Strategic Management
Summary of Chapter-7(Chapter-10) 1. Strategic managers often pursue diversification when their companies are generating free cash flow, that is, financial resources they do not need to maintain a competitive advantage in the company’s core industry that can be used to fund profitable new business ventures. 2. A diversified company can create value by (a) transferring competencies among existing businesses, (b) leveraging competencies to create new businesses, (c) sharing resources to realize economies of scope, (d) using product bundling, and (e) taking advantage of general organizational competencies that enhance the performance of all business units within a diversified company. The bureaucratic costs of diversification rise as a function of the number of independent business units within a company and the extent to which managers have to coordinate the transfer of resources between those business units. 3. Diversification motivated by a desire to pool risks or achieve greater growth often results in falling profitability. 4. There are three methods companies use to enter new industries: internal new venturing, acquisition, and joint ventures. 5. Internal new venturing is used to enter a new industry when a company has a set of valuable competencies in its existing businesses that can be leveraged or recombined to enter a new business or industry. 6. Many internal ventures fail because of entry on too small a scale, poor commercialization, and poor corporate management of the internal venture process. Guarding against failure involves a carefully planned approach toward project selection and management, integration of R&D and marketing to improve the chance new products will be commercially successful, and entry on a scale large enough to result in competitive advantage. 7. Acquisitions are often the best way to enter a new industry when a company lacks the competencies required competing in a new industry, and it can purchase a company that does have those competencies at a reasonable price. Acquisitions are also the method chosen to enter new industries when there are high barriers to entry and a company is unwilling to accept the time frame, development costs, and risks associated with pursuing internal new venturing. 8. Acquisitions are unprofitable when strategic managers (a) underestimate the problems associated with integrating an acquired company, (b) overestimate the profit that can be created from an acquisition, (c) pay too much for the acquired company, and (d) perform inadequate pre-acquisition screening to ensure the acquired company will increase the profitability of the whole company. Guarding against acquisition failure requires careful preacquisition screening, a carefully selected bidding strategy, effective organizational design to successfully integrate the operations of the acquired company into the whole company, and managers who develop a general managerial competency by learning from their experience of past acquisitions. 9. Joint ventures are used to enter a new industry when (a) the risks and costs associated with setting up a new business unit are more than a company is willing to assume on its own, and (b) a company can increase the probability that its entry into a new industry will result in a successful new business by teaming up with another company that has skills and assets that complement its own. 10. Restructuring is often required to correct the problems that result from (a) a business model that no longer creates competitive advantage,(b) the inability of investors to assess the competitive advantage of a highly diversified company from its financial statements, (c) excessive diversification because top managers who desire to pursue empire building that results in growth without profitability, and (d) innovations in strategic management such as strategic alliances and outsourcing that reduce the advantages of vertical integration and diversification. Department of Finance
Jagannath University, Dhaka.
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