Such cost-saving benefits along the value chains of related businesses are called economies of scope—a concept distinct from economies of scale. N Whether the business is in an industry with attractive growth potential. 20 relative market share), but a 10 percent share is actually strong if the leader's share is only 12 percent (a 0.
C. a company's costs to enter the target industry are so high that the potentials for good profitability and return on investment are eroded. N The emergence of new technologies that threaten the survival of one or more important businesses. Chapter 8 • Diversification Strategies 178. businesses will be partially offset by cyclical upswings in its other businesses, thus producing somewhat less earnings volatility. For example, business units in rapidly growing industries are often cash hogs—so labeled because the cash flows they are able to generate from internal operations aren't big enough to fund their operations and capital requirements for growth. Diversification merits strong consideration whenever a single-business company A. has integrated - Brainly.com. Different businesses have different cash flow and investment characteristics. E. there is an absence of competitively valuable strategic fits between their respective value chains.
A beer brewer acquiring a maker of aluminum cans. Diversification Strategy Options. D. evaluating the extent of cross-business strategic fits. Entry barriers for startup companies are likely to be high in attractive industries—if barriers were low, a rush of new entrants would soon erode the potential for high profitability.
N A multinational diversification strategy provides opportunities for sister businesses to collaborate in developing and leveraging competitively valuable resources and capabilities. The core concepts and analytical techniques underlying each of these steps merit further discussion. The rationale for related diversification is strategic: Diversify into businesses with strategic fits along their respective value chains, capitalize on strategic-fit relationships to gain competitive advantage over rivals whose operations do not offer comparable strategic fit benefits, and then use competitive advantage to boost profitability and achieve the desired 1 + 1 = 3 impact on shareholder value. Strategic uses of corporate financial resources (see Figure 8. Some diversified companies are really dominant-business enterprises—one major "core" business accounts for 50 to 80 percent of total revenues and a collection of small related or unrelated businesses accounts for the remainder. What Does Crafting a Diversification Strategy Entail? Diversification merits strong consideration whenever a single-business company based. It can move into one or two large new businesses or a greater number of small ones. The following three questions help reveal whether a diversified company has adequate nonfinancial resources: 1. But it is risky for a single-business company to continue to keep all of its eggs in one industry basket when, for whatever reasons, its long-term prospects for continued good performance start to dim. A. which businesses in the portfolio have the most potential for strategic fit and resource fit. 7 percent of revenues); as of December 31, 2018, Microsoft's balance sheet showed the company had cash, cash equivalents, and short-term investments totaling $127. The task of crafting a diversified company's overall or corporate strategy falls squarely in the lap of top-level executives and involves four distinct facets: 1.
Three, the benefits of cross-business strategic fits are not automatically realized when a company diversifies into related businesses—the benefits materialize only after management has successfully pursued internal actions to capture them. 90 Costs relative to competitors' costs 0. Reproduction and distribution of the contents are expressly prohibited without the author's written permission. A diversified company's strategy fails the resource fit test when its financial resources are stretched across so many businesses that its credit rating is impaired. C. Diversification merits strong consideration whenever a single-business company website. Mainly in either technology related activities or sales and marketing activities. The Path to Enhancing Shareholder Value via Unrelated Diversification For a strategy of unrelated diversification to produce companywide financial results above and beyond what the businesses could generate operating as stand-alone entities, corporate executives should pursue five outcomes: 1.
A diversified company must guard against overtaxing its resources and capabilities, a condition that can arise when (1) it goes on an acquisition spree and management is called upon to assimilate and oversee many new businesses quickly or (2) it lacks sufficient supplies of competitively valuable resources and capabilities that it can transfer from one or more existing business to bolster the competitiveness of resource-deficient businesses. C. Related diversification is particularly well-suited for the use of offensive strategies and capturing valuable financial fits. C. Identifying opportunities to achieve greater economies of scope. D. Diversification merits strong consideration whenever a single-business company product page. offers potential for the company's existing businesses and new businesses to perform better together under a single corporate umbrella. Also, normally, the revenue and earnings outlook for businesses in fast-growing businesses is better than for businesses in slow-growing businesses. A business unit's relative market share is defined as the ratio of its market share to the market share held by the largest rival firm in the industry, with market share measured in unit volume, not dollars. C. A PC producer deciding to diversify into producing and marketing its own brands of MP3 players and LCD TVs. Whether getting into a new business has potential to enhance shareholder value hinges on whether a company's entry into that business can pass the attractiveness test, the cost-of-entry test, and the better-off test.
Does the company have adequate financial strength to fund its different businesses, pursue growth via new acquisitions, and maintain a healthy credit rating? For a diversified company to be a strong performer, a substantial portion of its revenues and profits must come from business units in industries with relatively high industry attractiveness scores. Which of the following statements about corporate diversification is incorrect? Any recent moves to. For example, when Disney acquired Marvel Comics, Disney executives immediately made Marvel's iconic Spiderman character available for use at Disney theme parks, in Disney retail stores, and in Disney video games. C. helps a company escape the rigors of competition in its present business. The value of determining the relative competitive strength of each business a company has diversified into is to. Others are broadly diversified around a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both. C. There is a strong chance that the combined competitive advantages of the various businesses will produce a 1 + 1 = 3 performance outcome as opposed to just a 1 + 1 = 2 performance outcome.
Acquiring new businesses with attractive profit prospects. Cross-business strategic fits can be derived from. 1 Identifying a Diversified Company's Strategy. 10 Hard-to-resolve problems in one or more businesses or big strategic mistakes (sloppy analysis of the industries a company is getting into, discovering that the problems of a newly acquired business will require considerably more time and money to correct than was expected, or being overly optimistic about a newly-acquired company's future prospects) can cause a precipitous drop in corporate earnings and crash the parent company's stock price.
And buying a well-positioned company in an appealing industry often entails a high acquisition cost that makes passing the cost-of-entry test less likely. 35 Industry profitability 0. In 2012, Kraft Foods instituted a dramatic restructuring by dividing itself into two companies. Subpar performance by some business units is bound to occur, thereby raising questions of whether to divest them or keep them and attempt a turnaround.
N Combining the related value chain activities of separate businesses into a single operation to achieve lower costs. In companies pursuing unrelated diversification, top executives spend much time and effort screening acquisition candidates and evaluating the pros and cons of keeping or divesting existing businesses, using such criteria as: n Whether the business can meet corporate targets for profitability and return on investment. C. shareholders will view the contemplated diversification move as attractive. This can provide a competitive advantage over single business rivals with small cash flows from operations, a weaker credit rating, and limited ability to raise capital from external sources. Indeed, in actual practice, the business make-up of diversified companies varies considerably.
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