Ch. 8

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

A situation in which one party is more informed than the other due to the possession of private info is called Info Asymmetry. It can result in the ____ of desirable goods by inferior ones.

crowding out

Moderate levels of diversification are associated with

higher firm performance

Assets required to be co-located such as equipment necessary for mining bauxite

site specificity of specialized asset

A helpful restructuring tool that guides portfolio planning and each category warrants a different strategy

BCG Growth-share matrix

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

Owning inputs of the value chain is called _____ whereas _____ is owning activities closer to the customer

Backward, forward

Alternatives on the make or buy continuum with the least integration

Buy (Arms length) like short term contracts

A way to guide managerial decision in regard to diversification strategy. The first tasks is to identify existing core competencies & understand current market situation. When applying existing or new dimensions to core competencies and markets, four quadrants emerge each with distinct implications

Core Competence-Market Matrix

Decisions that leaders make; goal-directed actions that they take in quest for competitive advantage

Corporate Strategy

What range of products/services should the company offer describes __.

Diversification

Additional business activity pursued in corporate diversification

Dominant

Name 2 ways that diversification can enhance firm performance

Economies of scale (reduce costs) Economies of scope (increase value)

Increase in a variety of markets and geographic regions

Geographic diversification

costs that 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

Crowding out of desirable goods and services by inferior ones like used cars, e-commerce, mortgage-backed securities, and R&D projects are examples of

Info Asymmetry

A related-diversification strategy that can enhance corporate performance and considers coordination and influence and can add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize growth potential

Internal Capital Markets

Can be a source of value creation in diversification strategy; a way to allocate capital at a lower cost if more efficient than external markets

Internal Capital Markets

The most integrated alternative to performing ones own corporate family. The corporate parent owns and can direct it via command and control

Parent-subsidiary relationship

A major disadvantage of organizing economic activity within firm in which agents pursue their own interests (corporate jets, golf outings, and expensive hotels)

Principal Agent Problem

Increase in variety of products and services and active in several product markets

Product Diversification

Product and geographic diversification

Product-market diversification

Constrained: all businesses share competencies and Linked: some businesses share competencies

Related diversification

The two dimensions of BCG growth-share matrix are

Relative market share (horizontal axis) and speed of market growth (vertical axis)

Reorganizing and divesting business units and activities helps refocus a company and leverage competencies more fully.

Restructuring

What are the 4 types of Corporate Diversification?

Single Dominant Related Unrelated

Co-located assets, unique equipment, and human capital; have high opportunity costs because they have significantly more value in their intended use than in their next best use.

Specialized Assets

What is one solution the principal (owner of the firm) can take to ensure agents (employees) are acting on behalf of the firm?

Stock options to make agents owners

Moving internal value chain activities to other firms

Strategic Outsourcing

-Long-term contracts (licensing and franchising) -equity alliance -joint ventures

Strategic alliance (in the middle of 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

Taper Integration

What are 2 alternatives to Vertical Integration

Taper integration and strategic outsourcing

A conglomerate; no businesses share competencies

Unrelated corporate diversification

Lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets, securing critical supplies and distribution channels are all advantages of

Vertical Integration

The ownership of inputs or distribution channels. It asks "what percentage of the firms sales is generated within the firms boundaries?"

Vertical Integration

When transactions are too risky or costly

Vertical Market Failure

When does vertical integration make sense?

When there are issues with raw materials and eliminate annoyances to enhance customer experience

If market costs are less than in house costs then the firm should

consider purchasing

costs that are a function of number, size, and type of businesses that are linked

coordination

The Underlying concepts that guide the three dimensions of corporate strategy: (vertical integration, diversification, and geo scope)

core competencies, economies of scale, economies of scope, transaction costs

SBU matrix is plotted in four categories of the matrix

dog, cash cow, star, and question mark

Firms that compete in single markets could potentially benefit from ____ by leveraging core competencies into adjacent markets

economies of scope

employees with specific qualities and knowledge that is not transferable to a different employer

human asset specificity

What are the four risks of vertical integration

increasing costs and potential for legal repercussions reduced quality and flexibility

High and low levels of diversification are generally associated with

lower overall performance

The diversification-performance relationship implies that companies that focus on a single business, as well as companies that pursue unrelated diversification...

often fail to achieve additional value creation

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

physical asset specificity

The transformation of raw materials into finished goods along distinct stages (supply chain)

vertical integration

Three Boundaries of the firm (3)

vertical integration, diversification, geographic scope

If in House costs are less than Market costs a firm should

vertically integrate (own production of inputs or own output distribution channels)