Strategic Management - Chapter 10: Corporate-Level Strategy: Related and Unrelated Diversificationt

What is a diversified company?

A company that makes and sells products in two or more different or distinct industries

What the general ways in which diversification could lead to a loss of a competitive advantage?

1) Changes in the industry or inside a company that occur over time 2) Diversification pursued for the wrong reasons 3) Excessive diversification that results in bureaucratic costs

It pays for a company to pursue UNRELATED diversification when......

1) Each of the business unit's functional competencies have few useful applications across industries, but the company's top managers are skilled at raising the profitability of poorly run businesses and.... 2) The company's managers use their superior strategic management competencies to improve the competitive advantage of their business units and keep bureaucratic costs under control

How can a company promote entrepreneurship?

1) Encourage managers to take 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 pursuing too many risky ventures that have a low probability of generating a profitable return on investment.

What three organizational competencies help a company increase its performance and profitability

1) Entrepreneurial capabilities 2) Organizational design capabilities 3) Strategic capabilities

How can changes in industry/company lead to issues in diversification?

1) Environment changes rapidly and unpredictably 2) Future success of business is hard to predict with this strategy 3) Companies must be willing to divest business units as rapidly as they acquire them, but managers do not behave this way, typically

How can a company help to ensure a successful new venture?

1) Excel at exploratory and development research 2) Have connections with research institutions and make sure scientists who understand R&D are in charge of the funds 3) Foster a close relationship between R&D and marketing to increase probability of commercial success 4) Foster close links between R&D and manufacturing 5) Think big to construct efficient manufacturing facilities

What are the three methods managers use for entering new industries?

1) Internal new ventures 2) Acquisitions 3) Joint ventures

What is significant in new venturing regarding scale of entry?

1) Large scale entry is often a critical precondition of the success of a new venture 2) Large can entry results in far great returns than if a company enters on a small scale to limit investment and reduce potential losses 3) Large scale entrants can more rapidly realize scale economies, build brand loyalty, and gain access to distribution channels

What are the three reasons for the relatively high rate of failure with new ventures?

1) Market entry on too small a scale 2) Poor commercialization of the new-venture product 3) Poor corporate management of the new-venture division

What are the two types of diversification?

1) Related diversification 2) Unrelated diversification

When sharing resources and capabilities, what are the two major sources of cost reductions?

1) Sharing across business units lowers cost structure compared to "going it alone" 2) Brand building (Nike) if the differentiated products are able to be placed in suitable endorsements spots

What is an argument against companies diversifying to ensure they have a "steady" stream of revenue in the face of industry downtrun?

1) Stockholders can eliminate risk by diversifying their own portfolios, thus diversification is an unproductive use of resources, we should instead give shareholders dividends 2) Research suggests this tactic does not work as industry cycles are unpredictable, and you could end up as Kodak with industry downturns in MULTIPLE industries at the same time

It pays for a company to pursue RELATED diversification when......

1) The company's competencies can be applied across a greater number of industries and... 2) The company has superior strategic capabilities that that allow it to keep bureaucratic costs under close control - perhaps by encouraging entrepreneurship or by developing a value creating org. culture

What affects the level of bureaucratic costs in a diversified organization?

1) The number of business units in a company's portfolio 2) The degree to which coordination is required between these different business units to realize the advantages of diversification

With regards to a turnaround strategy, how do do we improve the performance of the acquired company?

1) Top managers of the acquired company are replaced with a more aggressive top management team 2) The new team sells of expensive assets such as under- performing divisions, executive jets, and elaborate corporate headquarters 3) Terminates staff to reduce cost structure 4) Devises new strategies to improve the performance of the business and improve efficiency, quality, innovation, and customer responsiveness 5) Pay for performance bonus structure is introduced 6) Stretch goals are introduced

What are the five primary ways to pursue a multibusiness model based on diversification to increase profitability?

1) Transfer competencies between business units 2) Leverage competencies to create business units in new industries 3) Share resources between business units to realize synergies or economies of scope 4) Use product bundling 5) Utilize GENERAL organizational competencies that increase the performance of ALL a company's business units

What is significant in new venturing regarding implementation?

1) companies will often establish too many internal new venture divisions at the same time and cut funding to each 2) Extensive advanced planning is not done 3) Failure to anticipate the time and costs involved (i.e., killing a business unit off after 3 years if it takes 5 to become profitable)

What do studies show regarding too much diversification?

1) it may reduce company profitability (reduce value rather than creating it)

What percentage of products reaching the marketplace do not generate an adequate return?

33-60%

What is unrelated diversification?

A corporate-level strategy based on a multi-business model that uses general organizational competencies to increase the performance of all the company's business units. This is done through general org. competencies or their internal capital market

What is related diversification?

A corporate-level strategy based on the goal of establishing a business unit in a new industry that is related to a company's existing business units by some form of commonality or linkage between their value-chain functions

What is internal capital market?

A corporate-level strategy whereby the firm's headquarters assesses the performance of business units and allocates money across them. Cash generated by units that are profitable but have poor investment within their business is used to cross-subsidize businesses that need cash and have strong promise for long-run profitability

What is the takeaway from sharing of resources and capabilities?

Diversification to obtain economies of scope is possible only when SIGNIFICANT commonalities exist, and it should only be pursued when the competencies will result in SIGNIFICANT synergies that will achieve a competitive advantage for one or more of a company's new/existing business units

What is a hallmark of superior strategic management capabilities?

Managers that possess these intangible, hard-to-define governance skills manage different business units in a way that enables these units to perform better than they would if they were independent companies

What is a major implication of product bundling?

While useful, bundling can occur through contracts and partnerships. For it to serve as justification for diversification, there must be a strong need for coordination that cannot be overcome through market contracts

What are organizational design skills?

The ability of a company's managers to create a structure, culture, and control systems that motivate and coordinate employees to perform at a high level

What are implications regarding internal and external capital markets?

The amount of value that can be created through an internal market is directly proportional to the inefficiency of the external capital market. It is not very common in the US, where we have many regulations. It is more common in developing countries. Companies pursuing unrelated diversification have NO intention of sharing anything other than cash and general organizational competencies across business units.

How do we choose between related versus unrelated diversification?

The choice depends on a comparison of the benefits of each strategy against the bureaucratic costs of pursuing it.

What is diversification?

The process of entering new industries, distinct from a company's core or original industry, to make new kinds of products for customers in new markets

What is the leveraging of competencies?

The process of taking a distinctive competency developed by a business unit in one industry and using it o create a new business unit in a different industry (Apple going from PCs to phones, Microsofit going from PC to videogames and search engines)

What is internal new venturing?

The process of transferring resources to, and creating a new business unit or division in, a new industry to innovate new kinds of products

What are economies of SCOPE?

The synergies that arise when one or more of a diversified company's business units are able to lower costs or increase differentiation because they can more effectively pool, share, and utilize expensive resources or capabilities

How do we transfer competencies across businesses?

We find the commonality that allows both businesses to operate more effectively and exploit it (Marketing and Sales prowess of Phillip Morris and the acquisition of Miller brewing Co.)

What is a turnaround strategy?

When managers of a diversified company identify inefficient, poorly managed companies in other industries and then acquire and restructure them to improve their performance, and thus the profitability of the total corporation.

What is significant in new venturing regarding commercialization?

new ventures may fail because it is marketing a product based on tech for which there is no demand, or the company fails to correctly position or differentiate the product in the market to attract consumers

An unrelated diversified company only has to cope with.....

the bureaucratic costs that arise from the NUMBER of business units it has (note: no coordination is needed)

A related diversified company has to cope with....

the bureaucratic costs that arise from the NUMBER of business units it has AND the coordination between those.