Business Strategy (Test 3)

A new product in which known components, based on existing technologies are reconfigured in a novel way to attack new markets

Architectural Innovation

Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain

Backward vertical integration

________ refers to the use of strategic alliances

Borrow

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). SBUs are plotted into four categories (dog, cash cow, star, and question mark), each of which warrants a different investment strategy.

Boston Consulting Group (BCG) growth-share metrix

The disadvantages of organizing economic activity within the firm includes:

1. Administrative costs 2. low-powered incentives, such as hourly wages and salaries. 3. The principal-agent problem

The advantages of markets include:

1. High-powered incentives 2. increased flexibility

Many firms have dominated an early wave of innovation only to be challenged and often destroyed by the next wave. Examples:

1. The exploitation of television-viewing options: Netflix 2. The move from typewriters to PCs to mobile devices

Several reasons explain why firms need to grow:

1. increase profits 2. lower costs 3. increase market power 4. reduce risk 5. motivate management

Vertical integration, either backward or forward, can have a number of benefits, including:

1. lowering costs 2. improving equality 3. facilitating scheduling and planning 4. facilitating investments in specialized assets 5. securing critical supplies and distribution channels

Alliances can be governed by the following mechanisms:

1. non-equity 2. equity alliances 3. joint ventures

Given that mergers and acquisitions, on average, destroy rather than create shareholder value, why do we see so many mergers? Reasons include:

1. principal-agent problems 2. the desire to overcome competitive disadvantage 3. superior acquisition and integration capability

For diversification to enhance firm performance, it must do at least one of the following:

1. provide economies of scale, which reduces costs 2. exploit economies of scope, which increases value 3. reduce costs and increase value

Three main benefits to a horizontal integration strategy:

1. reduction in competitive intensity 2. lower costs 3. increased differentiation

The disadvantages of markets include:

1. search costs 2. opportunism by other parties 3. incomplete contracting 4. enforcement of contracts

Common reasons firms enter alliances; they do so to:

1. strengthen competitive position 2. enter new markets 3. hedge against uncertainty 4. access critical complementary assets 5. learn new capabilities

The advantages of firms include:

1. the ability to make command-and-control decisions, 2. coordination of highly complex tasks to allow for specialized division of labor. 3. 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. 4. Creation of community of knowledge, meaning employees within firms have ongoing relationships, exchanging ideas and working closely together to solve problems.

By formulating corporate strategy, executives make important choices along three dimensions that determine the boundaries of the firm:

1. the degree of vertical integration: in what stages of the industry value chain to participate 2. the type of diversification: what range of products and services to offer 3. the geographic scope: where to compete

Several factors led to a shift in the knowledge landscape from closed innovation to open innovation. They include:

1. the increasing supply and mobility of skilled workers. 2. the exponential growth of venture capital 3. the increasing availability of external options to commericalize ideas that were previously shelved or insource promising ideas and inventions. 4. the increasing capability of external suppliers globally.

Why do firms make acquisitions? Three main reasons stand out:

1. to gain access to new markets and distribution channels 2. to gain access to a new capability or competency 3. to preempt rivals

Today, about __________ percent of the global mobile market uses the GSM standard.

80

A firm's ability to understand external technology developments, evaluate them and integrate them into current products or create new ones.

Absorptive Capacity

The purchase or takeover of one company by another; can be friendly or unfriendly.

Acquisition

A firm's ability to effectively manage three alliance-related tasks concurrently: 1.) partner selection and alliance formation, 2.) alliance design and governance, and 3.) post-formation alliance management.

Alliance Management Capability

Valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy.

Trade Secret

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.

Transaction Cost Economies

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

Transaction Costs

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.

Unrelated Diversification Strategy

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

Vertical Inegration

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

Vertical market failure

In all other cases, the firms should consider finding a less costly _______ arrangement when building is not an option.

borrow

Short-term as well as long-term contracts, such as licensing or franchising are a way to _____________ resources from another company.

borrow

Regardless, the firm should always first consider ________________ the necessary resources through integrated strategic alliances before looking at mergers and acquisitions.

borrowing

__________________ buyer beware

caveat emptor

_____________ are a function of the number, size, and types of businesses that are linked.

coordination costs

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

credible commitment

To accomplish effective alliance management, strategy scholars suggest that firms create a ____________, led by the vice president or director of alliance management and endowed with its own resources and support staff.

dedicated alliance function

Patents are a _________.

double-edged sword

The customers entering the market in the growth stage are ___________________.

early adopters

The customers coming into the market in the shakeout stage are called __________________________.

early majority

Another form of strategic alliance is an_____________________ - a partnership in which at least one partner take partial ownership in the other partner.

equity alliance

Firms can also innovate by leveraging _________________ into new markets

existing technologies

Jeff Besoz

founder of Amazon

Reed Hastings:

founder of Netflix

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

franchising

___________ all activities are conducted within the boundaries of the firm

fully vertically integrated

Bring the early majority on board is the key to catching the growth wave of the industry life cycle. Once they decide to enter the market, a __________________ is frequently observed.

herding effect

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

influence costs

The key insight of transaction cost economies is that different __________ markets versus firms have different costs attached.

institutional arrangements

In addition to the formal governance mechanisms, ____________ is a critical dimension of alliance success.

inter-organizational trust

____________ can be a source of value creation in a diversification strategy if the conglomerate's headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets.

internal capital markets

A ____________ is a standalone organization created and jointly owned by two or more parent companies.

joint venture

The next wave of growth comes from buyers in the ____________________ entering the market in the maturity stage. They make up 34% of the market.

late majority

_______________ are contractual alliances in which the participants regularly exchange codified knowledge

licensing agreements

Although, the industry life cycle is a useful framework to guide strategic choice, industries do not ___________ through these stages.

necessarily evolve

Firms following the closed innovation model, however, are much more likely to fall prone to the ___________

not-invented-here syndrome

When outsourced activities take place outside the home country, the correct term is ________.

offshoring

The firm may experience _____________________- resistance to changes in the status quo.

organizational inertia

the ____________ describes the most-integrated alternative to performing an activity within one's own corporate family

parent-subsidary relationship

In the introductory stage, the level of ______________ innovation is at a maximum because new features increasing perceived consumer value are critical to gaining a traction in the market.

product

The resource gap is _________ because closing the gap is likely to lead to competitive advantage

strategic

The customer segment in the introductory stage of the industry life cycle is called _________________________.

technology enthusiasts

The term ________ implies that the firm is able to source the resource externally through a contract that allows for the transfer of ownership or use of the resource.

tradable

Social entrepreneurs use a _________ approach to assess performance

triple-bottom line

firms that are less __________________ are firms that focus on only one or a few stages of the industry value chain.

vertically disintegrated with a low degree of vertical integration

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 _____________ by owning production of the needed inputs or the channels for the distribution of outputs.

vertically integrate

__________ in the build-borrow-buy framework refers to internal development.

Build

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).

Build-borrow-or-buy-framework

________ refers to acquiring a firm.

Buy

Cooperation by competitors to achieve strategic objective.

Co-opetition

is a process driven by the "perennial gale of creative destruction," in the words of famed economist Joseph Schumpeter.

Competition

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

Conglomerate

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

Core competence market matrix

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

Corporate Strategy

Equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances

Corporate Venture Capital

Conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group.

Crossing-the-chasm framework

An innovation that leverages new technologies to attack existing markets from the bottom up.

Disruptive Innovation

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

Diversification Discount

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

Diversification premium

The agents that introduce change into the competitive system.

Entrepreneurs

The process by which people undertake economic risk to innovate- to create new products, processes, and sometimes new organizations.

Entrepreneurship

Partnership in which at least one partner takes partial ownership in the other

Equity Alliance

Idea:

Example: wireless communication technology today is built upon the fundamental science breakthroughs Albert Einstein accomplished over 100 years ago in the research on the nature of light.

Knowledge that can be codified; concerns knowing about a process or product.

Explicit Knowledge

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

External Transaction Costs

an innovation that squarely builds on an established knowledge base and steadily improves an existing product or service.

Incremental Innovation

Depiction of 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

Industry Value Chain

The five different stages- introduction, growth, shakeout, maturity, and decline that occur in the evolution of an industry over time

Industry life-cycle

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

Information Assymmetry

The commercialization of any new product or process, or the modification and recombination of existing ones.

Innovation

the successful introduction of a new product, process, or business model- a powerful driver in the competitive process

Innovation

A firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making

Innovation Ecosystem

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

Internal Transaction Costs

When innovating within existing companies, change agents are often called _________________: those pursuing corporate entrepreneurship

Intrapreneurs

The transformation of an idea into a new product or process or the modification of existing ones.

Invention

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

Joint-venture

________________ are the last consumer segment to come into the market, entering in the declining stage of the industry life cycle.

Laggards

Situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary.

Learning Races

A form of long-term contracting in the manufacturing sector the enables firms to commercialize intellectual property.

Licensing

A form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.

Managerial Hubris

An innovation that draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of the existing knowledge bases with a new stream of knowledge

Radical Innovation

Approach to strategic decision making that breaks down a large investment decision into a set of smaller decisions that are staged sequentially over time.

Real-options perspective

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

Related-constrained diversification strategy

A kind of related diversification strategy in which executives pursue various business opportunities that share only a limited number of linkages

Related-linked diversification strategy

Strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries

Relational view of competitive advantage

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

Restructuring

An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes also called frugal innovation.

Reverse Innovation

________ assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting.

Site specificity

The pursuit of social goals while creating a profitable business.

Social Entrepreneurship

Unique assets with high opportunity cost: they have significantly more value in their intended use than in their next best use. They come in three types: site specificity, physical asset specificity, and human asset specificity.

Specialized Assets

An agreed-upon solution about a common set of engineering features and design choices

Standard

A voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.

Strategic Alliance

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

Strategic Alliances

The pursuit of innovation using tools and concepts from strategic management.

Strategic Entrepreneurship

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

Strategic Outsourcing

___________________ is an umbrella term that denotes different hybrid organizational forms--among them, long term contracts, equity alliances, and joint ventures.

Strategic alliances

Knowledge that cannot be codified; concerns knowing how to do a certain task can be acquired only through active participation in that task.

Tacit Knowledge

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

Taper Integration

Competitive benefits that accrue to the successful innovator

First-mover advantages

Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain

Forward Vertical integration

The process of merging with competitors, leading to industry consolidation.

Horizontal Integration

Acquisition in which the target company does not wish to be acquired.

Hostile Takeover

___________ investments made in human capital to acquire unique knowledge and skills, such as mastering the routines and procedures of a specific organization, which are not transferable to a different employer

Human asset specificity

Broadly viewed, innovation describes the discover, development, and transformation of new knowledge in a four-step process captured in the four I's:

Idea Invention Innovation Imitation

A conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions.

Markets and technology framework

The joining of two independent companies to form a combined entity. (Ex: Live Nation merged with Ticketmaster)

Merger

First movers may also benefit from _____________ effects.

Network

The positive effect (externality) that one user of a product or service has on the value of that product for other users.

Network Effects

Partnership based on contracts between firms

Non-equity alliance

What factors explain increasingly rapid technological diffusion and adoption?

One determinant is that initial innovation such as the car, airplane, telephone, and the use of electricity provided the necessary infrastructure for newer innovations to diffuse more rapidly. Also, the emergence of new business models that make innovations more accessible, and satellite and cable distribution systems facilitated the ability of mass media such as radio and TV to deliver advertising and information to a wider audience.

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 other are spun out.

Open Innovation

________ is defined as self-interest seeking with guile

Opportunism

__________ concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long-term rewards.

Partner commitment

________ captures aspects of cultural fit between different firms.

Partner compatibility

A form of intellectual property that gives the inventor exclusive rights to benefit from commercializing a technology for a specified time period in exchange for public disclosure of the underlying idea

Patent

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

Physical-asset specificity

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

Principal-agent problem

New ways to produce existing products or deliver existing services.

Process Innovation

New or recombined knowledge embodied in new products

Product Innovation

Markets where the market leader captures almost all of the market share and is able to extract a significant amount of the value credited.

Winner-takes-all markets