Term
| When do strategic managers pursue diversification? |
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Definition
| When companies are generating free cash flow; that is, financial resources they do not need to maintain a competitive advantage in their company's core industry and so can be used to fund new, profitable business adventures. |
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Term
| How a Company Creates Value Through Diversification? |
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Definition
| Transferring competencies among existing businesses, leveraging competencies to create new businesses, sharing resources to realize economies of scope, using product bundling, taking advantage of general organizational competencies that enhance the performance of all business units within a diversified company, and operating an internal capital market. |
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Term
| Bureaucratic Costs of Diversification |
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Definition
| Rises as a function of the number of independent business units within a company and the extent to which managers must coordinate the transfer of resources between those business units? |
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Term
| What often results in failing profitability? |
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Definition
| Diversification motivated by a desire to pool risks or achieve greater growth. |
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Term
| What are internal new venturing, acquisition, and joint ventures? |
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Definition
| Three Methods Companies Use to Enter New Industries |
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Term
| What is the use of Internal New Venturing? |
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Definition
| Entering 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. |
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Term
| Why do many internal ventures fail? |
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Definition
| Entry on too small a scale, poor commercialization and poor corporate management. |
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Term
| What does guarding against failure in internal ventures involve? |
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Definition
| Carefully planned approach to 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. |
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Term
| When should Acquisitions be used to enter a new industry? |
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Definition
When a company lacks the competencies required to compete in the new industry, and it can purchase a company that does have those competencies at a reasonable price.
This is also true if there are high barriers to entry and working with existing companies is undesirable. |
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Term
| When are acquisitions unprofitable? |
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Definition
| Strategic managers underestimate the problems associated with integrating an acquired company, overestimate the profit that can be created from an acquistion, pay too much for the acquired company, and perform inadequate pre-acquisition screening to ensure the acquired company will increase the profitability of the whole company. |
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Term
| What does guarding against acquisition failure require? |
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Definition
| Careful pre-acquisition 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. |
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Term
| What is the focus of the business level strategy? |
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Definition
| How to maximize profit in a single industry or market. |
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Term
| What is the focus of a corporate level strategy? |
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Definition
| How to maximize profit in many industries and markets. |
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Term
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Definition
| Absorbing others within the same market. |
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Term
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Definition
| Moving into the markets of buyers of suppliers. |
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Term
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Definition
| A company purchases another company. |
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Term
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Definition
| Two firms are combined on a relatively coequal basis. |
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Term
| When are Joint Ventures Used To Enter A New Industry? |
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Definition
| 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 a company can increase the probability that its entry into a new industry will result in a successful new business by reaming up with another company with skills and assets that complement its own. |
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Term
| What are the benefits of Horizontal Integration? |
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Definition
| Manage rivalry, reduce costs, increase value of products (help differentiate) and increased bargaining power over buyers and suppliers. |
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Term
| When is restructuring required? |
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Definition
| A business model no longer creates competitive advantage, the inability of investors to assess the competitive advantage of a highly diversified company from its financial statements, excessive diversification because top managers desire to pursue empire building that results in growth without profitability, and innovators in strategic management such as strategic alliances and outsourcing that reduce the advantages of vertical integration and diversification. |
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Term
| What are the limits of horizontal integration? |
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Definition
| Overestimation of benefits, cultural differences between acquired and acquiring company and high management turnover. |
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Term
| Why would the price of a company increase when another company announces an attempt to acquire it? |
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Definition
| The fact that another company wants to acquire it, shows that the company has more value and then increases the price of the company. |
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Term
| What are benefits of Vertical Integration? |
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Definition
| Add value to core products/businesses, can help supply a competitive advantage, greater control over supply chain activities and the ability to build barriers of entry. |
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Term
| What are the disadvantages of Vertical Integration? |
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Definition
| Increased costs, managerial inefficiencies and rapid change in industry. |
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Term
| In what case should a firm vertically integrate? |
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Definition
| Cost in-house < Cost market |
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Term
| In what case should a firm outsource? |
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Definition
| Cost in-house > Cost market |
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Term
| What are included in cost of market (using a contract)? |
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Definition
| Hold-up risks and opportunism by the contractor. |
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Term
| What are alternatives to Vertical Integration? |
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Definition
| Arm's length transactions, short term contracts, long term contracts, equity alliances, joint ventures, parent subsidiary relationships and perform activities in house. |
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Term
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Definition
| Two companies buy one company, but one owns more of the company than the other. |
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