6650 Chapter 8: Corporate Strategy: Vertical Integration and Diversification

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single-business firm

derives 95% or more of its revenues from one business

dominant-business firm

derives between 70- and 95% of its revenues from a single business, but it pursues at least one other business activity and shares competencies in products, services, technology, or distribution

parent-subsidiary relationship

describes the most integrated alternative to performing an activity within one's own corporation. The corporate parent owns the subsidiary and can direct it via command and control

restructuring

describes the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully

RFP

request for proposals

economies of scope

savings that come from producing two or more outputs or providing different services at less cost than producing each individually though using the same resources and technology

diversification discount

situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units

diversification premium

situation in which the stock price of related-diversification firms is valued at greater than the sum of their individual business units

information asymmetries

situations in which one party is more informed than another, because of the possession of private information

after-sales service and support

stage five of the industry value chain include

marketing sales

stage four of the industry value chain include

final assembly manufacturing

stage three of the industry value chain include

principal-agent problem

A situation in which an agent performing activities on behalf of a principal (the owner of the firm) pursues his or her own interests

conglomerate

a company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy

disadvantages for firms

Are administrative costs an advantage/disadvantage for firms/markets

advantages of markets

Are high-powered incentives an advantage/disadvantage for firms/markets

disadvantages for firms

Are low-powered incentives, such as hourly wages and salaries an advantage/disadvantage for firms/markets

disadvantage of markets

Are search costs an advantage/disadvantage for firms/markets

advantages for firms

Are transaction-specific investments, such as specialized robotics equipment that is highly valuable within the firm, but of little or no use in the external market an advantage/disadvantage for firms/markets

product-market diversification strategy

a company that pursues both a product and geographic diversification strategy simultaneously

risks of vertical integration

Increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions are considered?

advantages for firms

Is coordination of highly complex tasks to allow for specialized division of labor an advantage/disadvantage for firms/markets

disadvantage of markets

Is enforcement of contracts an advantage/disadvantage for firms/markets

disadvantage of markets

Is incomplete contracting an advantage/disadvantage for firms/markets

advantages of markets

Is increased flexibility an advantage/disadvantage for firms/markets

disadvantage of markets

Is opportunism by other parties an advantage/disadvantage for firms/markets

advantages for firms

Is the ability to make command-and-control decisions by fiat along clear hierarchical lines of authority an advantage/disadvantage for firms/markets

advantages for firms

Is the creation of a community of knowledge an advantage/disadvantage for firms/markets

disadvantages for firms

Is the principal-agent problem an advantage/disadvantage for firms/markets

make managers owners through stock options

One way to overcome the principal-agent problem is?

dogs

SBU that are under performing businesses; holds a small market share in a low-growth market, recommended to divest the business or to harvest it

cash cow

SBUs that compete in a low-growth market but hold considerable market share. the earnings and cash flows are high and stable

star

SBUs that hold a high market share in a fast-growing market. Earnings are high and either stable or growing.

question marks

SBUs that hold an unclear standing. earnings are low and unstable, but might be growing. cash flow is negative

benefits of vertical integration

Securing critical supplies and distribution channels, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets are considered?

raw material

Stage one of the industry value chain include

components intermediate goods

Stage two of the industry value chain include

licensing franchising

Two types of long-term contracts

internal transaction costs

costs pertaining to organizing an economic exchange within a hierarchy; also called administrative costs

increased flexibility

The transaction in markets that enables those who wish to purchase goods to compare prices and services among many different providers

product diversification strategy geographic diversification strategy product-market diversification strategy

Three general diversification strategies

site specificity physical-asset specificity human asset specificity

Three types of specialized assets?

long-term contracts equity alliances joint ventures

What are the 3 hybrid organizational forms of strategic alliances?

core competencies economies of scope economies of scale transaction costs

What are the four underlying strategic management concepts that determine the scope of a firm?

single business dominant business related diversification unrelated diversification

What are the main types of business diversification

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 (horizontal axis) and speed of market growth (vertical axis).

higher than

a diversification premium is a situation in which the stock price of a related-diversification firm is valued______________________the sum of their individual business units

related diversification strategy

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

licensing

a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent

core competence-market matrix

a framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets

coordination costs

a function of the number, size, and types of businesses that are linked to one another

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 carry the franchisor's brand name

credible commitment

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

equity alliance

a partnership in which at least one partner takes partial ownership int he other partner

joint venture

a special form of strategic alliance where two or more partners create and jointly own a new organization

transaction cost economics

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 is forwardly integrated but also relies on outside market firms for some of its distribution

fully vertically integrated

all activities are conducted within the boundaries of the firm

transaction costs

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

vertical integration

allows firms to increase operational efficiencies through improved coordination and the fine-tuning of adjacent value chain activities

transaction cost economics

allows leaders to explain which activities a firm should pursue in-house (make) versus which goods and services to obtain externally (buy)

industry value chain

also called vertical value chains

short-term contracts long-term contracts (licensing & franchising) equity alliances joint ventures

alternatives in the make-or-buy continuum include?

diversification

an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes

site specificity

assets are required to be co-located, such as the equipment necessary for mining

physical-asset specificity

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

opportunism

behavior characterized by self-interest seeking with guile

business strategy

concerns the question of how to compete in a single product market

long-term contracts

contracts that help facilitate transaction-specific investments and generally are greater than one year

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

search costs

costs incurred when a firm must scour the market to find reliable suppliers from among the many firms competing to offer similar products and services

external transaction costs

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

corporate strategy

determines the boundaries of the firm along three dimensions: industry value chain, products and services, and geography (regional, national, or global markets)

degree of diversification

determines the range of products and services the firm should offer

vertically disintegrated

firms that focus on only one or a few stages of the industry value chain

dog cash cow star question mark

four categories of the BCG growth share matrix that SBU's are potted into

human-asset specificity

investments made in human capital to acquire unique knowledge and skills

strategic outsourcing

moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain

forward vertical integration

moving ownership of activities in the value chain closer to the end customer

backward vertical integration

moving ownership of activities in the value chain upstream to the originating inputs of the value chain

influence costs

occur due to political maneuvering by managers to influence capital resource allocation and the resulting inefficiencies stemming from the suboptimal allocation of scarce resources

economies of scale

occur when a firm's average cost per unit decreases as its output increases

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

vertical integration

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

industry value chain

they depict the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing

specialized assets

unique assets with high opportunity cost: they have significantly more value in their intended use than in their next-best use.

core competencies

unique strengths embedded deep within a firm and allow a firm to differentiate its products and services from those of its rivals

strategic alliances

voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage

related-constrained related-linked

what are the two types of related diversification

related-constrained diversification

when executives consider business opportunities only where they can leverage their existing competencies and resources, (must be related through common resources, capabilities, and competencies) the firm is using?

related linked diversification

when executives consider new business activities that share only a limited number of linkages the firm is using?

unrelated diversification strategy

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

off-shoring

when outsourced activities take place outside the home country

vertically integrate

when the costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market, then the firm should?


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