BUSMGT4490 - Chapter 8: Vertical Integration and Diversification
Licensing
a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property
Core Competence-Market Matrix
a framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets
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
Four underlying strategic management concepts
- core competencies - transaction costs - economies of scope - economies of scale
Why firms need to grow
1. increase profits 2. lower costs 3. increase market power 4. reduce risk 5. motivate management
A(n) _____ is a voluntary arrangement between firms that involves sharing of resources and capabilities with the intent of developing processes, products, or services
Strategic Alliance
Joint Venture
a stand-alone organization created and jointly owned by two or more parent companies
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
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
Product Diversification Strategy
corporate strategy in which a firm is active in several different product markets
Which of the following is the best option if a company wants to show strong commitment to a partner firm without acquiring that firm?
equity alliance
The four quadrants of the core competence-market matrix are which of the following?
existing/new - competencies/markets
Companies that transact in the open market incur
external transaction costs
In order for a firm to lower costs, it must
grow
Specialized assets have _____
high opportunity cost
The risks of vertical integration are increased costs, reduced quality, reduced flexibility, and _____
increase potential for legal repercussions
The _____ depicts the transformation of raw materials into finished goods and services along distinct vertical stages, each of which represents a distinct industry in which a number of different firms are competing
industry value chain
What are the costs associated with related-diversification strategies
influence and coordination
Which of the following are characteristics of a joint venture?
it is a long-term commitment by two or more partners it facilitates transaction-specific investments
Long-term contracts include which of the following forms
licensing franchising
Strategic Outsouring
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain
_____ refers to the act of outsourcing some of their firm's activities outside of the home country to another nation
offshoring
Wheels on the Go! is a company that manufactures tires for semi-trucks. The company is entirely owned by North American Haulers, a company in the semi-truck industry. The two companies have formed a(n) ____
parent-subsidiary relationship
In the taper integration system, a firm has _____ reliance on outside markets
partial
What is a major disadvantage or organizing economic activity within firms?
principal-agent problem
When a multi-business firm pools and shares and leverages competencies across different business lines, it is following a(n)
related diversification strategy
Why did Coca-Cola enter into a strategic alliance with Monster
so that it could gain private information to determine whether an acquisition might be beneficial
Long-term contracts are classified as _____
strategic alliances
Vertical Integration
the firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs
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 three types: site specificity, physical asset specificity, and human-asset specificity
Strategic Alliances
voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services
Which of the following statements about the make-or-buy continuum is true?
The "make" and "buy" choices anchor each end of the continuum
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). SBUs are plotted into four categories (dog, cash cow, star, and question mark), each of which warrants a different investment strategy
In the Boston Consulting Group growth-share matrix, each of the four categories in the matrix represents
a different investment strategy
To figure out is a firm's type of diversification is _____, one can ask questions about the degree to which the corporation's business units share core competencies
related or unrelated
Which type of alternative on the make-or-buy continuum involves competitive bidding by external companies hoping to acquire a temporary arrangement with a firm?
short-term contracts
Taper integration allows firms to ___
- gain knowledge from external sources - be more flexible when responding to market changes such as fluctuations in demand
To get the benefits of vertical integration without the accompanying risks, companies can
- use taper integration - choose strategic outsourcing
Principal-Agent Problem
situation in which an agent performing activities on behalf of a principal pursues his or her own interests
Information Asymmetry
situation in which one party is more informed than another because of the possession of private information
Diversification Discount
situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units
What is licensing?
a long-term contract that enables firms to commercialize intellectual property
Long-term contracts include which of the following forms?
licensing and franchising
Which of the following are types of general diversification strategies
- geographic - product - product-market
The forms of specialized assets include
- site specificity - human-asset specificity - physical-asset specificity
____ is a situation in which one party has more knowledge than another due to the possession of private knowledge
information asymmetry
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
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 involve moving ownership of activities upstream to the originating (inputs) point of the value chain
Industry Value Chain
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
____ refers to an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes
diversification
TWN, a large multinational corporation , chose to spin off one of its SBUs that was unrelated to TWN's core business in order to avoid the _____. When they announced the spin-off, the stock price of TWN went up by 5%
diversification discount
In the Boston Consulting Group matrix, _____ hold the small market share in a low-growth market
dogs
If a company moves ownership of activities closer to the end customer, such as providing after sales support, it is engaging in _____ vertical integration
forward
General Diversification Strategies
▪ A firm that is active in several different product markets is pursuing a product diversification strategy. ▪ A firm that is active in several different countries is pursuing a geographic diversification strategy. ▪ A company that pursues both a product and a geographic diversification strategy simultaneously follows a product-market diversification strategy.