Chapter 8

Taper Integration

(Alternative to Vertical Integration) A way of orchestrating value activities in which a firm is backwardly integrated, but it also relies on outside-market firms for some of its distribution.

Industry Value Chain

(AKA Vertical Value Chains) They depict the transformation of raw materials into finished goods and services along distinct vertical stages.

Strategic Outsourcing

(Alternative to Vertical Integration & reduces its level) Involves moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain.

Conglomerate

A company that combines 2 or more strategic business units (SBU's) under one overarching corporation and follows an unrelated diversification strategy.

Specialized assets

Assets required to be co-located.

Related Diversification Strategy

A firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business related to the primary activity.

Product-market Diversification Strategy

A firm is active in several different markets and several different countries.

Product Diversification Strategy

A firm is active in several different product markets.

Licensing

A form of long-term contacting in the manufacturing sector that enable firms to commercialize intellectual property such as a patent.

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 cary the franchisor's brand name.

Credible Commitment

A long-term strategic decision that is both difficult and costly to reverse. Ex: CocaCola & Monster

Joint Venture

A stand-alone organization created & jointly owned by two or more parent companies.

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.

Core Competence-market Matrix

Combines existing core competencies with new market opportunities.

Corporate Strategy

Comprises the decisions that senior management and the goal directed actions it takes in the quest for competitive advantage in several industries and markets simultaneously.

Internal Transaction Costs

Costs pertaining to organizing an economic exchange within a hierarchy. (AKA Administrative Costs) Ex: costs of recruiting and retaining employees, salaries and benefits, shop floor.

Related-Constrained Diversification Strategy

Executives pursue only businesses where they can apply the resources and core competencies already available in the primary business.

Related-Linked Diversification Strategy

Executives pursue various businesses opportunities that share only a limited # of linkages.

Geographic Diversification Strategy

Firm is active in several different countries.

Human Asset Specificity

Investments made in human capital to acquire unique knowledge and skills, which are NOT transferable to a different employer.

Boston Consulting Group growth-share matrix

Locates the firm's individual SBU's in two dimensions: 1) Relative Market Share (Horizontal Axis) 2) Speed of Market Growth (Vertical Axis) 4 different categories: Dog, Cash Cow, Star, and ?

Forward vertical integration

Moving ownership of activities closer to the end customer.

Backward Vertical Integration

Moving ownership of activities upstream to the originating inputs of the value chain.

Principal-agent problem

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

Info. Asymmetry

Situation in which one party is more informed than another because of the possession of private info.

External Transaction Costs

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

Vertical Integration

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

Diversification Premium

The stock price of related-diversification firms is valued at greater than the sum of their individual business units.

Diversification Discount

The stock price of such highly diversified firm is valued at less than the sum of their individual business unites.

Transaction cost economics

Theoretical framework in strategic management that helps managers decide what activities to do in house vs what services and products to obtain from the external market.

Strategic Alliances

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

Unrelated Diversification Strategy

When less than 70% of its revenues comes from a single business and there are few, if any, linkages among its businesses.

Vertical Market Failure

When the markets along the industry value chain are too risky, and alternatives too costly in time or money.

Physical-asset specialized

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