Ch. 9 Horizontal integration and Vertical Integration

What are the benefits of vertical integration?

- Facilitate investment in specialized assets - Protect quality - Results improved scheduling (greater control over supply chain activities) - Build barriers to entry

What are the four Corporate level decision?

- Globalization - Horizontal and vertical Integration - Diversification - Strategic Alliances

What are some disadvantages of vertical integration?

- cost - rapid change in the industry - demand unpredictablitiy

What are the steps to vertical integration for an oil company?

- exploring for crude oil - drilling for crude oil - pumping crude oil - shipping crude oil - refining crude oil - selling oil to gas stations

What are some benefits of horizontal integration?

- managing rivalry - reduce competition by gaining market share - reduced costs - increasing value of products - increased bargaining power over buyers and suppliers

What are some limitations for Horizontal integration?

- over estimation of benefits - cultural difference between acquired and acquiring company - high management turnover

What are some horizontal integration limitations?

- over estimation of benefits - cultural differences between acquired and acquiring company - high management turnover

What is corporate strategy?

Identifying the business in which a company should participate, the value creation activities in those businesses, and best means of expanding and contracting those businesses.

What is horizontal integration?

The process of acquiring or merging with industry competitors to gain competitive advantages. google buying android

Define acquisition.

When a company purchases another company. Example would be when Google bought Android.

what is credible commitment?

a believable promise or pledge to support the development of a long term relationship between companies

what is hostage taking?

a means of exchanging valuable resources to guarantee that each partner to an agreement will keep their side of the bargain

How does horizontal integration increase bargaining power?

horizontal integration increases bargaining power over buyers and suppliers because the acquirer gains market share.

When should firms vertically integrate?

if cost in-house < Market cost

When should a firm outsource?

if cost in-house > Market cost

What are specialized assets

is one that is designed to perform a specific task and whose value is significantly reduced in its next best use example would be when BP invests in pipelines to lower shipping costs.

What is strategic alliance?

long-term agreements between two or more companies to jointly develop new products or processes that benefit all companies that are part of the agreement

What is vertical integration?

the expansion of operations either backwards or forwards example would be Coca-Cola buying bottling plants

What are transfer pricing?

the price that one division of a company charges another division for its products, which are the inputs the other division requires t make its own products

Define merger.

two firms are combines on a relatively co-equal basis.

What is vertical disintegration?

when a company decides to exit industries, either forward or backward in the industry value chain to its core industry to increase profitability.