MGMT 449 FINAL EXAM VERIFIED STUDY GUIDE
Diversification - Answers - Initiatives must create value for shareholders through:
- Mergers and acquisitions
- Strategic alliances
- Joint ventures
- Internal development
Diversification should create synergy
- Business 1 plus Business 2 equals more than two.
A firm may diversify into RELATED businesses - Answers - - Benefits derive from
horizontal relationships:
- Sharing intangible resources such as core competencies in marketing
- Sharing tangible resources such as production facilities, distribution channels via
vertical integration
A firm may diversify into UNRELATED businesses - Answers - Benefits derive from
hierarchical relationships
-Value creation derived from the corporate office
-Leveraging support activities in the value chain
Related diversification - Answers - enables a firm to benefit from horizontal relationships
across different businesses
Economies of scope - Answers - Allow businesses to:
- Leverage core competencies
- Sharing related activities
- Enjoy greater revenues, enhance differentiation.
Related businesses gain MARKET POWER by: - Answers - pooled negotiating power
and vertical integration
Core Competencies - Answers - Reflect the collective learning in organizations. Can
lead to the creation of value and synergy if:
- They create superior customer value.
- The value-chain elements in separate businesses require similar skills
- They are difficult for competitors to imitate or find substitutes for
Corporations can also achieve synergy by SHARING ACTIVITIES across their business
units - Answers - Sharing tangible and value-creating activities can provide payoffs:
- Cost savings through elimination of jobs, facilities and related expenses, or
economies of scale>
- Revenue enhancements through increased differentiation and sales growth.
,Market Power - Answers - Can lead to the creation of value and synergy through:
- Pooled Negotiating Power: gaining greater bargaining power with suppliers and
customers
- Vertical Integration: a firm becomes its own supplier or distributor through Backward
Integration and Forward Integration
Related Diversification: Vertical Integration, Issues: - Answers - - Is the company
satisfied with the quality of the value that its present suppliers and distributors are
providing?
- Are there activities in the industry value chain presently being outsourced or performed
independently by others that are viable source of future profits?
- Is there a high level of stability in the demand for the organization's product?
- Does the company have the necessary competencies to execute the vertical
integration strategies?
- Will the vertical integration initiatives have potential negative impacts on the firm's
stakeholders?
Transaction Cost Perspective - Answers - Every market transaction involves some
transaction costs:
- Search costs
- Negotiating costs
- Contract costs
- Monitoring costs
- Enforcement costs
- Need for transaction specific investments
- Administrative costs
Unrelated Diversification - Answers - Enables a firm to benefit from vertical or
hierarchical relationships between the corporate office and individual business units
through:
- The corporate Parenting Advantage (providing competent central functions)
- Restructuring to redistribute assets (asset, capital, and management restructuring)
- Portfolio Management (BCG growth/share matrix)
Parenting - Answers - Allows the corporate office to create value through management
expertise and competent central functions
In RESTRUCTURING parent intervenes - Answers - - Asset restructuring involves the
sale of unproductive assets
- Capital restructuring involves changing the debt-equity mix, adding debt or equity
- Management restructuring involves changes in the top management team,
organizational structure, and reporting relationships
Portfolio Management - Answers - Involves a better understanding of the competitive
position of an overall portfolio or family businesses by:
, - Suggesting strategic alternatives for each business
- Identify priorities for the allocation of resources
- Using Boston Consulting Group's (BCG) growth/share matrix
Unrelated Diversification: Limitations of Portfolio Management - Answers - - SBU are
compared on only 2 dimensions and each SBU is considered a standalone entity
+ Are these the only factor that really matter?
+ Can every unit be accurately compared on that basis? What about possible
synergies?
- An oversimplified graphical model is not substitute for managers' experience
- Following strict and simplistic rules for resource allocation can be detrimental to a
firm's long-term viability
Goal of Diversification - Answers - Diversification can reduce variability in revenues and
profits over time. However,
- Stockholders can diversify portfolios at a much lower cost/
- Stockholders don't have to worry about integrating the acquisition into their portfolio
- Economic cycles are difficult to predict, so why diversify?
Choice to diversify most be part of an overall diversification strategy
Means of Diversification - Answers - Diversification can be accomplished via:
- Mergers and acquisition
- Divestments
- Pooling resources of other companies with a firm's own resource base through
strategic alliances and joint ventures.
- Internal development through corporate entrepreneurship or new venture
development
Reasons for Diversification Failures - Answers - Acquisition can destroy value by:
- Paying a premium for target firm
- Failing to integrate the activities of the newly acquired businesses into the corporate
family.
- Undertaking diversification initiatives that are too easily imitated by the competition
Mergers - Answers - Involve a combination or consolidation of 2 firms to form a new
legal entity
- On a relative equal basis
- Are relatively rare
Acquisitions - Answers - involve one firm buying another either through stock purchase,
cash, or the issuance of debt
Motives of Mergers and Acquisitions - Answers - -Acquiring is faster than building
-Acquiring valuable resources can expand product offerings and services and/or enter
new market segments.
- Mergers and acquisitions help a firm develop synergy:
Diversification - Answers - Initiatives must create value for shareholders through:
- Mergers and acquisitions
- Strategic alliances
- Joint ventures
- Internal development
Diversification should create synergy
- Business 1 plus Business 2 equals more than two.
A firm may diversify into RELATED businesses - Answers - - Benefits derive from
horizontal relationships:
- Sharing intangible resources such as core competencies in marketing
- Sharing tangible resources such as production facilities, distribution channels via
vertical integration
A firm may diversify into UNRELATED businesses - Answers - Benefits derive from
hierarchical relationships
-Value creation derived from the corporate office
-Leveraging support activities in the value chain
Related diversification - Answers - enables a firm to benefit from horizontal relationships
across different businesses
Economies of scope - Answers - Allow businesses to:
- Leverage core competencies
- Sharing related activities
- Enjoy greater revenues, enhance differentiation.
Related businesses gain MARKET POWER by: - Answers - pooled negotiating power
and vertical integration
Core Competencies - Answers - Reflect the collective learning in organizations. Can
lead to the creation of value and synergy if:
- They create superior customer value.
- The value-chain elements in separate businesses require similar skills
- They are difficult for competitors to imitate or find substitutes for
Corporations can also achieve synergy by SHARING ACTIVITIES across their business
units - Answers - Sharing tangible and value-creating activities can provide payoffs:
- Cost savings through elimination of jobs, facilities and related expenses, or
economies of scale>
- Revenue enhancements through increased differentiation and sales growth.
,Market Power - Answers - Can lead to the creation of value and synergy through:
- Pooled Negotiating Power: gaining greater bargaining power with suppliers and
customers
- Vertical Integration: a firm becomes its own supplier or distributor through Backward
Integration and Forward Integration
Related Diversification: Vertical Integration, Issues: - Answers - - Is the company
satisfied with the quality of the value that its present suppliers and distributors are
providing?
- Are there activities in the industry value chain presently being outsourced or performed
independently by others that are viable source of future profits?
- Is there a high level of stability in the demand for the organization's product?
- Does the company have the necessary competencies to execute the vertical
integration strategies?
- Will the vertical integration initiatives have potential negative impacts on the firm's
stakeholders?
Transaction Cost Perspective - Answers - Every market transaction involves some
transaction costs:
- Search costs
- Negotiating costs
- Contract costs
- Monitoring costs
- Enforcement costs
- Need for transaction specific investments
- Administrative costs
Unrelated Diversification - Answers - Enables a firm to benefit from vertical or
hierarchical relationships between the corporate office and individual business units
through:
- The corporate Parenting Advantage (providing competent central functions)
- Restructuring to redistribute assets (asset, capital, and management restructuring)
- Portfolio Management (BCG growth/share matrix)
Parenting - Answers - Allows the corporate office to create value through management
expertise and competent central functions
In RESTRUCTURING parent intervenes - Answers - - Asset restructuring involves the
sale of unproductive assets
- Capital restructuring involves changing the debt-equity mix, adding debt or equity
- Management restructuring involves changes in the top management team,
organizational structure, and reporting relationships
Portfolio Management - Answers - Involves a better understanding of the competitive
position of an overall portfolio or family businesses by:
, - Suggesting strategic alternatives for each business
- Identify priorities for the allocation of resources
- Using Boston Consulting Group's (BCG) growth/share matrix
Unrelated Diversification: Limitations of Portfolio Management - Answers - - SBU are
compared on only 2 dimensions and each SBU is considered a standalone entity
+ Are these the only factor that really matter?
+ Can every unit be accurately compared on that basis? What about possible
synergies?
- An oversimplified graphical model is not substitute for managers' experience
- Following strict and simplistic rules for resource allocation can be detrimental to a
firm's long-term viability
Goal of Diversification - Answers - Diversification can reduce variability in revenues and
profits over time. However,
- Stockholders can diversify portfolios at a much lower cost/
- Stockholders don't have to worry about integrating the acquisition into their portfolio
- Economic cycles are difficult to predict, so why diversify?
Choice to diversify most be part of an overall diversification strategy
Means of Diversification - Answers - Diversification can be accomplished via:
- Mergers and acquisition
- Divestments
- Pooling resources of other companies with a firm's own resource base through
strategic alliances and joint ventures.
- Internal development through corporate entrepreneurship or new venture
development
Reasons for Diversification Failures - Answers - Acquisition can destroy value by:
- Paying a premium for target firm
- Failing to integrate the activities of the newly acquired businesses into the corporate
family.
- Undertaking diversification initiatives that are too easily imitated by the competition
Mergers - Answers - Involve a combination or consolidation of 2 firms to form a new
legal entity
- On a relative equal basis
- Are relatively rare
Acquisitions - Answers - involve one firm buying another either through stock purchase,
cash, or the issuance of debt
Motives of Mergers and Acquisitions - Answers - -Acquiring is faster than building
-Acquiring valuable resources can expand product offerings and services and/or enter
new market segments.
- Mergers and acquisitions help a firm develop synergy:
