Chapter 8 Corporate Strategy

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 and speed of market growth. SBUs are plotted into four categories (dog, cash, star, and question mark) each of which warrants a different investment strategy

diversification

an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes

franchising

another example of a long-term contract, granting 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

equity alliance

another form of strategic alliance; partnership in which at least one partner makes partial ownership in the other partner

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

unrelated diversification strategy

corporate strategy in which a firm derives less than 70% of its revenues from a single business and there are few if any linkages among its businesses

geographic diversification strategy

corporate strategy in which a firm is active in several different countries

product diversification strategy

corporate strategy in which a firm is active in several different product markets

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

transaction cost economics

explains and predicts the boundaries of the firm; insights gained from transaction cost economics help managers decide what activities to do in-house versus what services and products to obtain from the external market

vertical integration

firm's ownership of its production of needed inputs or of the channels which it distributes its outputs

the degree of vertical integration:

in what stages of the industry value chain to participate

why do firms need to grow?

increase profits, lower costs, increase market power, reduce risk, motivate management

licensing

is a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent

strategic outsourcing

moving one or more internal value chain activities outside the firms boundaries to other firms in the industry value chain

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

information symmetries

situations in which one party is more informed than another because of the possession of private information

external transaction costs

the costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract

strategic alliances

voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, and services

the type of diversification:

what range of products and services to offer

lemons problem

when firms transact in the market, such unequal information (pg. 261)

vertical market failure

when the markets along the industry value chain are too risky, and alternatives too costly in time or money

internal transaction costs

these include costs pertaining to organizing an economic exchange within the firm - for example, the costs of recruiting and retaining employees; paying salaries and benefits; setting up a shop floor

specialized assets

unique assets with high opportunity costs: 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

the geographic scope:

where to compete

what does corporate strategy provide the answers for?

where to compete

corporate strategy

comprises the decisions that senior management makes and goal-directed actions it takes in the quest for competitive advantage in several industries and markets simultaneously

benefits of vertical integration:

lowering costs, improving quality, facilitation scheduling and planning, etc.

principal-agent problem

major disadvantage of organizing economic activity within firms, as opposed to within markets; it can arise when an agent such as a manager, performing activities, on behalf of the principal, pursues his or her own interests

core competence-market matrix

a framework guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets

conglomerate

a company that combines two or more strategic businesses unites under one overarching corporation; follows an unrelated diversification strategy

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

credible commitment

a long-term strategic decision that is both difficult and costly to reverse

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

joint venture

another special form of strategic alliance; two or more partners create and jointly own a new organization

the advantages of markets include:

high-powered incentives, increased flexibility, search costs, opportunism by other parties, incomplete contracting, enforcement of contracts

related constrained diversification strategy

a kind of related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in the primary business

transaction costs

are all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm 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

backward vertical integration

changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) points of the value chain

product-market diversification strategy

corporate strategy in which a firm is active in several different product markets and several different countries

long-term contracts

work much like short-term contracts but with a duration generally greater than one year