SM CHAPTER 6

• Diversification


  The process firms expand their business by entering new businesses — whether via mergers and acquisitions, strategic alliances and joint ventures, or internal development
• Diversification


  • Must be justified by the creation of value for shareholders
  • Firms can either diversify into related or unrelated businesses
  • Diversification should be synergistic
• Related diversification


  The primary benefits are to be derived from horizontal relationships — businesses sharing intangible resources (i.e., core competencies) and tangible resources (e.g., production facilities, distribution channels)
• Unrelated diversification


  The primary benefits are derived largely from vertical relationships, that is, value that is created by the corporate office
• Unrelated diversification


  • Few benefits to be derived from horizontal relationships
  • Benefits are to be gained from vertical (or hierarchical) relationships, i.e., the creation of synergies from the interaction of the corporate office with the individual business units
• Economies of scope


  Cost savings due to the breadth of operations
• Core competencies


  The "glue" that binds existing businesses together or as the engine that fuels new business growth
• Core competencies


  • Must enhance competitive advantage(s) by creating superior customer value
  • Different businesses in the corporation must be similar in at least one important way to benefit from the core competence
  • Must be difficult for competitors to imitate or find substitutes for
• Sharing activities


  Synergy can be achieved by sharing tangible activities across business units, such as common manufacturing facilities, distribution channels, and sales forces
• Sharing activities


  • Provide cost savings and revenue enhancements
• Market power


  A company's relative ability to manipulate the price of an item in the marketplace by affecting the supply or demand
• Pooled negotiating power


  Similar businesses working together or the affiliation of a business with a strong parent can strengthen an organization's bargaining power in relation to suppliers and customers as well as enhance its position vis a vis its competitors
• Vertical integration


  Expansion or extension of the firm by integrating preceding or successive productive processes
• Vertical integration


  • Involves considering: quality of value from current suppliers/distributors, activities in the industry value chain that are viable sources of future profits, stability in demand, necessary competencies, potential negative impacts on stakeholders
• Transaction costs


  Costs involved in a transaction, including search, negotiating, contracting, monitoring, and enforcement
• Administrative costs


  Costs involved in vertical integration
• Parenting advantage


  The positive contribution of the corporate office to "parenting" and restructuring of (often acquired) businesses
• Restructuring


  The corporate office trying to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change
• Restructuring


  • Types: Asset Restructuring, Capital Restructuring, Management Restructuring
• Portfolio management

  The idea of a balanced portfolio of businesses whose profitability, growth, and cash flow characteristics would complement each other, and add up to satisfactory overall corporate performance
• Diversification should not be undertaken solely to reduce risk, as shareholders can diversify their portfolios more cheaply than corporations
• Mergers and acquisitions (M&A)

  Growth through M&A has played a critical role in the success of many corporations, providing speed, resources, and the ability to expand product offerings and enter new markets
• Mergers and acquisitions


  • Potential advantages: obtaining valuable resources, achieving synergy, industry consolidation
  • Potential limitations: high takeover premiums, imitation by competitors, managerial ego and credibility issues, cultural clashes
• Divestment


  Corporate managers often find it necessary to divest businesses from their portfolios to enhance competitive position
• Strategic alliances and joint ventures


  Cooperative relationships with potential advantages such as entry into new markets, reducing costs, and developing/diffusing new technologies
• Strategic alliances and joint ventures

  • Potential limitations: lack of complementary strengths, limited synergy opportunities, low trust, and insufficient attention to relationship nurturing
• Internal development (intrapreneurship)


  Firms can diversify via corporate entrepreneurship and new venture development, capturing the full value of innovative endeavors
• Internal development


  • Advantages: ability to capture full value, potentially lower cost than external funding
  • Disadvantages: time-consuming nature, particularly important in fast-changing environments
• Growth for growth's sake


  Managerial motives that can erode value creation, such as executives' incentives to grow the size of the firm for prestige, compensation, and excitement
• Egotism


  Managerial motives that can erode value creation, such as pride and unwillingness to back down, even when detrimental to the firm
• Anti-takeover tactics


  Efforts by management to prevent hostile or unfriendly takeovers, often in management's best interests but not shareholders'