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Strategic Management
, Sixth Edition
Charles W. L. Hill, University of Washington
Gareth R. Jones, Texas A&M University
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Chapter Summaries
Chapter 10: Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures
- Managers often first consider diversification when their company is generating
free cash flow, which are financial resources in excess of those necessary
to maintain a competitive advantage in the company's original, or core, business.
- A diversified company can create value by
- transferring competencies among existing business,
- leveraging competencies to create new businesses,
- sharing resources to realize economies of scope,
- using diversification as a means of managing rivalry in one or more industries, and
- exploiting general organizational competencies that enhance the performance
of all business units within a diversified company.
The bureaucratic costs of diversification are a function of the number of independent business units
within the company and the extent of coordination between those business units.
- Diversification motivated by a desire to pool risks or achieve greater growth is often associated with the dissipation of value.
- There are three vehicles that companies use to enter new business areas:
internal ventures, acquisition, and joint ventures.
- Internal new venturing is typically employed as an entry strategy when a
company has a set of valuable competencies in its existing businesses that
can be leveraged or recombined to enter the new business area.
- Many internal ventures fail because of entry on too small a scale, poor commercialization,
and poor corporate management of the internal venture process. Guarding against
failure involves a structured approach toward project selection and management,
integration of R&D and marketing to improve commercialization of a venture idea, and entry
on a significant scale.
- Many acquisitions fail because of poor postacquisition integration, overestimation
of the value that can be created from an acquisition, the high cost of acquisition, and poor preacquisition
screening. Guarding against acquisition failure requires structured screening,
good bidding strategies, positive attempts to integrate the acquired company
into the organization of the acquiring one, and learning from experience.
- Joint ventures may be the preferred entry strategy when (a) the risks and
costs associated with setting up a new business unit are more than the company
is willing to assume on its own and (b) the company can increase the probability of successfully
establishing a new business by teaming up with another company that has skills
and assets complementing its own.
- Restructuring is often a response to
- excessive diversification,
- failed acquisitions, and
- innovations in management process that have reduced the advantages of vertical integration and diversification.
- Exit strategies include divestment, harvest, and liquidation. The choice
of exit strategy is governed by the characteristics of the relevant business unit.
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