Chapter 8 352
offshoring
the outsourcing of activities outside the home country
single-business firm
derives 95 percent or more of its revenues from one business
principal-agent problems and information asymmetries
Can lead to market failures, and thus situations where internalizing the activity is preferred
dominant-business firm
derives between 70 and 95 percent of its revenues from a single business but pursues at least one other business activity
firm growth
is motivated by the following: increasing profits, lowering costs, increasing market power, reducing risk, and managerial motives
It must support and strengthen a firm's strategic position, regardless of whether it is a differentiation, cost-leadership, or blue ocean strategy.
How does corporate strategy gain and sustain competitive advantage?
building new core competencies to create and compete in markets of the future.
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
conglomerates
The Tata Group, Warren Buffet's Berkshire Hathaway and the Japanese Yamaha group have several strategic business units under one corporate umbrella and are pursuing an unrelated diversification strategy. We would refer to these businesses as
increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions
What are the risks of vertical integration?
securing critical supplies and distribution channels, lowering costs, improving costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets
What the benefits of vertical integration?
When the costs to pursue an activity in-house are less than the costs of transacting in the market
When should firms vertically integrate?
increasing profits
are clearly related to enhancing a firm's competitive advantage
managerial motives such as increasing company perks and job security
are not legitimate reasons a firm needs to grow
"how to compete."
business strategy
increasing market power
can also contribute to a greater competitive advantage, but can also result in legal repercussions such as antitrust lawsuits
true
choices within a related diversification strategy can be related-con-strained or related-linked
"where to compete."
corporate strategy
1. industry value chain 2. products and services 3. geography (regional, national, or global markets)
corporate strategy concerns the boundaries of the firm along three dimensions:
Vertical Integration
denotes a firm's addition of value what percentage of a firm's sales is generated by the firm within its boundaries
industry value chain (vertical value chain)
depicts the transformation of raw materials in to finished products goods and services. Each stage typically represents a distinct industry in which a number of different firms compete
transaction cost economics
help managers decide what activities to do in-house ("make") versus what services and products to obtain from the external market ("buy").
strategic sourcing
involves moving one or more value chain activities outside the firm's boundaries to other firms boundaries to other firms in the industry value chain
forward vertical integration
involves moving ownership of activities closer to the end (customer) point of the value chain
diversification-performance relationship
is a function of the underlying type of diversification
taper integration
is a strategy in which a firm is backwardly integrated but also relies on outsidemarket firms for some of its supplies, and/or is forwardly integrated but also relies on outsidemarket firms for some distribution
information asymmetries arise when one party
is more informed than another because of the possession of private information
unrelated diversification
often results in a diversification discount: the stock price of such highly diversified firms is valued at less than the sum of their individual business units
related diversification
often results in a diversification premium: the stock price of related-diversification firms is valued at greater than the sum of their individual business units
a firm follows a related diversification strategy
when it derives less than 70 percent of its revenues from a single business activity but obtains revenues from other lines of business that are linked to the primary business activity
a firm follows an unrelated diversification strategy
when less than 70 percent of its revenues come from a single business, and there are few if any linkages among its businesses