Corporate Strategy Ch 8

What is a credible commitment?

A long-term strategic decision that is both difficult and costly to reverse.

What is an equity alliance?

A partnership in which at least one partner takes partial ownership in the other partner (buy stock or make equity investment).

Explain the principle-agent problem.

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

What is information asymmetry?

A situation in which one party is more informed than another, because of the possession of private information. This contributes to the lemons problem.

What is taper integration?

A strategy in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies OR is forwardly integrated but also relies on some outside-market firms for some of its distribution.

What are transaction costs?

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

Describe the difference between backward and forward vertical integration.

Backward - moving ownership of activities upstream nearer to the originating point to the industry value chain whereas forward is the opposite.

Identify and evaluate the benefits and risks of vertical integration.

Benefits - securing critical supplies and distribution channels, lowering costs, improving quality, facilitating scheduling and planning. Risks - increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions.

What are the underlying strategic management concepts that guide the discussion of vertical integration, diversification, and geographic competition?

Core competencies, economies of scale, economies of scope, and transaction costs.

Describe the difference between corporate strategy and business strategy.

Corp - where to compete. Boundaries the firm in industry value chain, products and services, and geography. Bus - how to compete.

Explain diversification.

Diversification increases the variety of products and services it offers or markets and the geographic regions in which it competes. The firm is active in several different product markets, geographic locations, or both.

What are the three key questions answered by corporate strategy?

In what stages of the industry value chain to participate, what range of products and services to offer, where to compete geographically.

What is strategic outsourcing?

Involves moving one or more value chain activities outside the firm's boundaries to other firms in the industry value chain. Off-shoring is same, but outside the country.

What is the purpose of analyzing transaction costs?

Make or buy.

What are four alternatives to make or buy?

Short-term contracts, long-term contracts, equity alliances, and joint ventures.

What is the difference between a single-business firm and a dominant-business firm?

Single derives 95% of revenue from one business, where dominant derives 95-70% from a single business while pursuing at least one other business activity.

Who is responsible for formulating corporate strategy?

The CEO.

Define corporate strategy.

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

Explain vertical integration.

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