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Lecture

Set Three.docx

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Department
Business
Course
BU481
Professor
Tabatha Dominguez
Semester
Fall

Description
Set Three Portfolio Management o Pursuing portfolio management in countries with efficient capital marketing and a developedof professional mgmt talento Ignoring the fact that industry structure is not attractiveRestructuringo Mistaking rapid growth or a not industry as sufficient evidence of a restructuring opportunityo Lacking the resolve or resources to take on troubled situations and to intervene in mgmt o Ignoring the fact that industry structure is not attractive o Paying tip service to restructuring but actually practicing passive portfolio mgmto Companies find it very hard to dispose of business units once they are restructured and performing well Transferring Skills o mistaking similarity or comfort with new businesses as sufficient basis for diversificationo Providing no practical ways fortransfer to occuro Ignoring the fact that industry structure is not attractiveSharing Activities o Sharing for its ownrather than because it leads to competitive advantageo Assuming sharing will occur naturally without senior mgmt playing an active role o Ignoring the fact that industry structure is not attractiveSIndustry Attractiveness industry chosen for diversification must be structurally attractive or capable of being made attractive An attractive industry will have high avg ROI difficult to enter because high barriers to entry suppliersbuyers have moderate power few substitutes and stable rivalryCost of entry tests cost of entry must not capitalize all the future profits Expected returns must exceed costs of entry Catch22 because an attractive industry is usually one with high barriers to entryBetteroff test new unit or the corporation must gain competitive advantage from the link EX onetime competitive adv when parent company overhauls the strategy parent company will hold new unit for shortterm in this case or ongoing competitive advantage by marketing the product through the already welldeveloped distribution system parent company has more reason to hold onto unit for longterm 1 Attractiveness Test industries chosen for diversification must be structurally attractive or capable of being made attractive o attractive industry high average return on investment will be difficult to enter because enter barriers are high suppliers and buyers have only modest bargaining power substitute produce or services are few rivalry among competitors is stableo unattractive industry structural flaws excess of substitute materials powerful and pricesensitive buyers and excessive rivalry caused by high fixed costs and large group of competitorso diversification cannot create shareholder value unless new industries have favourable that support returns exceeding the cost of capitalo if the industry doesnt have such returns the company must be able to restructure the industry or gain a sustainable competitive advantage that leads to returns well above the industry averageo company suspended the attractiveness test because they had aunclear belief that industry fit closely with their own businesses hope that corporate comfort they felt would lead to a happy outcome the companies ignored poor industry structures unless close fit give a competitive advantage such comfort will turn into pain when diversification results in poor returnso another reason for ignoring low entry cost buyer has an inside track and owner is anxious to sell company finds it must reinvest in newly acquired unit if only to replace fixed assets and fund working capital o Diversifying companies are prone to use rapid growth or other simple indicators as proxy for target industrys attractivenessRushing into a fast growing company can be burned because they mistook early growth for long term profit potential Industry are profitable only if their structure is attractive 2 Cost of Entry Test must not capitalize all the future profits o diversification cannot build the shareholder value if cost of entry into a new business eats up its expected returnso company can enter new industries by acquisition or startup acquisition expose it to an increasingly efficient merger market acquirer beats the market if it pays a price not fully reflecting the prospect of new unit Startup the company must overcome entry barriers Attractive business are attractive because their entry barriers entering in the market are high
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