts to crack the market.
- Situations call for a _____ when:
•Pursuing the expansion opportunity is too complex, uneconomical, or risky to go it alone.
•The opportunities in a new industry require a broader range of competencies and know-how than an expansion-minded firm can marshal
Disadvantages of Joint Ventures
•Potential for conflicting objectives.
•Operational and control disagreements.
- generates operating cash flows that are too small to fully fund its operations and growth
- must receive cash infusions from outside sources to cover its working capital and investment requirements
generates operating cash flows over and above its internal requirements, thereby providing financial resources that may be used to invest in cash hogs, finance new acquisitions, fund share buyback programs, or pay dividends.
Cash flows generated from internal operation aren't big enough to fund their expansion
Businesses that generate substantial cash surpluses over what is needed to adequately fund their operations
Reasons for not divesting a cash hog business:
•It has highly valuable strategic fit with other business units.
•Capital infusions needed from the corporate parent are modest relative to the funds available.
•There's a decent chance of growing the cash hog into a solid bottom-line contributor.
involves radically altering the business lineup by divesting businesses that lack strategic fit or are poor performers and acquiring new businesses that offer better promise for enhancing shareholder value
an independent company created when a corporate parent divests a business either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent
When restructuring is necessary:
•There is a serious mismatch between the firm's resources and capabilities and the type of diversification that it has pursued.
•Too many businesses are in slow-growth, declining, low-margin, or otherwise unattractive industries.
•There are too many competitively weak businesses.
•New technologies threaten the survival of important businesses.
•There are ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors.
•An excessive debt burden with interest costs eats deeply into profitability.
•Ill-chosen acquisitions have not lived up to expectations.
Economies of scope
- Stem directly from cost-saving strategic fit along the value chains of related businesses.
- Sibling business can share R and D and manufacturing
Yamaha name in motorcycles gave it instant credibility when it went into the personal watercraft industry. Saved money on advertising to get a name out there
When it is feasible to manufacture the products of different businesses in a single plant or have a single sales force for the products of different businesses
- Google's technological know-how has aided in the development of Android and Chrome.
- Disney shared Marvel's characters with many of the other Disney businesses, including theme parks and retail stores
4 things management does for diversification
1) Pick the industry and how to get there
2) Use tools (value-chain relationships) to gain a competitive advantage
3) Invest in areas where potential earnings are higher
4) Initiate actions to boost the combined performance of the corporation's collection of business
Initiating actions to boost the combined performance of the corporation's collection of businesses
- Stick closely with the existing business lineup,
- broaden the scope of diversification by entering additional industries
- retrenching to a narrower scope of diversification,
- broadly restructuring the business lineup with multiple divestitures
Establishing investment priorities and steering corporate resources into the most attractive business
Channel resources into areas where earnings potentials are higher
Pursuing opportunities to leverage cross-business value chain relationships into competitive advantage
Companies should have a strategic fit across the value chains of their business to gain a 1+1=3 effect
Picking new industries to enter and deciding on the means of entry
Figure out what new industries offer the best growth and whether to start from the ground up, acquiring a company, or forming joint venture/strategic alliances
Sets found in the same folder
BUSN 495 Exam 3 - Chapter 6
BUSN 495 Exam 3 - Chapter 7
BUSN 495 Exam 3 - Chapter 9
Other sets by this creator
BUSN 495 Exam 2 - Chapter 10
BUSN 495 Exam 2 - Chapter 4
BUSN 495 Exam 2 - Chapter 3
BUSN 495 Exam 1 - Chapter 5
Other Quizlet sets
T10 - Trastorno específico del aprendiza…
Rhetorical Devices for AP Language
Febuary - Bellringers