Diversifying into a new industry by forming a new internal subsidiary to enter and compete in the target industry is attractive when _______.

Question

A) all of the potential acquisition candidates are losing money.
B) it is impractical to outsource most of the value chain activities that have to be performed in the target business/industry.
C) there is ample time to launch the new business from the ground up.
D) the company has built up a hoard of cash with which to finance a diversification effort.
E) none of the companies already in the industry is an attractive strategic alliance partner.

Answer 1

C) there is ample time to launch the new business from the ground up.
Generally, forming a start-up subsidiary to enter a new business (via internal development) has appeal only when (1) the parent company already has in-house most or all of the skills and resources needed to compete effectively; (2) there is ample time to launch the business; (3) internal entry has lower costs than entry via acquisition; (4) the targeted industry is populated with many relatively small firms such that the new start-up does not have to compete against large, powerful rivals; (5) adding new production capacity will not adversely impact the supply-demand balance in the industry; and (6) incumbent firms are likely to be slow or ineffective in responding to a new entrant's efforts to crack the market.