MGT 405 Chapter 6

When is a joint venture an attractive way for a company to enter a new industry?

When it does not have the financial resources/requisites, marketing expertise because it does not understand customer needs

When should a firm consider vertical integration?

When transaction costs are higher than administrative costs.

What are the advantages of unrelated diversification strategy?

(1) Corporate office can contribute to "parenting" and restructuring of businesses (2) Add value by viewing the entire corporation as a family or "portfolio" of businesses and allocating resources to optimize corporate goals of profitability.

Why is acquisition of an existing business an attractive strategy option for entering a promising new industry?

(1) Obtaining resources that help the organization expand product offering/services (2) Opportunity for firms to attain synergy (core competencies, sharing activities, building marketing power) (3) Consolidation within an industry and force other players to merge (4) Enter new market segments

Unrelated Diversification

A firm entering a different business that has little horizontal interaction with other businesses of a firm

What is the essential requirement for different businesses to be "related"?

Businesses sharing intangible and tangible resources

What are the factors that makes it appealing to diversify into a new industry by forming an internal start-up subsidiary to enter and compete in the target industry?

Capture value created by their innovative activities without having to share the wealth, firms can develop new products or services at a lower cost and rely on their own resources

What are the risks of vertical integration

Costs and expenses associated with increased overhead and capital expenditures, loss of flexibility, unbalanced capacities, and additional administrative costs

What is the difference between economies of scale and economies of scope?

Economies of scope refers to cost savings from leveraging core competencies, sharing activities, or building market power. Economies of scale is decreases in cost p/u as absolute output p/period increases.

Diversification

Expansing operations by entering new businesses

Core Competencies

Strategic resources that reflect the collective learning in the organization

Vertical Integration

When a firm becomes its own supplier or distributor.

Related Diversification

The primary benefits are to be derived from horizontal relationships — businesses sharing in/tangible resources