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38 Cards in this Set
- Front
- Back
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Diversification |
The process of firms expanding their operations by entering new businesses |
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Related Businesses |
Horizontal relationships of diversification - sharing intangible and tangible resources |
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Unrelated Businesses |
Hierarchical relationships of diversification - value creation derives from corporate office, leveraging support activities |
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Low level of diversification - Single Business Strategy |
Corporate level strategy in which the firm generates 95% or more of its sales revenue from its core business area |
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Low level of diversification - Dominant Business Diversification Strategy |
Corporate level strategy whereby firm generates 70-95% of total sales revenue within a single business area |
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Moderate to high levels diversification - Related Constrained Diversification Strategy |
Less than 70% of revenue comes from the dominant business - Direct links (share products, technology and distribution linkages) between the firms businesses |
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Moderate to high levels of diversification - Related Linked Diversification Strategy (Mixed related and unrelated) |
Less than 70% of revenue comes from the dominant business - Mixed: linked firms sharing fewer resources and assets among their businesses, concentrating on the transfer of knowledge and competencies among the businesses |
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High levels of diversification - Unrelated |
Less than 70% of revenue comes from dominant business - no relationship between businesses - these firms are commonly called conglomerates |
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Approaches to diversification |
1. Acquisitions or mergers 2. Collaborative ventures (Joint ventures or strategic alliance) 3. Internal development (new products, markets, technology) |
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Rationale for Merger & Acquisitions |
1. Industry consolidation(more efficient operations) 2. Geographic extension (economies of scale and scope) 3. Product extension 4. Acquiring valuable resources (M&As as R&D) |
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Limitations of Mergers and Acquisitions |
1. Competing firms often can imitate any advantages 2. The takeover premium is often high 3. Management ego and compensation interests can get in the way of sound decisions 4. There can be many cultural issues that may hinder benefits |
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Creating value with Mergers and Acquisitions |
Related M&A activity creates more value than unrelated. M&A activity creates market value but target firms capture it. |
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Strategic Alliances and Joint Ventures |
-Introduce successful product of service into a new market (Lacks requisite marketing expertise) -Join other firms to reduce manufacturing costs in the value chain (pool capital, value-creating activities, facilities) -Develop of diffuse new technologies |
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Unmet expectations of strategic alliances and joint ventures |
-Improper partner (strengths contributed by each should be unique) -Partners must be compatible -Partners must trust one another |
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Divestment |
The exit of a business for a firm's portfolio -sell for profit -cut their losses -focus more on core businesses -provide cash flows to fund existing businesses or purchase better opportunities |
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Related diversification |
Firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power |
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Economies of Scope |
Cost savings from leveraging core competencies or sharing related activities among businesses in a corporation - benefit of related diversification |
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Core competencies |
a firms strategic resources that reflect the collective learning in the organization |
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Market Power |
Firm's abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment - benefit of related diversification |
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Pooled Negotiating Power |
The improvement in bargaining position relative to suppliers and customers - benefit of related diversification |
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Vertical Integration |
When a firm becomes its own supplier or distributor (Integrating preceding or successive production processes) |
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Benefits of vertical integration |
-A secure source of raw materials or distribution channels -Protection of and control over valuable assets -Access to new business opportunities -Simplified procurement and admin procedures |
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Risks of vertical integration |
-Costs and expenses -Loss of flexibility resulting from large investments -Problems associated with unbalanced capacities along the value chain -Additional admin costs associated with managing a more complex set of activities |
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Unrelated diversification |
A firm entering a different business that has little horizontal interaction with other businesses of a firm |
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Parenting advantage |
The positive contributions of the corporate office to a new business as a result of expertise and support provided |
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Portfolio management |
-assessing the competitive position of a portfolio of businesses within a corp -suggesting strategic alternatives for each business -identifying priorities for the allocation of resources across the businesses |
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Stars |
Business units competing in high-growth industries with relative high market share - long term growth potential |
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Question marks |
Business unites competing in high-growth industries with weak market shares - opportunities to invest in and grow |
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Cash Cows |
Business units with high market shares in low growth industries - limited long run potential but are a source of cash for investing in stars and question marks |
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Dogs |
Business units with weak market shares in low-growth industry - Divest |
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Portfolio Management tips |
-Allocate resources -Expertise of corp office in locating attractive firms to acquire -Provide financial resources to business units on favorable terms reflecting corporations overall ability to raise funds -provide high quality review and coaching -provide a basis for developing strategic goals |
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transaction cost perspective |
A perspective that the choice of a transactions governance structure, such as vertical integration or market transaction, is influenced by transaction costs including search, negotiating, contracting, monitoring, and enforcement costs, associated with each choice. |
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Internal Development |
Entering a new business through investment in new facilities often called corporate entrepreneurship and new venture development |
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Egotism |
Manager's actions to shape their firms strategies to serve their selfish interests rather than to maximize long-term shareholder value |
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Anti-takeover tactics |
Managers actions to avoid losing wealth or power as a result of a hostile takeover |
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Greenmail |
A payment by a firm to a hostile party for the firms stock at a premium, made when the firm's management feels that the hostile party is about to make a tender offer |
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Golden parachute |
A prearranged contract with managers specifying that, in the event of a hostile takeover, the target firms managers will be paid a significant severance package |
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Poison pill |
Used by a company to give shareholders certain rights in the event of a takeover by another firm |
