requires significant investment of a firm’s resources, including time, making it difficult to quickly earn a profitable return. An acquisition strategy is another course of action a firm can take to gain access to new products and to current products that are new to it. Compared with internal product development processes, acquisitions provide more predictable returns as well as faster market entry. Returns are more predictable because the performance of the acquired firm’s products can be assessed prior to completing the acquisition. 4. Lower Risk Compared to Developing New Products The outcomes of an acquisition can be estimated more easily and accurately than the outcomes of an internal product development process; as such, managers may view acquisitions as less risky. However, firms should be cautious: even though research suggests acquisition strategies are a common means of avoiding risky internal ventures (and therefore risky R&D investments), acquisitions may also become a substitute for internal innovation. Over time, being dependent on others for innovation leaves a firm vulnerable and less capable of mastering its own destiny when it comes to using innovation as a driver of wealth creation. Thus, a clear strategic rationale should drive each acquisition a firm chooses to complete. 5. Increased Diversification Acquisitions are also used to diversify firms. Based on experience and the insights resulting from it, firms typically find it easier to develop and introduce new products in markets they are currently serving. In contrast, it is difficult for companies to develop products that differ from their current lines for markets in which they lack experience. Thus, it is relatively uncommon for a firm to develop new products internally to diversify its product lines. Acquisition strategies can be used to support the use of both related and unrelated diversification strategies. Firms using acquisition strategies should be aware that, in general, the more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful. Thus, horizontal acquisitions and related acquisitions tend to contribute more to the firm’s strategic competitiveness than do acquisitions of companies operating in product markets that differ from those in which the acquiring firm competes. Nonetheless, the unrelated diversification strategy, such as the one Samsung is implementing, can also lead to success when used in ways that enhance firm value. 6. Reshaping the Firm’s Competitive Scope As discussed in Chapter 2, the intensity of competitive rivalry is an industry characteristic that affects a firm’s profitability. To reduce the negative effect of an intense rivalry on financial performance, firms may use acquisitions to lessen their product and/or market dependencies. Reducing a company’s dependence on specific products or markets shapes the firm’s competitive scope. For example, Dean Foods was built through the acquisition of many smaller dairies, and that effort has left its supply chain fragmented and decentralized.
7. Learning and Developing New Capabilities Firms sometimes complete acquisitions to gain access to capabilities they lack. Research shows that
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