MGT499 exam 3

T/F Firms that pursue extremely high or extremely low levels of diversification perform better than those that pursue moderate levels of diversification

False

Unrelated diversification (conglomerate)

no businesses share competencies

Different types of strategic alliances

non-equity alliances equity alliances joint ventures

For diversification to enhance firm performance, it must do at least one of the following:

-Provide economies of scale, which reduces costs -Exploit economies of scope, which increases value -Both

Benefits of taper integration

-exposes in house suppliers and distributers to market competition so that performance comparisons are possible -enhances firms flexibility -combine internal and external knowledge

Why do firms enter strategic alliances?

-strengthen competitive position -enter new markets -hedge against uncertainty -access critical complementary assets -learn new capabilities

Why do firms engage in M&A's with competitors?

1. It reduces competitive intensity because the M&A leads to fewer competitors in the market 2. It could lower costs as firms pursue economies of scale 3. It could increase the differentiation of a firm's product and service offerings as the firm uses horizontal integration to fill gaps in its product offering 4. To access new markets & distribution channels 5. To access a new capability or competency 6. To preempt rivals

Forward vertical integration

A focal firm entering into its buyers' business in the industry value chain

Which of the following statements is true of an equity alliance?

A) An equity alliance is based on contractual agreements rather than partial ownership. B) In an equity alliance, the partners frequently exchange personnel to make the acquisition of tacit knowledge possible. C) Equity alliance is easy to initiate and terminate compared to non-equity alliance. D) An equity alliance creates stronger ties between the alliance partners when compared to parent-subsidiary relationship B

Horizontal integration

Absorption into a single firm of several firms involved in the same level of production and sharing resources at that level

When should a firm vertically integrate?

If cost to produce in house < Cost to buy

When should a firm outsource?

If cost to produce in house > cost to buy

Merger

Combination of two or more companies into a single firm Tend to be a friendly approach

corporate venture capital (CVC)

Defined as corporate minority equity investment in private startups

Primary purpose of CVC

For corporations: to learn new technologies that new ventures develop • For new ventures: to access complementary assets as well as capital

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

Level of diversification

non-equity alliance

Partnership based on contracts between firms. The most frequent forms are supply agreements, distribution agreements, and licensing agreements firms tend to share explicit, codifiable knowledge such as: Patents, user manuals and fact sheets, scientific publications due to its temporary nature, it can result in a lack of trust and commitment

Vertical Integration

Practice where a single entity controls the entire process of a product, from the raw materials to distribution

Onshoring

Relocation of business processes or production to a lower-cost location inside the same country as the business.

geographic diversification strategy

Selling the same product in different markets

BCG Growth-Share Matrix

The Boston Consulting Group planning tool that evaluates business units in terms of their growth potential and market share.

Horizontal integration through M&A's

The process of merging with a competitor at the same stage of the industry value chain, leading to industry consolidation A type of corporate strategy that can improve a firm's strategic position in a single industry

Industry value chain

The transformation of raw materials into finished goods and services along distinct vertical stages

Why Strategic Alliances Are Attractive

They enable firms to achieve goals faster and at lower costs than going it alone They complement or augment the value chain In contrast to M&A, they allow firms to circumvent potential legal repercussion

T/F Firms are more capable than markets at coordinating highly complex tasks, while markets are mor capable of providing high-powered incentives for entrepreneurship

True

T/F Managers have alternatives other than the two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").

True

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.

Speed of market growth

What dimension is on the vertical axis?

Principle-agent problem

When the agent (worker or manager) doesn't act in the best interest of the principle (owner). Due to the separation of ownership and control in public companies, the principal - agent problems are almost inevitable

Single Business Diversification Strategy

a corporate-level strategy wherein the firm generates 95% or more of its sales revenue from its core business area

Backward vertical integration

a focal firm entering into its suppliers' business in the industry value chain

Managerial hubris

a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary

unrelated diversification

a growth strategy whereby a new business lacks any common elements with the present business

related diversification

a growth strategy whereby the current target market and/or marketing mix shares something in common with the new opportunity

Related diversification

a growth strategy whereby the current target market and/or marketing mix shares something in common with the new opportunity Constrained: ALL businesses share competencies Linked: SOME businesses share competencies

Relative market share

a measure of the product's strength in a particular market, defined as the sales of the focal product divided by the sales achieved by the largest firm in the industry Horizontal

Equity alliances

a partnership in which at least one partner takes partial ownership in the other partner Equity alliances often involve exchange of personnel, so they allow the sharing of tacit knowledge that cannot be codified, in addition to explicit knowledge tends to produce stronger ties and greater trust than non-equity, contractual relationship

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

Transaction cost

all internal and external costs associated with an economic exchange, whether within a firm or in markets

business level strategy

an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

Site specificity

assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting

Physical asset specificity

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

Dominant business diversification

between 70% and 95% of revenue comes from a single business Additional business activity pursued

Global expansion

can enable companies to increase their profitability and grow their profits more rapidly

low market growth, high market share

cash cow

Economies of scope

cost savings from leveraging core competencies or sharing related activities among businesses in a corporation

Internal transaction costs

costs associated with organizing an economic exchange within a firm; administrative costs and etc Often increases as a firm becomes more vertically integrated

External transaction cost

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

low market growth, low market share

dog

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

Risks of Vertical Integration

increasing costs, reducing quality, reducing flexibility, increasing the potential for legal repercussions

Human-asset specificity

investments made in human capital to acquire unique knowledge and skills

M&A

mergers and acquisitions

Outsourcing

moving some of a firm's internal activities and decision responsibility to outside providers

Corporate Strategy

quest for competitive advantage when competing in multiple industries

high market growth, low market share

question mark

Geographic scope

scope of the geographic area to be covered by advertising media

Benefits of vertical integration

securing critical supplies, lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets

product diversification

selling different kinds of products

Product-market diversification

selling different kinds of products in different regions/countries

high market growth, high market share

star

Backward integration

takes information entered into a given system and sends it automatically to all upstream systems and processes

Off-shoring

the practice of basing some of a company's processes or services overseas, so as to take advantage of lower costs.

Restructuring

the process of reorganizing and divesting business units and exiting industries to refocus upon a company's core business and rebuild its distinctive competencies

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

Acquisition

the purchase of a company by another company Can be friendly or unfriendly

Strategic alliances

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

Joint ventures

when two or more companies join forces - sharing resources, risks, and profits, but not actually merging companies - to pursue specific opportunities Long-term commitment - Exchange both tacit and explicit knowledge via frequent interactions of personnel -Steppingstone toward full integration of the partnership • Often used to enter foreign markets