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Strategy for competing against rivals within a particular industry or industry segment |
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Strategy for guiding a firm's entry and exit from different businesses, for deterring how a parent company adds value to and manages its portfolio of business, and for creating value through diversification |
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Actions that firms use to try to compete successfully only within a single industry
Examples) McDonald's, Starbucks, Subway |
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3 Types of Concentration Strategies |
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Market Penetration Market Development Product Development |
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an attempt to gain additional share of existing markets using existing products (advertising campaigns) |
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Trying to sell existing products within new markets (Starbucks coffee in grocery stores) |
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Creating new products to serve existing markets (McDonald's expanding healthy menu) |
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Pursuing a concentration strategy by acquiring or merging with a rival |
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when one company purchases another company |
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the joining of two similarly sized companies into one company |
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Why is horizontal integration often a good idea? |
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Economies of scale reduce rivalry access to distribution channels |
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What could go wrong with horizontal integration? |
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60% of M&A are bad for shareholder wealth 30-45% are undone Culture clash |
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When a firm gets involved in new portions of the value chain |
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What would Porter say about vertical integration? |
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Reduce buyer or supplier power Increase profit potential in an industry |
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What risks do you run not being vertical integrated? |
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Loss of price control No control over lead time |
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What risks do you run being vertically integrated? |
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You have to compete in a new industry could be more expensive You might not be that good in the industry |
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Backward Vertical Integration |
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A strategy that involves a buyer entering the industry that it purchases goods or services from (Ford creating subsidiaries that provide key inputs to vehicles such as rubber, glass, and metal) |
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Forward Vertical Integration |
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A strategy that involves a supplier entering the industry that it supplies inputs to (Disney operating retail stores that sell merchandise based on disney's characters and movies) |
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involve a firm entering entirely new industries |
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Condition under which the combined benefits of activities in two or more arenas (Industries) are greater than the simple sum of those benefits |
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Three Tests for Diversification |
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How attractive is the industry the firm is considering entering? How much will it cost to enter the industry? Will the new unit and the firm be better off? |
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When a firm moves into a new industry that has important similarities with the firm's existing industry or industries (Disney purchased ABC) |
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Purpose of Related Diversification |
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To develop and exploit core competencies (Skill set that is difficult for competitors to imitate and can be leveraged in different business) |
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Unrelated Diversification |
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When a firm enters an industry that lacks any important similarities with the firm's existing industry or industries |
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Portfolio Planning Purpose |
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To guide resource allocation across business unit; to help make decisions
Key assumption: resources are constrained (you only have so much $ to work with) |
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Portfolio Planning is based on |
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The Boston Consulting Group (BCG) matrix |
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Best-known approach to portfolio planning
Using the matrix requires a firm's businesses to be categorized as high or low along two dimensions 1. It's share of the market 2.The growth rate of its industry |
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reducing the size of part of a firm's operations, ofter through laying off employees |
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Selling off part of a firm's operations |
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creating a new company whose stock is owned by investors out of a piece of a bigger company |
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the tendency of investors to undervalue the shares of a diversified firm |
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shutting down portions of a firm's operations, often at a tremendous financial loss |
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