Chapter 8 - Corporate Strategy: Vertical Integration and Diversification

Product-Market Diversification Strategy

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

Diversification

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

Site Specificity

Assets are required to be co-located, such as the equipment necessary for mining

Physical-asset Specificity

Assets whose physical and engineering properties are designed to satisfy a particular customer

Joint Venture

Organizational form in which two or more partners create and jointly own a new organization

Specialized Assets

Unique assets with high opportunity cost: they have significantly more value in their intended use than in their next-best use.

Strategic Alliance

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage

Products and Services

What range of goods to provide; determines the level of diversification

Related-Linked Diversification

When executives consider new business activities that share only a limited number of linkages

Geographic

Where to compete in terms of regional, national, and international markets

Conglomerate

A company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy

Boston Consulting Group 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).

Core Competence-Market Matrix

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

Licensing

A from of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property

Franchising

A long-term contract in which a franchiser grants a franchisee the right to use the franchiser's trademark and business processes to offer goods and services that carry the franchiser's brand name; the franchisee in turn pays an up-front buy-in lump sum and a percentage of revenues

Credible Commitment

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

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 percent of its revenues from a single business activity and obtains revenues from other lines of business that are directly linked to the primary business activity

Product Diversification Strategy

Corporate Strategy in which a firm is active in several different product markets

Unrelated Diversification Strategy

Corporate strategy in which a firm derives less than 70 percent of its revenues from a single business activity 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

Human Asset Specificity

Investments made in human capital to acquire unique knowledge and skills

Strategic Outsourcing

Moving one or more internal value chain activities outside the firm's 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

Related-Constrained Diversification

Strategy where businesses can leverage their existing competencies and resources; the choices of alternative business activities are limited by the fact that they need to be related through common resources, capabilities, and competencies

Vertical integration

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

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

Corporate Strategy

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

Industry Value Chain

the transformation of raw materials into finished goods and services along distinct vertical stages. This decision determines the firm's vertical integration

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