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Definition
The process of entering new industries, distinct from a company’s core or original industry, to make new kinds of products for customers in new markets. |
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| A company that makes and sells products in two or more different or distinct industries. |
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| Transferring Competencies |
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Definition
| The process of taking a distinctive competency developed by a business unit in one industry and implanting it in a business unit operating in another industry. |
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Term
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| A skill or competency that, when shared by two or more business units, allows them to operate more effectively and create more value for customers. |
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| The process of taking a distinctive competency developed by a business unit in one industry and using it to create a new business unit in a different industry. |
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| The synergies that arise when one or more of a diversified company’s business units are able to lower costs or increase differentiation because they can more effectively pool, share, and utilize expensive resources or capabilities. |
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Term
| General Organizational Competencies |
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Definition
Competencies that result from the skills of a company’s top managers and that help every business unit within a company perform at a higher level than it could if it operated as a separate or independent company. |
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| Organizational Design Skills |
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Definition
| The ability of a company’s managers to create a structure, culture, and control systems that motivate and coordinate employees to perform at a high level. |
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Term
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Definition
| When managers of a diversified company identify inefficient, poorly managed companies in other industries and then acquire and restructure them to improve their performance—and thus the profitability of the total corporation. |
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Term
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Definition
A corporate-level strategy based on the goal of establishing a business unit in a new industry that is related to a company’s existing business
units by some form of commonality or linkage between their value-chain functions. |
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Term
| Unrelated Diversification |
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Definition
| A corporate-level strategy based on a multibusiness model that uses general organizational competencies to increase the performance of all the company’s business units. |
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Term
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Definition
A corporate-level strategy whereby the firm’s headquarters assesses the performance of business units and allocates money across them. Cash generated by units that are profitable but have poor investment opportunities within their business is used to cross-subsidize businesses that need cash and have strong promise for long- run profitability. |
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Definition
| The costs associated with solving the transaction difficulties between business units and corporate headquarters as a company obtains the benefits from transferring, sharing, and leveraging competencies. |
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Term
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Definition
| The process of transferring resources to, and creating a new business unit or division in, a new industry to innovate new kinds of products. |
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Term
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Definition
| The process of reorganizing and divesting business units and exiting industries to refocus upon a company’s core business and rebuild its distinctive competencies. |
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Term
| a diversification strategy should enable a company or its individual business units to perform one or more value-chain functions: |
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Definition
| (1) at a lower cost, (2) in a way that allows for differentiation and gives the company pricing options, or (3) in a way that helps the company manage industry rivalry better—in order to increase profitability. |
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Term
| There are five primary ways in which pursuing a multi-business model based on diversification can increase company profitability. |
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Definition
Diversification can increase profitability when strategic managers (1) transfer competencies between business units in different industries, (2) leverage competencies to create business units in new industries,
(3) share resources between business units to realize synergies or economies of scope,
(4) use product bundling, and
(5) utilize general organizational competencies that increase the performance of all a company’s business units.
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Term
| Companies that base their diversification strategy on transferring competencies tend to |
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Definition
| acquire new businesses related to their existing business activities because of commonalities between one or more of their value-chain functions. |
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Term
| To increase profitability, transferred competencies must involve value-chain activities that |
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Definition
| become an important source of a specific business unit’s competitive advantage in the future. In other words, the distinctive competency being transferred must have real strategic value. |
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Term
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Definition
| More and more companies are entering into industries that provide customers with new products that are connected or related to their existing products. |
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Term
Three general organizational competencies help a company increase its performance and profitability:
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Definition
(1) entrepreneurial capabilities,
(2) organizational design capabilities, and
(3) strategic capabilities. |
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Term
| Entrepreneurial Capabilities |
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Definition
| A company that generates significant excess cash flow can take advantage of it only if its managers are able to identify new opportunities and act on them to create a stream of new and improved products, in its current industry and in new industries. |
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Term
| to promote entrepreneurship, a company must: |
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Definition
(1) encourage managers to take risks, (2) give managers the time and resources to pursue novel ideas,
(3) not punish managers when a new idea fails, and
(4) make sure that the company’s free cash flow is not wasted in pursuing too many risky ventures that have a low probability of generating a profitable return on investment. |
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Term
Principal reasons why a business model based on diversification may lead to a loss of competitive advantage:
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Definition
(1) changes in the industry or inside a company that occur over time,
(2) diversification pursued for the wrong reasons, and
(3) excessive diversification that results in increasing bureaucratic costs.
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Term
The level of bureaucratic costs in a diversified organization is a function of two factors:
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Definition
1) the number of business units in a company’s portfolio, and
2) the degree to which coordination is required between these different business units to realize the advantages of diversification. |
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Term
| It pays for a company to pursue unrelated diversification when |
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Definition
(1) each business unit’s functional competencies have few useful applications across industries, but the company’s top managers are skilled at raising the profitability of poorly run businesses and
(2) the company’s managers use their superior strategic management competencies to improve the competitive advantage of their business units and keep bureaucratic costs under control. |
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Term
| Three reasons are often put forward to explain the relatively high failure rate of internal new ventures: |
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Definition
(1) market entry on too small a scale, (2) poor commercialization of the new-venture product, and
(3) poor corporate management of the new-venture division. |
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Term
Acquisitions may fail to raise the performance of the acquiring companies for four reasons:
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Definition
(1) companies frequently experience management problems when they attempt to integrate a different company’s organizational structure and culture into their own;
(2) companies often overestimate the potential economic benefits from an acquisition;
(3) acquisitions tend to be so expensive that they do not increase future profitability; and
(4) companies are often negligent in screening their acquisition targets and fail to recognize important problems with their business models. |
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