Chapter 8: Strategic Decision Making

Identify and briefly describe the strategic options for companies that are already diversified

-Stick closely with existing business lineup: if the current business offers growth opportunities and added economic value for shareholders -Broaden the diversification base: get more businesses and build positions in new industries, add businesses that will strengthen the businesses that the company already has -Divest some businesses and go back to a narrower diversification base: get out of weak businesses, focus resources on businesses in few arenas -Restructure the company's business lineup through a mix of diversifications and new acquisitions: sell of weak businesses, use cash from divestitures to make acquisitions in other promising industries

What are the four distinct facets of corporate level strategy?

1. Pick new industries to enter and decide on means of entry 2. Initiate actions to boost combined performance of businesses 3. Pursue opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage 4. Establish investment opportunities, steering resources

Explain the significance of the three tests for judging a diversification move. Describe in some detail the three basic strategies that organizations can use to enter new businesses.

1. industry attractiveness test: the industry must be structurally attractive, have resource requirements that match those of the parent company and have good growth, profitability, and ROI 2. The cost of entry test: the cost of entry must not be so high that it exceeds the potential for good profitability 3. The better off test: must offer potential for company's existing businesses and the new business must perform better together under a single corporate umbrella than they would operating independently

Unrelated diversification is a ___________ approach to create shareholder value

A finance driven approach

Identify and briefly describe the six steps associated with evaluating the strategy of a diversified company.

Assessing the attractiveness of the industries the company has diversified into, both individually and as a group. Assessing the competitive strength of the company's business units and drawing a nine-cell matrix to simultaneously portray industry attractiveness and business unit competitive strength. Evaluating the extent of cross-business strategic fit along the value chains of the company's various business units. Checking whether the firm's resources fit the requirements of its present business lineup. Ranking the performance prospects of the businesses from best to worst and determining what the corporate parent's priorities should be in allocating resources to its various businesses. Crafting new strategic moves to improve overall corporate performance.

How can unrelated diversification build shareholder value?

Being part of a larger organization can make things more efficient and cheaper. Spreads risks among many different industries

Why do firms pursue related diversification?

Combining commonalities and having businesses that perform better than just as individual businesses. Strategic fits Spread risk Sharing costs by combining value chains into a single operation Exploiting the common use of a well-known brand name Collaboration across businesses to create new competitive advantages

What are the differences between corporate level and business level strategy? What is corporate level strategy?

Corporate level: deals with the entire organization. It focuses on how to improve the combined performance of the set of businesses the company has diversified into and turning them into competitive advantage. Business level: strengthening the market position, building competitive advantage, and improving the performance of a single line of business unit

Explain the 2 major drawbacks of pursuing unrelated diversification.

Demanding managerial requirements Limited competitive potential: no strategic cross-business benefits in unrelated diversification

The primary approach to corporate level strategy is...

Diversification

What are the distinguishing characteristics of a multinational diversification strategy?

Diversification in products and geographic locations such as country markets or regions you're going to compete in

Discuss and explain why building shareholder value is the ultimate justification for diversifying?

Give shareholders a value that they can't capture on their own. You have to give shareholders a reason to pick your business.

How can strategic fits and economies of scope lead to a competitive advantage?

It allows the businesses to share resources or transfer them from business to business at a low cost

How can related diversification build shareholder value?

It can result in building a multi-business company that is greater as a whole than the sum of its parts (synergy). Related diversification allows to convert cross-business strategic fit into competitive advantage over business rivals

Conglomerates

Major corporation that owns smaller companies in unrelated industries

What are the pros and cons or what is the appeal of unrelated diversification?

Pros: Companies don't have to go for linkages and partnerships. They just go for financial economies Expansion from existing markets Cons: Cannot combine value chains and may lack expertise or knowledge

What is related diversification?

Related diversification is when the businesses possess competitively valuable cross-business value chain and resource commonalities; building the company around businesses where there is a good strategic fit around corresponding value chain activities (Johnson & Johnson)

What are strategic fits, economies of scope, and synergies and why are they important in the pursuit of related diversification?

Strategic fits: When one or more value chain activities of different businesses are similar to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities Economies of scope: cost reductions that flow from operation in multiple businesses Synergies: Existing business and new businesses perform better together than they would operating individually

In what areas can strategic fits be captured?

Supply chain, R&D and technology, sales and marketing, distribution-related, and customer service

Why do firms pursue unrelated diversification?

They're seeking any advantage in any industry to get good financial results; adding new, unrelated products. Companies might engage in unrelated diversification due to cost efficiencies. It may offset costs during a low season.

When should a firm diversify?

When growth opportunities are limited, buyer demand is flat/declining, or there are changing industry conditions

Joint venture

an agreement between two or more companies to share a business project

Acquisition

buying a firm that will be a good fit for your existing businesses

What is unrelated diversification?

operating several businesses under one ownership that are not related to one another (Samsung: phones, appliances)

What is diversification?

the process of firms expanding their operations by entering new businesses