Strategic Management

1. Diversification Method
Once an organization has decided to pursue a diversification strategy, it can pursue one of three basic approaches to carry it out: an internal venture to develop the new business on its own, an acquisition, or a joint venture. a. Internal Ventures: In spite of the benefit of internal ventures, the risks of failure are high, and even successful ventured takes many years to become profitable. In fact, the slow speed of internal ventures often causes managers to think seriously about acquisition when they want to diversify their firms. If a firm acquires an existing business, it gains immediate entrance into the new business area. Furthermore, if the acquired firm has been successful, the acquiring firm managers may feel there is less risk of failure. b. Merger and Acquisitions: some organizations choose to buy diversification in the form of acquisitions. They are often considered a “substitute for innovation”. Mergers occur ant time two organizations combine into one. Acquisition, where one organization buys a controlling interest in the stock of another organization or buys it outright from its owners, are the most common type of merges. Acquisitions are relatively quick way to: i. Enter new markets ii. Acquire new products or services iii. Learn new resource conversion process iv. Acquire needed knowledge and skills v. Vertically integrate vi. Broaden market geographically vii. Fill need in the corporate portfolio.

A Few of Many Potential Problems with Mergers and Acquisitions High Financial Costs I. High premium typically paid by acquiring firms II. Increased interest costs. Borrowing money at high interest rate finances many acquisitions. III. High advisory fees and other transaction costs. The fees charge by