Ch 8: Corporate Strategy -- Vertical Integration and Diversification
Core competence market matrix
Framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets
Diversification premium
Situation in which the stock price of related-diversification firms is valued at greater than the sum of their individual business units
Transaction costs
All internal and external costs associated with an economic exchange (firm or in markets)
Product market diversification strategy
Corporate strategy in which a firm is active in several different product markets and several different countries
Forward vertical integration
Changes in an industry value chain that involve moving ownership of activities closer to the endpoint of the value chain
Backward vertical integration
Changes in an industry value chain that involve moving ownership of activities upstream to the originating point of the value chain
Conglomerate
Company that combines two or more strategic business units under one overarching corporation (follows an unrelated diversification strategy)
Boston consulting group growth share matrix
Corporate planning tool in which the corporation is viewed as a portfolio of business units represented graphically along relative market share and market growth
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
Unrelated diversification strategy
Corporate strategy in which a firm derives less than 70 percent of its revenues from a single business and there are few 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
External transaction costs
Costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
Internal transaction costs (administrative costs)
Costs pertaining to organizing an economic exchange within a hierarchy
Corporate strategy
Decisions and goal-directed actions to gain and sustain competitive advantage in several industries and markets simultaneously
Industry value chain
Depiction of the transformation of raw materials into finished goods and services along distinct vertical stages
Vertical integration
Firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs
Diversification
Increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes
Licensing
Long-term contract in the manufacturing sector that enables firms to commercialize intellectual property
Franchising
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
Credible commitment
Long-term strategic decision that is both difficult and costly to reverse
Strategic outsourcing
Moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain
Related constrained diversification strategy
Related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in the primary business
Related linked diversification strategy
Related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages
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
Joint venture
Standalone organization created and jointly owned by two or more parent companies
Transaction cost economics
Theoretical framework to explain and predict the boundaries of the firm
Specialized assets
Unique assets with high opportunity cost (more value in their intended use than in their next-best use)
Strategic alliances
Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services
Taper integration
Way of orchestrating value activities in which a firm is backwardly/forwardly integrated but also relies on outside-market firms for some of its supplies/distribution
Vertical market failure
When the markets along the industry value chain are too risky and alternatives too costly in time or money