Chapter 6: Corporate Level Strategy Creating Value Through Diversification

Strategic Management

What is diversification?

Expanding operations by entering new businesses.

What is synergy?

When businesses create more value together than separately.

What should diversification create?

Shareholder value and synergy.

Why do diversification efforts fail?

Paying too much, poor integration, and easily imitated strategies.

What is related diversification?

Diversifying into businesses with similarities that can share resources and activities.

What is unrelated diversification?

Diversifying into businesses that are largely different and managed through the corporate office.

What are economies of scope?

Cost savings from sharing resources and activities across businesses

What is market power?

Competitive advantages gained through pooled negotiating power and vertical integration

What are core competencies?

Collective strengths and learning that create competitive advantage.

What are the three conditions for core competencies to create value?

Superior customer value, similar skills across businesses, and difficult imitation.

What is vertical integration?

Owning additional parts of the value chain.

What is the value chain?

Activities involved in creating and delivering a product or service.

What is the transaction cost perspective?

Every market transaction involves costs such as searching, negotiating, monitoring, and enforcing contracts.

What is the parenting advantage?

Value created by the corporate office through expertise and support.

What is restructuring?

Changing assets, capital structure, or management to improve performance.

What are the three types of restructuring?

Asset, capital, and management restructuring.

What is portfolio management?

Evaluating a corporation's businesses to allocate resources effectively.

What is the BCG Matrix used for?

Analyzing a firm's portfolio of businesses.

What are the four BCG categories?

Stars, Question Marks, Cash Cows, and Dogs.

What are the four main ways to diversify?

Mergers, acquisitions, divestments, strategic alliances/joint ventures, and internal development.

What is a merger?

Two firms combine to form a new company.

What is an acquisition?

One company purchases another.

Why do firms pursue mergers and acquisitions?

Gain resources, enter new markets, create synergies, and increase market power.

What are limitations of mergers and acquisitions?

High premiums, imitation, manager ego, and cultural conflicts.

What is divestment?

Selling part of a business to improve performance or raise cash.

Why is divestment difficult?

Emotions, valuation, timing, finding buyers, and communicating the deal.

What is a strategic alliance?

A cooperative relationship between firms.

What is a joint venture?

A shared business venture between firms.

What makes alliances successful?

Complementary strengths, unique capabilities, compatibility, and trust.

What are examples of opportunistic alliance behaviors?

Withholding information, non-compliance, misuse of intellectual property, and power plays.

What is internal development?

Creating new businesses internally instead of acquiring or partnering.

What are advantages of internal development?

No profit sharing, no integration problems, and no cultural conflicts.

What are limitations of internal development?

Time-consuming and requires ongoing capability development.