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| "real life" examples of a diversification decision |
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| Two types of diversification |
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which industries should we be in?
how do we devise advantages across industries |
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participating in different industries
what's the logic?
should create value through synergy
B1+B2> 2 |
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| which industries should we participate in? |
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| should we backward or forward integrate |
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retreating from old businesses
opposite of diversification |
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done through acquisitions
only approximately 1/3 actually create value and market power |
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| price that drops on announcement of an acquisition |
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economies of scope
shaping activities
transferring/leveraging core competencies
value chain |
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| Leveraging core competencies across their company |
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Related Diversification
Market Power Logic |
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Definition
a. pooled negotiating power
b. multiple point competition
c. vertical integration |
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| More influence over 5 forces |
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Strategy through which two firms agree to integrate their operations on a relatively co-equal basis.
Rarely take place due to one firm usually being dominate |
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Strategy through which one fir, buys a controlling interest in another firm, with the intent of making the acquired firm a subsidiary business within its portfolio.
Most common. |
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Acquisition wherein the target firm does not solicit the acquiring firms bid.
Unfriendly Acquisition. |
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Increased Market Power
Overcoming Entry Barriers
Cost of New Product development and increased speed to market
Increased Diversification
Reshaping competitive scope
Learning and Developing new Capabilities |
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| Types of Increased Market Power |
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Definition
Horizontal Acquisitions
Vertical Acquisitions
Related Acquisitions |
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| Approaches to Achieve Diversification |
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Definition
Internal Development ( New products, markets, technology)
Mergers of Acquisitions
Pooling resources of other companies with the firms own resource base. |
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Definition
Strategy through which one fir, buys a controlling interest in another fir, with the intent of making the acquired firm a subsidiary business within its portfolio.
Most common. |
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Term
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Definition
Acquisition wherein the target firm does not solicit the acquiring firms bid.
Unfriendly Acquisition. |
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Term
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Definition
Increased Market Power
Overcoming Entry Barriers
Cost of New Product development and increased speed to market
Increased Diversification
Reshaping competitive scope
Learning and Developing new Capabilities |
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Term
| Types of Increased Market Power |
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Definition
Horizontal Acquisitions
Vertical Acquisitions
Related Acquisitions |
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Term
| Approaches to Achieve Diversification |
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Definition
Internal Development ( New products, markets, technology)
Mergers of Acquisitions
Pooling resources of other companies with the firms own resource base. |
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Definition
Value creation for synergy must compensate for
1. fall of stock price on announcement
2. The high price of the acquired firm (overbid)
Synergies can be difficult to achieve |
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Definition
Acquisition of a company competing in the same industry as the acquiring firm.
Increase the firm's market power by exploiting synergies |
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A firms acquisition of a supplier or distributor of one or more of its goods or services
Leads to increased market power through more control of the value chain. |
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Acquisition of a firm in a highly related industry
Firms seek to create value through synergy from combining resources and capabilities |
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| factors associated with a market of with the firms currently operating in it that increase the expense and difficulty new firms encounter when trying to enter that particular market |
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| Cross Borders Acquisitions |
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Definition
Acquisitions made between companies headquartered in different countries.
Many believe the next wave of CB Acquisitions may be led out of Asia. |
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| Pitfalls in Acquisition Success |
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Definition
Integration Difficulties
Inadequate Evaluation of target
Large or Extraordinary Debt
Inability to achieve synergy
Too much Diversification
Managers overly focused on Acquisitions
Too Large |
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| Most fortune 500 companies are in |
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Definition
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Large firms continue to operate in multiple industries
Operating in multiple lines of business is associated with inferior performance
Firms that make acquisitions on average suffer negative reactions to their stock price
Diversification reflects agency behaviors on the part of the managers |
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Definition
Firms do better when they sell things off and focus on their core competencies
Ex: McDonalds |
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Market transactions
Licensing
Alliances
Equity alliances |
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3m
Dell and SAP
Eli Lily and Medtronic |
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