Mqm 385 - Chapter 10

Front 1

Strategic managers often pursue diversification when _________

Back 1

their companies are generating free cash flow.

Front 2

Free cash flow is ___________

Back 2

financial resources they do not need to maintain a competitive advantage in their companies core industry, thus can be used to fund new, PROFITABLE business ventures.

Front 3

A diversified company can create value in 5 ways:

Back 3

1. transforming competencies to create new businesses.

2. leveraging competencies to create new businesses.

3. sharing resources to realize economies of scope.

4. using product bundling

5. taking advantage of general organizational competitiveness that enhance the new bus.

Front 4

The ____________ of diversification rise as a function of the number of independent business units within a company and the extent to which managers ,ust coordinate the transfer of resources between those business units.

Back 4

bureaucratic costs

Front 5

Diversification motivated by a desire to pool risks or achieve greater growth often results __________

Back 5

in falling profitability.

Front 6

What are the three methods companies use to enter new industries?

Back 6

1. internal new venturing

2. acquisition

3. joint venture

Front 7

_________ is used to enter a new industry when a company has a set of valuable competencies in its existing business that can be leveraged or recombined to enter a new business or industry.

Back 7

Internal new venturing

Front 8

Many internal ventures fail because _________

Back 8

of entry on too small a scale, poor commercialization, and poor corporate management.

Front 9

What guards against failure when pursuing internal ventures?

Back 9

carefully planned approach to project selection and management , integration of R&D and marketing to improve the chance new products will be commercially successful.

And entry on a scale large enough to result in competitive advantage.

Front 10

When a company lacks the competencies required to compete in the new industry, what is the best method? And explain

Back 10

Acquisitions: purchase a company that does have those competencies at a reasonable price.

Front 11

When entry barriers are high and a company is unwilling to devote the time frame, dev costs, and risks, what is the best method to enter into a new industry?

Back 11

`Acquisitions

Front 12

What are the ways Acquisitions can be unprofitable?

Back 12

when managers...

1. underestimate the problems associated with integrating an acquired company.

2. overestimate the profit that can be created from an acquisition.

3. pay too much for the acquired company.

4. perform inadequate pre-acquisition screening to ensure the acquired company will increase profitability of the whole company.

Front 13

Joint Ventures are used to enter an industry when __________ (2)

Back 13

1. the risks and costs associated with setting up a new business unit are more than a company is willing to assume on its own.

2. a company increase the profitability that its entry into a new industry will result in a successful new business by teaming up with another company with skills and assets that complement its own.

Front 14

Restructuring is often required to correct the problems that result from a ________(4)

Back 14

1. a business model that no longer creats competitive advantage.

2. the inability of investors to assess the comptetitive advantage of a highkly diversified company from its financial statements.

3. excessive diversification because top managers desire to pursue empire building that results in growth without profitability.

4. innovation in strategic management such as strategic alliances and outsourcing that reduce the advantages of vertical integration and diversification.

Front 15

A company qualifies as diverse when it makes and sells products in two or more industries, that are _____________

Back 15

not in adjacent stages of an industry value chain (vertical integration)

Front 16

The diversification strategy the firm chooses, must pass the "better off" test which is _____

Back 16

the firm must be more valuable than it was before the diversification, and the cost of entry into new industry must be taken into account.

Front 17

AN example of a firm transferring competencies to diversify would be ________

Back 17

Philip Morris transforming its best marketing experts to Miller (the acquired company) to create Miller Lite

Front 18

Companies that base their diversification strategy on transferring competencies tend to _______

Back 18

acquire new businesses related to their existing business activities because of commonalities between one or more of their value-chain functions.

Front 19

Synergies that arise when one or more of a diversified company’s business units are able to lower costs or increase differentiation

Back 19

Economies of Scope

Front 20

Sources of cost reductions:

Sharing Resources and Capabilities

Back 20

1. Sharing lowers the cost structure

2. Marketing function creates the differentiation of products leading to a higher ROIC

Front 21

Takinga distinctive competency developed by a business unit in one industry andimplanting it in a business unit operating in another industry

Back 21

Transferring Competencies

Front 22

Skill or competency that whenshared by two or more business units allows them to operate more effectivelyand create more value for customers.

Back 22

Commonality

Front 23

Transferring Competencies Increaseprofitability when they:

Back 23

1. lowerthe cost structure of one or more of a diversified company’s business units.

2. enableone or more of its business units to better differentiate their products.

Front 24

Distinctivecompetency being transferred must have real strategic value.

T or F

Back 24

True

Front 25

Competenciesshould involve value-chain activities to increase profitability.

T or F

Back 25

True

Front 26

Takinga distinctive competency developed by a business unit in one industry and usingit to create a new business unit in a different industry

Back 26

Leveraging Competencies

Front 27

Providingproducts that are connected to each other

Back 27

Product Bundling

Front 28

Product Bundling Allowscompanies to expand their range by ____________

Back 28

providing customers a complete package

Front 29

Goal- Bundle products to offer customers:

Back 29

1. lowerprices.

2. superiorset of services.

Front 30

Product Bundling Doesnot always require joint ownership and Canbe achieved through market contracts

T or F

Back 30

True

Front 31

Helpbusiness units within a company perform at a higher level than it could if itoperated as a separate or independent company

Back 31

General Organizational Competencies

Front 32

General Organizational CompetenciesResultsfrom ___________________

Back 32

the skills of a company’s top managers

Front 33

Three types of General Organizational Competencies are ____________________

Back 33

1. Entrepreneurialcapabilities

2. Organizationaldesign capabilities

3. Strategiccapabilities

Front 34

_______________ is Requiredto take advantage of the free cash flow

Three types of General Organizational Competencies are ____________________

Back 34

Entrepreneurialcapabilities

Front 35

Topromote entrepreneurship, a company must:(4)

Three types of General Organizational Competencies are ____________________

Back 35

1. encoruange magers to tak risks

2. give managers the time and resources to pursue novel ideas

3. not punish managers when a new idea fails

4. make sure that the company's free cash flow is not wasted in risky ventures that would generate low ROI

Front 36

Organizational design skills are the _________

Three types of General Organizational Competencies are ____________________

Back 36

Abilityof the managers to create a structure, culture, and control systems thatmotivate and coordinate employees to perform at a high level

Front 37

Managers of a diversified companyidentify inefficient and poorly managed companies in other industries.

Back 37

Turnaround strategy

Front 38

Companies pursuing a strategy of unrelated diversification have no intention of ___________

Back 38

transferring or leveraging competencies between business units or sharing resources other than cash and general organizational competencies

Front 39

What are the three reasons why a business model based on diversification may lead to a loss of competitive advantage?

Back 39

1. Changes in the industry or company

2. Diversification for the wrong reasons

3. The bureaucratic costs of diversification

Front 40

growth does not create value for the stakeholders; growth is the _________

Back 40

by-product, not the objective of diversification.

Front 41

an unrelated company only has to cope with the bureaucratic cost, while a related company has to cope with both bureaucratic costs and _________

Back 41

from coordination among business units

Front 42

It pays for a company to pursue related diversification when _______(2)

Back 42

1. the company's competencies can be a applied across a greater number of industries

2. the company has superior strategic capabilities that allow it to keep bureaucratic costs under close control. (e.g. encouraging entrepreneurship or by developing value creating organizational culture.

Front 43

it pays for a company to pursue UN-related diversification when _______(2)

Back 43

1. each business unit's functional competencies have few useful applications across industries, but the company's top managers are skilled at raising the profitability of a poorly run business

2. the company managers use their soupier strategic management competencies to improve the competitive advantage of their business units and keep bureaucratic costs under control.