Chapter 8
Boston Consulting Group (BCG) growth-share matrix
A corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into four categories (dog, cash cow, star, and question mark), each of which warrants a different investment strategy.
Related-constrained diversification Strategy
A kind related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in the primary business ex)exxon, Nike, Johnson & Johnson
Credible commitment
A long-term strategic decision that is both difficult and costly to reverse
Organizing Economic Activity: Firm
Advantage: - Command and control - Coordination - Transaction-specific investments - Community of knowledge Disadvantages: - Administrative Costs - Low-powered incentives - Principal-agent problem
Organizing Economic Activity: Markets
Advantage: - High-powered incentives - Flexibility Disadvantages: - Search Costs - Opportunism - Incomplete contracting - Specifying and measuring performance - Enforcements of contracts
Transaction costs
All internal and external costs associated with an economic exchange, whether within a frim or in markets
Forward Vertical Integration
Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.
Related Diversification Strategy
Corporate Strategy in which a firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity.
Geographic diversification
Corporate Strategy in which firms is active in several different countries
Product-market diversification
Corporate strategy in which a firm is active in several different product markets and several different countries
what level of diversification lead to the highest levels of performance?
moderate
What is a related-linked diversification strategy?
one in which executives purse various businesses opportunities that share only a limited number of linkages
Equity Alliance
partnership in which at least one partner takes partial ownership in the other partner
Alternatives of Vertical Integration
- Taper Integration - Strategic Outsourcing
Which of the following are the four underlying strategic management concepts that determine the scope of a firm? (Check all that apply.)
- transaction costs - core competencies - economies of scope - economies of scale
Dominant business
-70%-95% of revenues from a single business but it pursues at least one other business activity that accounts for the remainder of revenue
Single Business
-95% of revenue from one business - google gets 95% of its revenues from online advertising
Three Dimension of corporate Strategy
-Core Competencies -Economies of scale -Economies of scope -Transaction costs
Core Competence- Market Matrix
A framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets
Product diversification
Corporate Strategy in which a firm is active in several different product markets
CC Market Matrix - CC - Existing - Market - Existing
Leveraging - Core competencies to improve current market position
CC Market Matrix - CC - Existing - Market - New
Redeploying - and recombining core competencies to compete in markets of the future
Principal-agent problem
Situation in which an agent performing activities on behalf of a principal pursues his or her own interests.
Vertical integration - definition
The firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs
______ costs are all of the costs associated with an economic exchange.
Transaction
Specialized assets
Unique assets with high opportunity cost: They have significantly more value in their intended use than in their next best use. They come in three types: - site specificity, - physical asset specificity, and - human-asset specificity.
Strategic Alliances
Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services - long term contracts - equity alliances - joint ventures
Which of the following is a fundamental corporate-level strategic decision?
What products and services should the firm offer?
The geographic scope
Where to compete
In the Boston Consulting Group growth-share matrix, each of the four categories in the matrix represents __.
a different investment strategy
Olivia's, an olive oil company, grows and harvests olives, makes olive oil, and distributes its olive oil to its retail shop. Olivia's is an example of __.
a fully vertically integrated company
Equity Alliances
a partnership with at which at least one partner takes partial ownership in the other partner
Transaction cost economics
a theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to competitive advantage
Transaction cost economics help managers do which of the following?
choose which activities to do within the firm
Which type of cost in a related-diversification strategy is a function of the number, size, and types of businesses that are linked?
coordination
TWN, a large multinational corporation, chose to spin off one of its SBUs that was unrelated to TWN's core business in order to avoid the ______. When they announced the spin-off, the stock price of TWN went up by 5%.
diversification discount
The persons responsible for forming corporate-level strategy are the
executives
In the __ quadrant of the core competence-market matrix, the focus is on leveraging core competencies to improve current market position
existing competence-existing market
In order for a firm to lower costs, it must ______.
grow
the lemons problem
information asymmetries cause superior goods to be replaces by inferior ones
Information Asymmetry
is a situation in which one party has more knowledge than another due to the possession of private knowledge.
diversification discount
is a situation in which the stock price of a highly diversified firms is valued as less than the sum of their individual business units.
Long-Term Contracts - Licensing
manufacturing sector that enables firms to commercialize intellectual property
Long-term contracts (such as licensing and franchising), equity alliances, and joint ventures are examples of which of the following?
strategic alliances
A state university hires an outside firm to develop and maintain their human resource system. This is called
strategic outsourcing
The most integrated alternative to vertical integration is __.
the parent-subsidiary relationship
A conglomerate fits which type of corporate diversification model?
unrelated diversification
degree of vertical Integration
what stages of the industry value chain to participate
Risks of vertical Integration
- Increasing costs - Reducing quality - Reducing flexibility - Increasing the potential for legal repercussions
Taper Integration - Benefits
- It houses in-house suppliers & distributors to market competition so that performance are possible - Tapper integration also enhances a firm's flexibility. can cut back in stocks it's own stores - Can combine internal & external knowledge
The firm plots its SBUs into one of four categories in the matrix:
- dog - cash cow - star - question mark
Taper integration allows firms to
- gain knowledge from external sources - be more flexible when responding to market changes such as fluctuations in demand.
Which of the following is an example of the principal-agent problem if the principal's goal is to create shareholder value? -a manager controls and limits his business expenses -a manager received generous stock options -a manager files first class on all business trips -a manager makes decisions based on what is best for the company
-a manager files first class on all business trips
Stages of Industry Value Chain
1) Raw Materials 2) Components, Intermediate Goods 3) Final Assembly, Manufacturing 4) Marketing, Sales 5) After-Sales Service & Support
Conglomerate
A company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy
Joint Venture
A stand alone organization created and jointly owned by two or more parent companies
Transaction cost economics
A theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulate a corporate strategy that is more likely to lead to competitve adavantage
SBUs identified as question mark
Earnings: Low, unstable or growing Cash Flow: Negative Strategy: Increase market share or harvest/divest compete in a high-growth market but have a low market share
Long-Term Contracts - Franchising
Franchisor grants a franchisee the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisor's brand name
Why firms need to grow?
Increase Profits Lower Costs Increase market Power Reduce Risk Motivate Management
Boston Matrix - Dog
Market Growth: Low Relative Market Share: Low Earning: Low, unstable Cash Flow: Neutral or negative Strategy: Harvest/Divest
Strategic Outsourcing
Moving one or more internal value chain activities outside the frim's boundaries to other firms in the industry value chain
Industry Value Chain
depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing
The matrix locates the firm's individual SBUs in two dimensions:
- Relative market share (horizontal axis) - Speed of the market growth (vertical axis)
Strategic leaders must determine corporate strategy along these three dimensions and ask three corresponding questions:
1. Vertical Integration 2. Diversification 3. Geographic Scope
Related Linked diversification Strategy
a kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages ex) Amazon expanding pasts books, Disney, GE
Search Costs
are perhaps the major drawback of transacting in markets.
When a manufacturer of computers starts to produce its own computer components, the manufacturer engages in __________ vertical integration.
backward
industry value chain
depicts the transformation of raw materials into finished goods and services along distinct vertical stages, each of which represents a distinct industry in which a number of different firms are competing.
Strategic Alliance
is a voluntary arrangement between firms that involve sharing of resources and capabilities with the intent of developing processes, products, or services.
Product Market Diversification Strategy
refers to a firm that pursues both product and geographic diversification`
Diversification
refers to an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes
Offshoring
refers to the act of of outsourcing some of the firm's activities outside of the home country to another nation.
Vertical Integration
refers to the firms' ownership of its production of needed inputs or of the channels by which is distributes its outputs
Which type of alternative on the make-or-buy continuum involves competitive bidding by external companies hoping to acquire a temporary arrangement with a firm?
short-term contracts
What are the four quadrants of the core competence-market matrix?
- New competencies with existing markets - Existing competencies with existing markets - New competencies with new markets - Existing competencies with new markets
Types of corporate diversification
-Single business -dominant business - Related Diversification -Unrelated Diversification
Four Options to Formulate Corporate Strategy via Core Competencies
1. Leverage existing core competencies to improve current market position 2. Build new core competencies to protect and extend current market position. 3. Redeploy and recombine existing core competencies to compete in markets of the future 4. Build new core competencies to create and compete in markets of the future
Taper Integration
A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside market firms for some of its supplies and/or is forwardly integrated but also relies on outside market firms for some of its distribution
Diversification
An increase in the variety of products and services a firm offers or markets and the geographics regions in which it competes
CC Market Matrix - CC - New - Market - New
Building - new core competencies to create and compete in markets of the future
CC Market Matrix - CC - New - Market - Existing
Building - new core competencies to protect and extend current market position
Backward Vertical Integration
Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain
External transactions costs
Costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
Internal Transaction Cost
Costs pertaining to organizing an economic exchange within a hierarchy; also called administrative costs.
SBUs identified as star
Earnings: High, stable or growing Cash Flow: Neutral Strategy: Hold or invest for growth compete in a high-growth market and a high market share
SBUs identified as dogs
Earnings: Low, unstable Cash Flow: Neutral or negative Strategy: Harvest/divest compete in a low-growth market and low market share
SBUs identified as cash cows
Earnings: high, stable Cash Flow: High, stable Strategy: Hold compete in a low-growth market but have high market share
Boston Matrix - Question Mark
Market Growth: High Relative Market Share: Low Earnings: Low, unstable, or growing Cash Flow: Negative Strategy: Increase market share or harvest/divest
Benefits of Vertical Integration
-Lower costs - Improving quality - Facilitating scheduling and planning - Facilitating investments in specialized assets - Securing critical supplies and distribution channels.
Vertical Integration
In what stages of the industry value chain should the company participate? The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages.
Boston Matrix - Cash Cow
Market Growth: Low Relative Market Share: High Earning: High, Stable Cash Flow: High, Stable Strategy: Hold
Diversification discount
Situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units
Diversification premium
Situation in which the stock price of related-diversification firms is valued at greater than the sum of their individual business units
Backward and Forward Vertical Integration along an Industry Value Chain
Stage 1: Raw Materials Stage 2: Component and Intermediate Goods Stage 3: Final Assembly and Manufacturing Stage 4: Marketing and Sales Stage 5: After-Sales Service and Support
Corporate Strategy
The decision that senior management makes the goal-directed actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously
Diversification
What range of products and services should the company offer?
The type of diversification
What range of products and services to offer
Google's choice to hire programmers in-house suggests that they decided that the __ costs associated with this strategy are __ than the costs associated with contracting in the open market.
transaction; lower
Boston Matrix - Star
Market Growth: High Relative Market Share: High Earning: High, Stable, or growing Cash Flow: Neutral Strategy: Hold or invest for growth
Information asymmetries
Situation in which one party is more informed than another because of the possession of private information
Transaction Costs
are all costs associated with an economic exchange
When a business answers the question of where to compete, it is determining __.
corporate strategy
If a company moves ownership of activities closer to the end customer, such as providing after-sales support, it is engaging in ______ vertical integration.
forward
A benefit of ___________ is that in-house suppliers and distributors are subjected to market competition, which allows the firm to assess performance in comparison to others.
taper integration
When a firm is more efficient in organizing economic activity than markets are, the firm should _____.
vertically integrate
related diversification strategy
when it derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity.
Boston Consulting Group (BCG) Growth - share matrix
corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) speed of marekt (vertical axis)
Vertical Integrate
When costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market
Geographic Scope
Where should the company compete geographically in terms of regional, national, or international markets?
Unrelated diversification strategy
corporate strategy in which a firm derives less than 70% percent of its revenues from a single business and there are few, if any, linkages among its businesses ex) Yamaha, tata, Berkshire Hathway