chapter 8 mgmt 493

if costs at market<costs in house

the firms should consider purchasing instead

three dimensions of corporate strategy

-vertical integration -diversification -geographic scope

if costs in house<costs at market

-vertically integrate -own production of the inputs

single business

95% or more of revenue comes from a single business (low level of diversification)

internal transaction costs

Also referred to as admin costs—these are costs related to organizing the economic exchange within a hierarchy. (paying salaries and benefits, providing office space)

taper integration

Backward integrated but also relies on outside market firms for supplies OR Forward integrated but also relies on outside market firms for some of its distribution

Alternatives to Vertical Integration

Taper integration; strategic outsourcing

The 3-D television division of a large consumer electronics company has been recognized as a question mark. The company's LCD television division has been categorized under dogs. Which of the following statements will hold well in this scenario?

The 3-D television division operates in a high-growth market, whereas the LCD television division operates in a low-growth market.

Divina Pharma Inc. and MF Electronics Inc. have together invested and created a new organization, FirstHealth Inc., to focus on developing diagnostic devices. Through this new firm, both companies are attempting to combine their core competencies to innovate and reduce their risks associated with transaction-specific investments. However, the new organization operates independent of Divina Pharma and MF Electronics. Which of the following alternatives to integration does this scenario best illustrate?

a joint venture

Dominant Business

additional business activity pursued

transaction costs

associated with an economic exchange

Firms that use taper integration also use ________ when they rely on outside-market firms for some of their supplies.

backward vertical integration

In 2007, Salesforce.com recognized an emerging market for platform as a service (PaaS) offerings and developed a new competency in delivering software development and deployment tools. This allowed its customers to either extend their existing CRM offering or build completely new types of software. This is an example of

building new core competencies to create and compete in markets of the future

external transaction costs

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

ESB Group is the parent company of many related businesses under its banner. Each share of the parent company is quoted at $220. However, if this had to be assessed by adding the stock prices of each of its strategic business units, the value would only be $200 per share. In this scenario, what has ESB Group created?

diversification premium

related diversification

entering a new business or industry to create a competitive advantage in one or more of an organization's existing divisions or businesses

increased market power=

fewer competitors, more bargaining power, high profitability

Corporate Strategy

goal-directed actions that leaders take in the quest for competitive advantage

lower costs=

growth enables efficiency

When approaching a bank for a loan, the borrower has better knowledge than the lender about his or her own ability to repay the loan without defaulting. What is this situation referred to as?

information asymmetry

Decisions relating to the range of products and services a firm will offer determine the firm's

level of diversification

agent

manager or employee -should act on behalf of principal

strategic outsourcing

moving internal value chain activities to other firms

principal

owner of the firm -goal:create shareholder value

Vertical Integration

ownership of inputs or distribution channels

Forward vertical integration

owning activities closer to the customer (Customer service, marketing, sales)

Backward vertical integration

owning inputs of the value chain (raw materials, assembly and manufacturing)

The core competency of MotorCraft Inc. is its fuel-efficient engine found in its cars. These engines are developed and built in-house. The company realizes that there is a new market opportunity to diversify. Thus, it produces the car engines on a large scale and sells them to other automobile companies. In this scenario, MotorCraft is

redeploying and recombining existing core competencies to compete in future markets

increase profits=

shareholders returns

the principal agent problem

the agent's objectives differ from those of the principal, and one side can pursue hidden actions -solution:create stock option incentives for agents

Which of the following companies will be considered as a conglomerate?

the tata group, active in industries such as tea, steel, IT, power, and automobiles

Decisions relating to "what stages of the industry value chain to participate in" determine a firm's

vertical integration