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MGT 460 : Strategic Management- Chapter 8 : Corporate Strategy

by: Winn

MGT 460 : Strategic Management- Chapter 8 : Corporate Strategy MGT 460

Marketplace > Marshall University > MGT 460 > MGT 460 Strategic Management Chapter 8 Corporate Strategy
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Learning Objective , term and concepts
Strategic Management
Dr. Uyi Lawani
Class Notes
Strategic, Management, Corporate, strategy
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This 5 page Class Notes was uploaded by Winn on Saturday March 5, 2016. The Class Notes belongs to MGT 460 at Marshall University taught by Dr. Uyi Lawani in Spring 2016. Since its upload, it has received 19 views.

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Date Created: 03/05/16
Chapter 8 : Corporate Strategy Diversification and the Multibusiness Company Explaining Important To Remember Most Important Learning Objective : 1) Understand when and how business diversification can enhance shareholder value 2) Gain an understanding of how related diversification strategies can product cross- business strategic fit capable of delivering competitive advantage 3) Become aware of the merits and risks of corporate strategies keyed to unrelated diversification 4) Gain command of the analytical tools for evaluating a company’s diversification 5) Understand a diversified company’s four main corporate strategy options for solidifying its diversification strategy and improving company performance. 6) Key and terms Organizing and Explaining the Term and Concepts: 1) What does crafting a diversification strategy entail ? a) Picking new industries to enter and deciding on the means of entry :  The decision to pursue business diversification requires that management decide which new industries to enter and whether to enter by starting a new business from the ground up. b) Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage:  To determine whether there are opportunities to strengthen a diversifies company’s business by such means as transferring competitively valuable resources and capabilities from one business to another. c) Establishing investment priorities and steering corporate resources into the most attractive business units. d) Initiating actions to boost the combined performance of the corporation’s collection of businesses 1- Sticking closely with the existing business lineup 2- Broadening the scope of diversification by entering additional industries 3- Divesting some businesses and retrenching to some additional industries 4- Restructuring the entire company 2) When business diversification becomes a consideration Diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business. : 1- It spots chance for expanding into industries whose technologies and products complement its present business. 2- It can leverage its collection of resources and capabilities by expanding into businesses where these resources and capabilities are valuable competitive assets 3- Diversifying into additional businesses opens new avenues for reducing costs. 4- It has a powerful and well-known brand name that can be transferred to the products of other business. 3) Building shareholder value: The ultimate justification for diversifying: added a long-term economic value for shareholders 1- The industry attractiveness test 2- The cost-of-entry test: the cost to enter the target industry must not be so high as to exceed the potential for good profitability. 3- The better-off test: how much synergy will be gained by diversifying into the industry 4) Approaches to diversifying the business lineup : a) Diversification by Acquisition of an Existing business b) Entering a new line of business through internal development :  Internal development of new businesses has become an increasingly important means for companies to diversify and is often referred to as corporate venturing or new venture development.  Internal development appeals when (1)The parent company already has in-house most of the skills and resources it needs to piece a new business and compete effectively (2)There is ample time to launch the business (3)The internal cost of entry is lower than the cost of entry via acquisition (4)The targeted industry is populated with many relatively small firms (5)Adding new production capacity will not adversely impact the supply- demand balance in the industry (6)Incumbent firms are to be slow or ineffective c) Joint Ventures : 1- Good vehicle for pursuing opportunity that is too complex 2- Make sense when chances in a new industry require a broader range of competencies d) Choosing a mode of entry : _ The question of critical resources and capabilities _ The question of entry barriers _ The question of speed 5) Choosing the diversification path : Related versus unrelated businesses  Businesses are said to be related when their value chains exhibit competitively important cross-business relationships.  Businesses are said to be unrelated when the resource requirements and key value chain activities are so dissimilar that no competitively important cross-business relationships exist. 6) Diversifying into related businesses :  Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar as to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities. a) Transferring specialized expertise, technological know-how or other valuable resources and capabilities from one business’s value chain to another’s b) Cost sharing between businesses by combining their related value chain activities into a single operation. c) Exploiting common use of a well-known brand name d) Sharing other resources (besides brands) that support corresponding value chain activities across businesses e) Engaging in cross-business collaboration and knowledge sharing to create new competitively valuable resources and capabilities. 7) Identifying cross-business strategic fit along the Value Chain  Strategic fit in supply chain activities  Strategic fit in R and D and Technology Activities  Manufacturing-related strategic Fit  Strategic fit in sales and marketing activities  Distribution-related strategic fit  Strategic Fit in customer service activities 8) Strategic fit, economies of scope and competitive advantage : (1)Transferring skills or knowledge (2)Combining related value chain activities to achieve lower costs (3)Leveraging the use of a well-respected brand name or other differentiation- enhancing resources (4)Using cross-business collaboration and knowledge sharing to create new resources and capabilities and drive innovation. (A)Strategic fit and economies of scope : stem directly from strategic fit along the value chains of related businesses.  The greater the cross-business economies associated with resource sharing and transfer, the greater the potential for a related diversification strategy to give a multibusiness enterprise a cost advantage over rivals. (B) From strategic fit to competitive advantage, added profitability, and gains in shareholder value 9) Diversification into unrelated business:  The strategy cannot create economic value for shareholders. There is no real justification for unrelated diversification. a) Building shareholder value via unrelated diversification 1- The benefits of astute corporate parenting 2- Judicious cross-business allocation for financial resources 3- Acquiring and restructuring undervalued companies 10) The path to greater shareholder value through unrelated diversification :  Diversify into businesses that can produce consistently good earnings and returns on investment.  Negotiate favorable acquisition prices ( to satisfy the cost-of-entry test)  Do a superior job of corporate parenting via high-level managerial oversight. 11) Evaluating the strategy of a diversifies company Step 1 : Evaluating industry attractiveness o _Calculating industry attractiveness scores for each industry into which the company has diversified. o Interpreting the industry attractiveness scores Step 2 : Evaluating business-unit competitive strength o Calculating competitive strength scores for each business unit o Interpreting the competitive strength scores o Using a Nine-Cell matrix to simultaneously portray industry attractiveness and competitive strength Step 3 : Determining the Competitve value of strategic fit in diversified companies Step 4 : Checking for resources fit o Financial Resource Fit ( internal capital market , a portfolio approach) o Nonfinancial resource fit : o Does the company have ( or can it develop ) the specific resources and capabilities needed to be successful in each of its businesses Step 5 : Ranking business units and assigning a priority for resource allocation. Step 6 : Crafting new strategic moves to improve overall corporate performance. Sticking closely with the existing business lineup Broadening a diversified company’s business base Divesting businesses and retrenching to a narrower diversification base Restructuring a diversified company’s business lineup.


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