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Chapter 6

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Administrative Studies
ADMS 4900
Kelly Thomson

Feb.13/2014 Lecture 6 Chapter 6—Corporate-Level Strategy: Creating Value through Diversification Making Diversification Work: An Overview - diversification can happen through mergers and acquisitions, strategic alliances/joint ventures, internal development - all about creating value for shareholder - why diversify?  synergy - achieving synergy 1. diversify into related businesses • sharing of tangible and intangible resources • increasing dominance in a market • vertical integration 2. diversify into unrelated businesses • value created from corporate office - benefits of each are not mutually exclusive Related Diversification: Economies of Scope and Revenue Enhancement - economies of scope cost savings from leveraging core competencies, sharing resources, sharing related activities among businesses within corporation - bigger profits 1. Leveraging Core Competencies - is the glue that binds existing businesses together or the engine that drives business growth - collective learning in organization (how to coordinate diverse production skills, integrate many streams of technologies) - criteria for core competency to create value and basis for synergy a) core competencies must enhance competitive advantage by creating superior customer value b) different business in corporation must be similar in at least one important way related to core competencies (doesn’t have to be product/service, but one element in value chain) c) core competencies must be difficult for competitors to imitate or find substitutes 2. Sharing Activities - share value creating activities—manufacturing facilities, distribution channels, sales force - main payoffs a) cost savings ~ cost savings = ‘hard synergies’ ~ arises due to elimination of jobs, facilities and related expense that are no longer required when two functions come together ~ highest when one company acquires another in same industry in same country ~ added cost of coordination b) enhancing revenue and differentiation ~ reduce cost of differentiation but also negative effect on business’s differentiation 3. Market Power - strengthen company’s bargaining power in relation to suppliers, customers and competitors - need to evaluate how combined business affects relationships with potential customers, suppliers and competitors - government regulations can limit how much market share corporation is allowed 4. Vertical Integration - extension into preceding or successive productive processes - backward integration (raw materials), forward integration - reduce its independence on suppliers or channels of distribution - benefits ~ secure source of raw materials or distribution channel that cannot he ‘held hostage’ to external markets where costs can fluctuate ~ protection and control over assets ~ access to new business opportunities and new forms of technology ~ improved coordination of activities across value chain - risks ~ cost associated with increased overhead and capital expenditures to facilitate new facilities, raw materials input etc ~ loss of flexibility resulting in inability to respond quickly to changes in external environment ~ problems associated with unbalance capacities or unfilled demand along value chain ~ extra admin costs with managing more complex activities - when considering vertical integration a) is value provided by present suppliers and distributors satisfactory? b) are there activities in the industry value chain presently being outsources that are viable sources of profit? c) is there relative stability in the demand for the organization’s products? d) is there a source of core competencies in the activity that is being considered for outsourcing? - transaction cost perspectiveevery market transaction involves some transaction cost a) search cost b) negotiating c) contract d) monitor e) enforcement - transaction specific investment related problem when purchasing specialized input from outside source ~ ex: supplier doesn’t want to install specialized machinery for specific product - administrative costs coordinating different stages of the value chain now internalized thus admin costs go up - vertical integration based on comparing admin costs and transaction costs ~ transaction costs < admin costs = avoid vertical integration ~ transaction costs > admin costs = vertical integration Unrelated Diversification: Financial Synergies and Parenting - types of synergies created 1. Corporate Parenting and Restructuring a) parenting - create value through management expertise ~ improve plans and budgets and provide competent central functions (ie: legal, financial, human resources) - help subsid
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