4490 Exam 2
what is an example of a strategic alliance?
Jupiter Pharma Inc. teaming up with a research company to invent and market breakthrough vaccines
GE's decision to let a GE team in China develop an inexpensive and portable ultrasound machine for developing markets is an example of _________
a bottom-up innovation strategy
product diversification strategy
corporate strategy in which a firm is active in several different product markets
product-market diversification strategy
corporate strategy in which a firm is active in several different product markets and several different countries
what are firm cost drivers
cost of input factors economies of scale learning curve effects experience curve effects
external transaction costs
costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
differentiation strategy
generic business strategy that seeks to create higher value for customers than the value that competitors create
strategy for dog
harvest/divest
what is the framework that states that important resources and capabilities are commonly embedded in strategic alliances that cross firm boundaries?
the relational view of competitive advantage
value innovation
the simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy
what are some advantages of joint ventures?
trust, commitment, strong ties
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 3 types - site specificity, physical asset specificity, human asset specificity
what key question does corporate strategy answer?
where to compete
what is an example of horizontal integration?
B9 Electronics Inc. acquires its competitor, Virtue Electronics Inc., to gain access to its core competencies
horizontal integration
the process of merging with competitors leading to industry consolidation
strategic entrepreneurship
the pursuit of innovation using tools and concepts from strategic management
social entrepreneurship
the pursuit of social goals while creating a profitable business
scope of competition
the size - narrow or broad - of the market in which a firm chooses to compete
invention
the transformation of an idea into a new product/process, or the modification and recombination of existing ones
a firm's transition between different parts of the industry life cycle is difficult because...
there is a big gulf separating the early adopters from customer segments that make up the mass market
what is a disadvantage faced by first movers in an industry?
they will have to find distribution channels and complementary assets
how can firms build alliance management capability?
through repeated experiences over time
what are some of the reasons why firms enter into strategic alliances?
to enter new markets, to learn new capabilities, to strengthen their competitive position
why might a firm want to enter into an equity alliance instead of a short- or long-term contract?
to facilitate transaction-specific investments, to get insider info about the partner's business, and to make a credible commitment
what are the three main reasons why firms make acquisitions?
to gain access to a new capability or competency, to gain access to new distribution channels and markets, to preempt rivals
what is the main goal of corporate venture capital investments?
to gain access to new technologies
what are the three choices in the build-borrow-or-buy framework?
acquisition of new resources, strategic alliances, or internal development
what are the three options used by executives to drive firm growth?
acquisitions, alliances, or organic growth
during the shakeout stage of the industry life cycle, profits degrade for....
all but the most efficient firms
what is the term that refers to a company's ability to handle three tasks related to an alliance concurrently and effectively?
alliance management capability
what is an example of related-constrained diversification?
an automobile company that manufactures petrol cars expanding into the diesel car industry
highly diversified firms experience a diversification discount in the stock market because they...
are unable to create additional value
blue ocean strategy
business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs
a firm might want to use a strategic alliance to...
change the industry structure
strategic trade-offs
choices between a cost or value position - such choices are necessary because higher value creation tends to generate higher cost
what are the forms of agreement that non-equity alliances typically take?
distribution, licensing, and supply agreements
what refers to an increase in the variety of products/services a firm offers or markets and the geographic region in which it competes?
diversification
________ is best described as the process by which people undertake economic risk to innovate - to create new products, processes, and sometimes new organizations
entrepreneurship
what are partnerships in which at least one partner takes partial ownership of the other partner?
equity alliances
strategy scholars believe that firms should create a dedicated alliance function with what features?
it should have its own resources and support staff; it should be led by a vice president or director
what are the phases of alliance management
partner selection and alliance formation, alliance design and governance, post-formation alliance management
there exists important trade-offs between value creation and low cost because value creation and cost tend to be...
positively correlated
economies of scope
savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources/technology
in which stage of the industry life cycle does competition become more intense, forcing weaker firms out of the industry?
shakeout
what are the main types of business diversification?
single business, dominant business, unrelated diversification, related diversification
economies of scale allow firms to...
spread their fixed costs over a larger output, employ specialized systems and equipment, take advantage of certain physical properties
when a blue ocean strategy is successfully formulated and implemented, investments in differentiation and low costs aren't...
substitutes but complements
knowledge that involves knowing how to do a certain task and that can't be codified is _______ knowledge
tacit
what is a fact about the real-options perspective?
the approach allows the incumbent firm to obtain additional info at predetermined stages
innovation
the commercialization of any new product or process, or the modification and recombination of existing ones
network effects
the positive effect (externality) that one user of a product or service has on the value of that product for other users
what is true of the growth stage in the industry life cycle?
the prices begin to fall during this stage when compared to the intro stage
what is a major disadvantage of organizing economic activity within firms?
the principal-agent problem
entrepreneurship
the process by which people undertake economic risk to innovate - to create new products, processes, and sometimes new organizations
what is an example of human-asset specificity?
training employees on how to operate a customized furnace
To formulate an appropriate business-level strategy, managers must answer the __________ questions of competition
who, what, why, how
when companies get involved in a bidding war and the winner overpays for the acquisition, the acquiring company has fallen victim to the...
winner's curse
credible commitment
a long-term strategic decision that is both difficult and costly to reverse
advantages of firms
command and control hierarchial lines of authority coordination transaction-specific investments community of knowledge
first-mover advantage
competitive benefits that accrue to the successful innovator
5 aspects of maturity stage
few firms remain industry structure morphs into an oligopoly with only a few large firms process innovation reaches its maximum level of product innovation sinks to minimum remaining firms tend to enjoy economies of scale
cash cow
low market growth, high market share
dog
low market growth, low market share
benefits of vertical integration
lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets, securing critical suppliers and distribution channels
one way to overcome the principal-agent problem is to...
make managers owners through stock options
winner-take-all markets
markets where the market leader captures almost all of the market share and is able to extract a significant amount of the value created
a ________ describes the process of joining two independent companies with their consent to form a combined entity on a permanent basis
merger
parent subsidiary relationship
most integrated alternative to performing an activitiy with one's own corporate family - corporate parent owns the subsidiary and can direct it via command and control
strategic outsourcing
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain
product innovation
new or recombined knowledge embodied in new products
closed innovation
new products discovered, developed, and commercialized internally
process innovation
new ways to produce existing products or deliver existing services
what are the three mechanisms that alliances can be governed by?
non-equity alliances, equity alliances, joint ventures
a disadvantage associated with obtaining goods/services externally is...
nontrivial search costs to be borne by the firm
a blue ocean strategy typically allows a firm to...
offer a differentiated product/service at low cost
minimum efficient scale (MES)
output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale
in the taper integration system, a firm has __________ reliance on outside markets
partial
what are the two necessary conditions for successful alliance formation?
partner commitment and partner compatibility
a firm with alliance management capability is able to effectively manage what?
partner selection and alliance formation, alliance design and governance, and post-formation alliance management
non-equity alliance
partnerships based on contracts between firms
equity alliance
partnerships in which at least one partner takes partial ownership in the other
what are the primary reasons why a firm might pursue a merger?
principal-agent problems, the desire to overcome competitive advantage, superior acquisition and integration capability
two important features that managers can adjust in an effort to improve the firm's strategic position are _________
product features and customer service
what are value drivers?
product features, customer service, complements
industry life cycle
the five different stages - introduction, growth, shakeout, maturity, and decline - that occur in the evolution of an industry over time
related-linked diversification strategy
a kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages
franchising
a long-term contract in which a franchiser grants a franchisee the right to use the franchiser's trademark and business processes to offer goods and services that carry the franchiser's brand name
what is an example of backward vertical integration?
a chocolate manufacturing company setting up its own cocoa plantations
conglomerate
a company that combines two or more strategic business units under one overarching corporation: follows an unrelated diversification strategy
markets-and-technology framework
a conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions
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 and speed of market growth - SBUs are plotted into 4 categories, each of which warrants a different investment strategy
absorptive capacity
a firm's ability to understand external technology development, evaluate them, and integrate them into current products or create new ones
innovation ecosystem
a firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic marketing decisions
patent
a form of intellectual property that gives the inventor exclusive rights to benefit from commercializing a technology for a specified period of time in exchange for public disclosure of the underlying idea
licensing
a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property
managerial hubris
a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary
open innovation
a framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones - the sharing goes both ways; some external ideas and inventions are insourced while others are spun out
core competence-market matrix
a framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets
what occurs when the targeted firm is unwillingly acquired?
a hostile takeover
a country may require a company to form ________ and provide knowledge and advanced technology in exchange for access to the market
a joint venture
related-constricted diversification strategy
a kind of related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in the primary business
how do mergers and acquisitions differ?
a merger describes the joining of two independent companies, while an acquisition describes the purchase or takeover of a firm
architectural innovation
a new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets
what approach to strategic decision making take a larger investment decision and divides it into multiple smaller decisions that happen over time?
a real-options perspective
a non-diversified company focuses on what?
a single market
what would most likely limit a firm's growth?
a social entrepreneur makes conservation of the environment the primary goal of their firm
joint venture
a stand-alone organization created and jointly owned by two or more parent companies
transaction cost economies
a theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to competitive advantage
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 forwardly integrated but also relies on outside-market firms for some of its distribution
what did Kraft see as an advantage of integration with Cadbury?
access to new markets
hostile takeover
acquisition in which the target company doesn't wish to be acquired
disadvantages of firms
administrative costs low-powered incentives principal-agent problem
transaction costs
all internal and external costs associated with an economic exchange, whether within a firm or in markets
standard
an agreed-upon solution about a common set of engineering features and design choices
diversification
an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes
radical innovation
an innovation that draws on novel methods or materials, is derived either from an entirely different knowledge base or form a recombination of the existing knowledge bases with a new stream of knowledge
disruptive innovation
an innovation that leverages new technologies to attack existing markets from the bottom up
incremental innovation
an innovation that squarely builds on an established knowledge base and steadily improves an existing product or service
reverse innovation
an innovation that was developed for emerging economies before being introduced in developed economies - also called frugal innovation
real-options perspective
approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time
4 categories of BCG growth-share matrix
cash cow, dog, question mark, star
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 involves moving ownership of activities upstream to the originating (inputs) point of the value chain
5 aspects of shakeout stage
competitive intensity increases and weaker firms forced out firms begin to cut prices and offer more services consolidations and acquisitions occur, weaker firms exit through bankruptcy winners often stake out a strong position as cost leaders few may implement blue ocean strategy, combining differentiation and low cost
build-borrow-or-buy framework
conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy)
crossing-the-chasm framework
conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group
co-opetition
cooperation by competitors to achieve a strategic goal
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, if any, linkages among its businesses
geographic diversification strategy
corporate strategy in which a firm is active in several different countries
internal transaction costs
costs pertaining to organizing an economic exchange within a hierarchy; also called administrative costs
early majority
customer coming into the market in the shakeout stage
technology enthusiasts
customer segment entering in the intro stage
laggards
customer segment entering the market at the decline stage
late majority
customer segment entering the market during the maturity stage
early adopters
customers entering the market in the growth stage
economies of scale
decreases in cost per unit as output increases
firms pursuing cost-leadership strategy seek to...
deliver products or services at a lower cost than competitors
in a focused differentiation strategy, a firm seeks to...
deliver products/services with unique features to a specific, narrow part of the market
4 aspects of growth stage of industry life cycle
demand increases competitive rivalry muted standard emerges product/process innovations made
industry value chain
depiction of the transformation of raw materials into finished goods/services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing
the viability of a differentiation strategy is severely undermined when the...
differentiated products become commoditized throughout the industry
a firm experiences _________ when an increase in output results in an increase in cost
diseconomies of scale
what can incumbent firms do to counter disruptive innovation?
disrupt themselves, protect the low end of the market, continue to innovate
3 reasons why incumbent firms focus on incremental innovation
economic incentives, organizational inertia, innovation ecosystem
corporate venture capital (CVC)
equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances
4 options at the final stage of the industry life cycle
exit, harvest, maintain, consolidate
cost-leaderships strategy
generic business strategy that seeks to create the same or similar value for customers at a lower cost
business-level strategy
goal-directed actions managers take in their quest for competitive advantage when competing in a single product market
strategy canvas
graphical depiction of a company's relative performance vis-a-vis its competitors across the industry's key success factors
horizontal integration can...
help a firm improve its strategic position in an industry
star
high market growth, high market share
question mark
high market growth, low market share
advantages of markets
high-power incentives flexibility
strategy for cash cow
hold
strategy for star
hold or invest for growth
value curve
horizontal connection of the points of each value on the strategy canvas that helps strategists diagnose and determine courses of action
________ is best described as the process of merging with a competitor at the same stage of the value chain
horizontal integration
when two competitors merge, leading to industry consolidation, they are engaging in...
horizontal integration
strategy for question mark
increase market share or harvest/divest
reasons why firms need to grow
increase profits, lower costs, increase market power, reduce risk, motivate management
firms often consolidate through horizontal mergers and acquisitions to...
increase their market power
what are some managerial advantages of building a firm into a large organization?
increased power, greater prestige, more job security
diseconomies of scale
increases in cost per unit when output increases
risks of vertical integration
increasing costs reducing quality reducing flexibility increasing the potential for legal reprecussions
factors that led to a shift in the knowledge landscape from closed to open innovation
increasing supply and mobility of skilled workers, the exponential growth of venture capital, the increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions, the increasing capabilities of external suppliers globally
what allows a firm to redefine a market in its favor?
innovation
experience curve
inverse relationship between the total value-added costs of a product and the company experience in manufacturing and marketing it
explicit knowledge
knowledge that can be codified; concerns knowing about a process or product
tacit knowledge
knowledge that can't be codified; concerns knowing how to do a certain task and can be acquired only through active participation in the task
cost-leadership strategy is focused on...
low cost
for diversification to enhance the performance of a firm, it has to do at least one of the following:
provide economies of scale, exploit economies of scope, reduce costs and increase value
acquisition
purchase or takeover of one company by another, can be friendly or unfriendly
as differentiation and cost leadership are distinct strategic positions that require trade-offs, it's...
quite difficult to translate a blue ocean strategy into reality
if a pharmaceutical company develops a first-of-its-kind vaccine to prevent HIV AIDS and thus creates a whole new market for the product (noninfected civilians), it would be a(n)...
radical innovation
what are some of the advantages of vertical integration?
reducing costs, facilitating scheduling, bettering quality
what are sources of value creation in a horizontal integration strategy?
reduction in competitive intensity, lower costs, increased differentiation
to figure out if a firm's type of diversification is ______ or ________, one can ask questions about the degree to which the corporation's business units share core competencies
related; unrelated
focused cost-leadership strategy
same as the cost-leadership strategy except with a narrow focus on a niche market
focused differentiation strategy
same as the differentiation strategy except with a narrow focus on a niche market
disadvantages of markets
search costs opportunism incomplete contracting enforcement of contracts
principal-agent problem
situation in which an agent performing activities on behalf of a principal pursues their own interests
informative asymmetry
situation in which one party is more informed than another because of the possession of private info
diversification premium
situation in which the stock price of highly diversified firms is valued at higher than the sum of its individual business units
diversification discount
situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units
learning races
situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which firms learn may vary
3 aspects of decline stage
size of market contracts further as demand falls innovation efforts cease managers have 4 strat options : exit, harvest, maintain, consolidate
relational view of competitive advantage
strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries
corporate strategy
the decisions that senior management makes and the goal-directed actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously
executives make important choices along 3 dimensions that determine the boundaries of a firm
the degree of vertical integration, the type of diversification, the geographic scope
vertical integration
the firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs
true or false: because of the size of organizations is typically positively correlated with prestige, power, and pay, principal-agent problems might be a reason to pursue M&As
true
trade secret
valuable proprietary info that isn't in the public domain and where the firm make every effort to maintain its secrecy
an advantage of ______ is that it helps ensure that needed materials and distribution channels are available when needed
vertical integration
strategic alliances
voluntary arrangements between firms that involve sharing of knowledge, resources, and capabilities with the intent of developing processes, products, and services
vertical market failure
when the markets along the industry value chain are too risky and alternatives too costly in time or money