Corporate Level Strategy: Modes of Diversification

Chapter 9Corporate Level Strategy:Modes of Diversification
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Overview
Internal developmentMergers and acquisitionsJoint ventures and Strategic alliancesFranchisingLicensing*
Internal Developmentand Greenfield Investment
Internal development – using existing facilities for the new productionGreenfield – the establishment of a new wholly owned subsidiary*
Internal Development/ Greenfield
Reasons:Utilizing firm-specific knowledgeEconomies of scopeBetter use of available resourcesResources neededBenefitsDrawbacks*
Mergers, Acquisitions and Takeovers
Merger – two firms agree to integrate their operations on equal basisAcquisition – one firm buys another firmTakeover – a hostile acquisition where the target firm did not solicit the acquiring firm’s bid*
Mergers & Acquisitions
ReasonsOvercoming entry barriersDecreased cost of new product developmentIncreased speed to marketReshaping the firm’s competitive scopeLearning and developing new capabilitiesResources neededBenefitsDrawbacks*
Partnerships (JVs & SAs)
Joint venture – a legally independent entity created by two or more firmsEquity-based strategic alliance – two or more firms buy minority % of each others shares without forming separate legal entityNon-equity strategic alliance – two or more firms develop a contractual relationship to share some of their resources and capabilities*
Reasons for PartneringAccess to restricted marketsShare high R&D costs & high capital investments in risky projectsSpeed up technology developmentEstablish or change industry standardsCompete against common rivalShare marketing and sales networkResources neededBenefitsDrawbacks*
Franchising & Licensing
Franchising – contracting another firm to manufacture and sell a firm’s products under its trademarkFranchisers: Bear the cost of marketing and branding; Receive percentage of profitsFranchisee: Guaranteed exclusive territory; Know-how support from the franchiserLicensing – providing a firm’s brand name to another firm to manufacture and/or sell products under it in exchange for a fixed licensing fee*
Franchising & Licensing
Reasons to franchise/ licenseOutsource the risk of diversificationTransfer financial costs (e.g., manufacturing, marketing, distribution) to another firmIncrease profits based on previous patents or innovationsResources neededBenefitsDrawbacks