Business Plans Paper

Chapter six-Making Diversification Work
1
Diversification initiatives must create value
for shareholders through:

ergers and acquisitions.
trategic alliances.

oint ventures.
nternal development.
Diversification should create synergy.
usiness 1 plus Business 2 equals more than
two.

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Reasons for Diversification Failures
Acquisitions can destroy value by:
Paying a premium for the 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.

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Related Diversification
Related diversification enables a firm to
benefit from horizontal relationships across
different businesses.
Economies of scope allow businesses to:
everage core competencies.
haring related activities.
njoy greater revenues, enhance differentiation.
Related businesses gain market power by:
ooled negotiating power.
ertical integration.

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Related Diversification: Leveraging Core
Competencies
Core competencies reflect the collective
learning in organizations. Can lead to the
creation of value and synergy if:
hey create superior customer value.
he value-chain elements in separate businesses
require similar skills.
hey are difficult for competitors to imitate or
find substitutes for.

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Related Diversification: Sharing
Activities
Corporations can also achieve synergy by
sharing activities across their business
units.
Sharing tangible and value-creating activities
can provide payoffs.
ost savings through elimination of jobs,
facilities and related expenses, or economies of
scale.
evenue enhancements through increased
differentiation and sales growth.

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Related Diversification: Market Power
Market power can lead to the creation of
value and synergy through:
ooled negotiating power.
aining greater bargaining power with
suppliers and customers.
ertical integration ! firm becomes its
own supplier or distributor through:
ackward integration.
orward integration.

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Related Diversification: Vertical
Integration, Transaction Costs
Transaction cost perspective.
Every market transaction involves some
transaction costs.
earch costs.
egotiating costs.
ontract costs.

onitoring costs.
nforcement costs.
eed for transaction specific investments.
dministrative costs.

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Unrelated Diversification: Portfolio
Management
Portfolio management involves a better
understanding of the competitive position of an
overall portfolio or family of businesses by:
uggesting strategic alternatives for each
business.
dentifying priorities for the allocation of resources.
sing Boston Consulting Groupà(BCG)
growth/share matrix.

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Unrelated Diversification: Portfolio
Management, BCG
Each circle
represents one of
the firmàbusiness
units. The size of
the circle
represents the
relative size of the
business unit in
terms of revenue.
Exhibit 6.4 The Boston Consulting
Group (BCG) Portfolio Matrix

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Means of Diversification
Diversification can be accomplished via:

ergers and acquisitions.
ivestments.
ooling resources of other companies with a firmÊown resource base through strategic alliances
and joint ventures.
nternal development through corporate
entrepreneurship or new venture development.

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Mergers and Acquisitions: Motives
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.
everaging core competencies.
haring activities.
uilding market power.
Can consolidate an industry, forcing other players to
merge.

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Mergers and Acquisitions: Limitations
Takeover premiums for acquisitions are typically
very high.
Competing firms can imitate advantages.
Competing firms can copy synergies.
Managers%gos get in the way of sound business
decisions
Cultural issues may doom the intended benefits.

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Mergers and Acquisitions: Divestment
Success
Successful divestiture involves:
emoving emotion from the decision.
nowing the value of the business you¥ selling.
iming the deal right.

aintaining a sizable pool of potential buyers.
elling a story about the deal.
unning divestitures systematically through a
project office.
ommunicating clearly and frequently.

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Strategic Alliances and Joint Ventures:
Motives
Strategic alliances and joint ventures are
cooperative relationships between two (or
more) firms with potential advantages.
bility to enter new markets through:
reater financial resources.
reater marketing expertise.
bility to reduce manufacturing or other costs in
the value chain.
bility to develop and diffuse new technologies.

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Strategic Alliances and Joint Ventures:
Limitations
Need for the proper partner:
artners should have complementary strengths.
artneràstrengths should be unique.
niqueness should create synergies.
ynergies should be easily sustained and defended.
artners must be compatible and willing to trust
each other.

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Managerial Motives
Managerial motives: Managers may act in
their own self interest, eroding rather than
enhancing value creation.
rowth for growthàsake.
op managers gain more prestige, higher rankings,
greater incomes, more job security.
tàexciting and dramatic!
xcessive egotism.
se of antitakeover tactics.

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International Strategy: Globalization
Globalization has to do with the rise of market
capitalization around the world.
nternational exchanges have increased.
rade in goods and services.
xchange of money, information, and ideas.
aws, rules, norms, values, and ideas are growing
more similar across countries.
Challenges include balancing between emerging
markets and developed markets.

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Factors Affecting a NationÊCompetitiveness
Michael Porteràdiamond of national
advantage explains why some nations and
their industries outperform others.
actor endowments.
emand conditions.
elated and supporting industries.
irm strategy, structure, and rivalry.

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Factors Affecting a NationÊCompetitiveness: Factor Endowments
Factor endowments involve factors of
production.
and.
apital.
abor.
Factors of production must be industry and firm
specific.

ust be rare, valuable, difficult to imitate, and
rapidly and efficiently deployed.

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Factors Affecting a NationÊCompetitiveness: Demand Conditions
Demand conditions refer to the demands that
consumers place on an industry.
Demanding consumers drive firms in that country
to:

eet high standards.
pgrade existing products and services.
reate innovative products and services.
etter anticipate future global demand.
roactively respond to product and service
requirements.

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Factors Affecting a NationÊCompetitiveness: Related and
Supporting Industries
Related and supporting industries enable
firms to manage inputs more effectively via:
competitive supplier base.
educes manufacturing costs.
lose working relationships with suppliers.
llows for joint research and development.
evelopment of related industries.
orces existing firms to practice cost control,
product innovation, better distribution methods.

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Factors Affecting a NationÊCompetitiveness: Firm Strategy
Firm strategy, structure, and rivalry affect
competitiveness via:
trong consumer demand.
trong supplier base.
igh new entrant potential from related
industries.
Domestic rivalry leads to a search for new
markets.
Intense domestic competition is a strong
indicator of global competitive success.

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International Expansion: Motivations
1
A company pursues international expansion for
many reasons. A company decides to become a
multinational firm in order to:
ncrease size of potential markets.
ttain economies of scale.
ake advantage of arbitrage opportunities.
pplied to every stage of the value chain.
nhance a productàgrowth potential.
einvigorate the product life cycle.

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International Expansion: Motivations
2
A company also decides to become a
multinational firm in order to:
ptimize the location of value chain activity.
o enhance performance.
o reduce cost.
o reduce risk.
ake advantage of learning opportunities.
xplore reverse innovation.
esign and manufacture products locally.
xport no-frills products to developed markets.

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International Expansion: Risks
1
Multinational firms also encounter risks.
olitical risk due to social unrest, military
turmoil, demonstrations, terrorism, absence of
the rule of law can lead to:
estruction of property.
isruption of operations.
on-payment for goods and services.
rbitrary government decisions.
conomic risk due to piracy and
counterfeiting.

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International Expansion: Risks
2
Multinational firms also encounter other risks.
urrency risk due to fluctuations in the local
currencyàexchange rate.
ffects cost of production or net profit.

anagement risk due to culture, customs,
language, income level, customer preferences,
distribution systems.
ould lead to the need for local adaptation of
apparently standard products.

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International Strategies: Opposing
Pressures
1
Cost reduction or adaptation to local markets?
Levitt suggested strategies that favor global
products and brands should do the following:
tandardize all products for all markets.
educe overall costs by spreading investments
over a larger market.
Assumes:
ustomers have homogenous needs and interests.
eople prefer lower prices at high quality.
lobal markets produce economies of scale.

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International Strategies: Opposing
Pressures
2
Cost reduction or adaptation to local markets?
Assumptions may be incorrect.
roduct markets DO vary widely between nations ¬ocal adaptations work.
here is a growing interest in multiple product
features, product quality, and service.
echnology permits flexible production; cost of
production may not be critical to product cost; a
firmàstrategy should not be solely product driven.
îe size fits all$oes NOT generally apply.

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International Strategies: Opposing
Pressures, Chart
Exhibit 7.3
Opposing
Pressures and
Four Strategies
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International Strategy
2
An international strategy requires diffusion
and adaptation of the parent companyÊknowledge and expertise to foreign markets.
The primary goal is worldwide exploitation of the
parent firmàknowledge and capabilities.
ll sources of core competencies are centralized.
ressure for both local adaptation and low costs
are rather low.

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Global Strategy
A global strategy implies a firm is interested in
lowering costs.
ompetitive strategy is centralized and controlled
by the corporate office.
roducts are standardized, operations centralized,
producing economies of scale.
orldwide volume supports research and
development.
hereàa standard level of quality worldwide.
ressure for reducing cost is high; pressure for
adaptation to local markets is weak.

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Multidomestic Strategy
A multidomestic strategy puts emphasis on
differentiating products and services to adapt to
local markets.
ecisions are decentralized.
roducts and services are tailored to local use.
onsider language, culture, income levels, customer
preferences, distribution systems.

arkets can expand rapidly.
rices are differentiated by market.
ressure for local adaptation is high; pressure for
lowering costs is low.

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Transnational Strategy
A transnational strategy seeks global
competitiveness via trade-offs.
fficiency versus local adaptation versus
organizational learning.
ssets and capabilities disbursed according to the
most beneficial location for a specific activity;
some value chain activities centralized, some
decentralized.
conomies of scale, increased knowledge flows.
ressures for both local adaptation and lowering
costs high.

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International Strategies: Global or
Regional?
It may be unwise for companies to rush into fullscale globalization.
Regionalization may be more reasonable.
istance still matters.
ommonalities of language, culture, economics,
legal and political systems, and infrastructure all
make a difference.
rading blocs and free trade zones ease trade
restrictions, taxes, and tariffs.

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International Strategies: Entry Modes,
Chart
Exhibit 7.8
Entry Modes
for
International
Expansion
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Chapter eight: Recognizing
Entrepreneurial Opportunities
Entrepreneurship involves value creation and the
assumption of risk.
New value can be created in many contexts.
tartup ventures.

ajor corporations.
amily-owned businesses.
onprofit organizations.
stablished institutions.
Ideas and opportunities can come from many sources.
Change or chance can uncover unmet customer needs.

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Entrepreneurial Opportunity Analysis
The three factors needed to successfully proceed:
Opportunity
Resources
Entrepreneurs(s)
Exhibit 8.1 Opportunity Analysis Framework
Source: Based on Timmons, J.A., & Spinelli, S. 2004. New Venture Creation (6th edition). New York:
McGraw Hill/Irwin; and Bygrave, W.D. 1997. The Entrepreneurial Process. In W.D. Bygrave (Ed.), The
Portable MBA in Entrepreneurship (2nd edition). New York: Wiley.

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Entrepreneurial Opportunities: Discovery
Discovery phase ecoming aware of the new
business concept. Ask: Where are the new venture
opportunities? What might be a creative solution to a
business problem?
an be spontaneous and unexpected.
an also result from a deliberate search.
re there frustrations with current products or
processes?
o stakeholders have unmet needs?
hat do other markets or industries do?
an we revive old ideas?

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Entrepreneurial Opportunities:
Evaluation
Evaluation phase nalyzing the viability of an
opportunity.
alk to potential target customers.
onduct a feasibility analysis.
hat are the operational requirements?
hat is the market potential?
s the idea strong enough to create value, and
therefore, profits?

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Entrepreneurial Opportunities: Viability
Viable opportunities have the following qualities:
hey are attractive.
hey are achievable.
hey are durable.
hey are value-creating.
Resources also need to be available, including an
entrepreneurial leader and team.

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Entrepreneurial Financial Resources
Financial resources depend on the stage of
venture development and venture scale.
nitial, startup financing.
ersonal savings, family, and friends.
rowdfunding.
arly-stage financing.
ank loans, angel investors.
ater-stage financing.
ommercial banks, venture capitalists equity
financing.

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Entrepreneurial Human, Social, and
Governmental Resources
Human capital.
trong, skilled management.
Social capital.
xtensive social contacts & strategic alliances.
echnology, manufacturing, or retail alliances.
Federal, state, & local government
resources.
overnment contracting.
oan guarantee programs BA.
raining, counseling, & support services.

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Entrepreneurial Leadership
Entrepreneurial leadership needs:
ourage.
elief in oneàconvictions.
nergy to work hard.
bility to build a dedicated team.
Leadership personality traits:
igher self-confidence, conscientiousness,
openness to new experiences, emotional stability.
ower agreeableness.
Leadership characteristics:
ision.
edication and drive.
ommitment to excellence.

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Entrepreneurial Leadership: Vision, Drive
and Dedication
Vision is an entrepreneuràmost important asset.
equires transformational leadership.
bility to envision realities that do not yet exist.
bility to share this vision with others.
Drive & dedication are necessary.
nvolves internal motivation.
alls for intellectual commitment.
equires patience.
tamina, willingness to work long hours.
nthusiasm that attracts others.

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Entrepreneurial Leadership:
Commitment to Excellence
Commitment to excellence is required.
ommit to knowing the customer.
rovide quality goods and services.
ay attention to details.
ontinuously learn.
onnect the dots.
ire people smarter than themselves.

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Entrepreneurial Strategy
New ventures require an
entrepreneurial strategy.
hat are the industry conditions?
hat are the barriers to entry? (Five-forces
analysis)
hat is the competitive environment?

ight there be retaliation by established
firms?
hat are the market opportunities?
ow should the firm actually enter a new
market?

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Entry Strategies
New venture entry strategies need to:
uickly generate cash flow.
uild credibility.
ttract good employees.
vercome the liability of newness.
Choices include:
ioneering new entry
mitative new entry
daptive new entry

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Entry Strategies: Pioneering
Pioneering new entry:
reate new ways to solve old problems.

eet customers.eeds in a unique new way.
ill it be accepted by consumers?
ill it be disruptive to the status quo of an
industry?
ill the advantage be sustainable against
imitators?

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Entry Strategies: Imitative
Imitative new entry:
mitators have a strong marketing orientation.
apitalize on proven market successes.
ntroduce the same basic product or service in
another segment of the market.
an we do it better than an existing competitor?
ill someone then imitate us?

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Entry Strategies: Adaptive
Adaptive new entry:
apitalizes on current market trends.
ffers a product or service that is somewhat new
and sufficiently different.
reates new value for customers.
aptures market share.
oes it do a superior job of meeting customer
needs?
an it be easily imitated?
ow can we continue to keep it fresh and new?

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Competitive Dynamics
New entry threatens existing competitors.
Competitive dynamics helps explain why
competitive strategies evolve and how to
respond.
eed to identify new competitive action.
ngage in threat analysis.
ave the motivation and capability to respond.
nderstand the types of competitive action.
valuate the likelihood of competitive reaction.

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Competitive Dynamics Model
Exhibit 8.3 Model of Competitive Dynamics
Source: Adapted from Chen, M.J. 1996. Competitor Analysis and Interfirm Rivalry: Toward a Theoretical
Integration. Academy of Management Review, 21(1): 100-134; Ketchen, D.J., Snow, C.C., & Hoover, V.L.
2004. Research on Competitive Dynamics: Recent Accomplishments and Future Challenges. Journal of
Management, 30(6): 779-804; and Smith, K.G., Ferrier, W.J., & Grimm, C.M. 2001. King of the Hill:
Dethroning the Industry Leader . Academy of Management Executive, 15(2): 59-70.
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Competitive Dynamics: Why Launch
Actions?
Why do companies launch new competitive
actions?
o improve market position.
o capitalize on growing demand.
o expand production capacity.
o provide an innovative new solution.
o obtain first mover advantages.
o strengthen financial outcomes and capture
profits.
o grow the business.

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