BUSMGT4490 - Chapter 8: Vertical Integration and Diversification

Licensing

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

Core Competence-Market Matrix

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

Franchising

a long-term contract in which a 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

Four underlying strategic management concepts

- core competencies - transaction costs - economies of scope - economies of scale

Why firms need to grow

1. increase profits 2. lower costs 3. increase market power 4. reduce risk 5. motivate management

A(n) _____ is a voluntary arrangement between firms that involves sharing of resources and capabilities with the intent of developing processes, products, or services

Strategic Alliance

Joint Venture

a stand-alone organization created and jointly owned by two or more parent companies

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

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 linked to the primary business activity

Product Diversification Strategy

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

Which of the following is the best option if a company wants to show strong commitment to a partner firm without acquiring that firm?

equity alliance

The four quadrants of the core competence-market matrix are which of the following?

existing/new - competencies/markets

Companies that transact in the open market incur

external transaction costs

In order for a firm to lower costs, it must

grow

Specialized assets have _____

high opportunity cost

The risks of vertical integration are increased costs, reduced quality, reduced flexibility, and _____

increase potential for legal repercussions

The _____ 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

industry value chain

What are the costs associated with related-diversification strategies

influence and coordination

Which of the following are characteristics of a joint venture?

it is a long-term commitment by two or more partners it facilitates transaction-specific investments

Long-term contracts include which of the following forms

licensing franchising

Strategic Outsouring

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

_____ refers to the act of outsourcing some of their firm's activities outside of the home country to another nation

offshoring

Wheels on the Go! is a company that manufactures tires for semi-trucks. The company is entirely owned by North American Haulers, a company in the semi-truck industry. The two companies have formed a(n) ____

parent-subsidiary relationship

In the taper integration system, a firm has _____ reliance on outside markets

partial

What is a major disadvantage or organizing economic activity within firms?

principal-agent problem

When a multi-business firm pools and shares and leverages competencies across different business lines, it is following a(n)

related diversification strategy

Why did Coca-Cola enter into a strategic alliance with Monster

so that it could gain private information to determine whether an acquisition might be beneficial

Long-term contracts are classified as _____

strategic alliances

Vertical Integration

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

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

Which of the following statements about the make-or-buy continuum is true?

The "make" and "buy" choices anchor each end of the continuum

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

In the Boston Consulting Group growth-share matrix, each of the four categories in the matrix represents

a different investment strategy

To figure out is a firm's type of diversification is _____, one can ask questions about the degree to which the corporation's business units share core competencies

related or unrelated

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

Taper integration allows firms to ___

- gain knowledge from external sources - be more flexible when responding to market changes such as fluctuations in demand

To get the benefits of vertical integration without the accompanying risks, companies can

- use taper integration - choose strategic outsourcing

Principal-Agent Problem

situation in which an agent performing activities on behalf of a principal pursues his or her own interests

Information Asymmetry

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

Diversification Discount

situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units

What is licensing?

a long-term contract that enables firms to commercialize intellectual property

Long-term contracts include which of the following forms?

licensing and franchising

Which of the following are types of general diversification strategies

- geographic - product - product-market

The forms of specialized assets include

- site specificity - human-asset specificity - physical-asset specificity

____ is a situation in which one party has more knowledge than another due to the possession of private knowledge

information asymmetry

Transaction Costs

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

Diversification

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

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) point of the 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

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

diversification

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

In the Boston Consulting Group matrix, _____ hold the small market share in a low-growth market

dogs

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

General Diversification Strategies

▪ A firm that is active in several different product markets is pursuing a product diversification strategy. ▪ A firm that is active in several different countries is pursuing a geographic diversification strategy. ▪ A company that pursues both a product and a geographic diversification strategy simultaneously follows a product-market diversification strategy.