Chapter 8: Book

corporate strategy

3 dimensions of ___ ___: - vertical integration - diversification - geographic scope

boundaries

3 dimensions that determine the ____ of the firm: ■ The degree of vertical integration—in what stages of the industry value chain to participate. ■ The type of diversification—what range of products and services to offer. ■ The geographic scope—where to compete.

diversification

4 MAIN types of ____: — single business - dominant business - related diversification (including its subcategories related-constrained and related-linked diversification) - unrelated diversification.

diversification

4 main types of BUSINESS ___ strategies include: - 1. Single business. - 2. Dominant business. - 3. Related diversification. - 4. Unrelated diversification: the conglomerate.

dominant business

A ___ ___ firm derives between 70 and 95 percent of its revenues from a single business, but it pursues at least one other business activity that accounts for the remainder of revenue. - shares competencies in products, services, technology, or distribution.

single business

A ___ ___ firm derives more than 95 percent of its revenues from one business.

non diversified

A ___ ___company focuses on a single market

conglomerate

A company that combines two or more strategic business units under one overarching corporation and follows an unrelated diversification strategy is called a _____.

product market

A company that pursues both a product and a geographic diversification strategy simultaneously follows a ___ ___ diversification strategy.

related

A firm follows a ____ diversification strategy when it derives less than 70 percent of its revenues from a single business activity and obtains revenues from other lines of business linked to the primary business activity.

diversification

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

star

BCG Matrix: A corporation's ___: SBUs hold a high market share in a fast-growing market. Their earnings are high and either stable or growing. ( High market share and high growth rate)

question marks

BCG Matrix: ___ ___: It is not clear whether they will turn into dogs or stars. Their earnings are low and unstable, but they might be growing. The cash flow, however, is negative. (Low market share but high growth)

Cash cows

BCG Matrix: ___ are SBUs that compete in a low-growth market but hold considerable market share. Their earnings and cash flows are high and stable. (high market share and low growth)

upper left

___ ___ quadrant of core competence market matrix combines existing core competencies with new market opportunities. Here, managers must come up with strategic initiatives to build new core competencies to protect and extend the company's current market position.

related linked diversification strategy

_A kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages. Example: Amazon

Business

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

information asymmetries

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

Boston Consulting Group (BCG) growthshare 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.

unrelated diversification strategy

A firm follows an ___ ___ ___ when less than 70 percent of its revenues comes from a single business and there are few, if any, linkages among its businesses.

geographic

A firm that is active in several different countries is pursuing a ____ diversification strategy.

product

A firm that is active in several different product markets is pursuing a ___ diversification strategy.

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.

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 in the other partner. - A partner purchases an ownership share by buying stock or assets (in private companies), and thus making an equity investment. The taking of equity tends to signal greater commitment to the partnership.

joint venture

A stand-alone organization created and jointly owned by two or more parent companies. - make a long-term commitment, which in turn facilitates transaction-specific investments.

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. - Enhances firm's flexibility

dogs

BCG matrix: ____ are relatively easy to identify: They are the under performing businesses. They hold a small market share in a low-growth market; they have low and unstable earnings, combined with neutral or negative cash flows. (low market share and low growth rate)

vertical integration

Benefits of ___ ___: ■ Lowering costs. ■ Improving quality. ■ Facilitating scheduling and planning. ■ Facilitating investments in specialized assets. ■ Securing critical supplies and distribution channels.

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.

diversification

For ____ to enhance firm performance, it must do at least one of the following: ■ Provide economies of scale, which reduces costs. ■ Exploit economies of scope, which increases value. ■ Reduce costs and increase value.

diversification

General ___ strategies: - product - geographic - product-market

grow

Reasons for why firms need to ____: - 1. Increase profits - 2. Lower costs. - 3. Increase market power - 4. Reduce risk - 5. Motivate management.

vertical integration

Risks of ___ ___: ■ Increasing costs. ■ Reducing quality. ■ Reducing flexibility. ■ Increasing the potential for legal repercussions.

specialized assets

Several forms of ___ ___: - site specify - physical asset specify - human asset specify

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..

principal agent problem

The ___ ___ ___ is a major disadvantage of organizing economic activity within firms, as opposed to within markets. It can arise when an agent such as a manager, performing activities on behalf of the principal (the owner of the firm), pursues his or her own interests.

corporate strategy

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.

degree of diversification

The range of products and services should the firm offer

lemon problem

This is known as the ___ ____. Assume only two types of cars are sold: good cars and bad cars (lemons). Good cars are worth $8,000 and bad ones are worth $4,000. Moreover, only the seller knows whether a car is good or is a lemon. Assuming the market supply is split equally between good and bad cars, the probability of buying a lemon is 50 percent. Buyers are aware of the general possibility of buying a lemon and thus would like to hedge against it. Therefore, they split the difference and offer $6,000 for a used car. This discounting strategy has the perverse effect of crowding out all the good cars because the sellers perceive their value to be above $6,000. Assuming that to be the case, all used cars offered are examples of ____.

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.

vertically integrate

When the costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market (Cin-house < Cmarket), then the firm should ___ ___.

fully vertically integrated

Where all activities are conducted within the boundaries of the firm.

internal transaction costs

___ ___ ___ : these include costs pertaining to organizing an economic exchange within a firm - occur within the firm - also include administrative costs Examples include: - the costs of recruiting - retaining employees - paying salaries and benefits

Industry value chains

___ ___ ___ are also called vertical value chains, because they depict the transformation of raw materials into finished goods and services along distinct vertical stages. - Each stage typically represents a distinct industry in which a number of different firms are competing.

Physical asset specificity

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

Human asset specificity

___ ___ ___ are 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.

external transaction costs

___ ___ ___ are the costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract. - occur when companies transact in the open market

parent subsidiary relationship

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

transaction cost economics

___ ___ ___ explains and predicts the boundaries of the firm. Insights gained from transaction cost economics help managers decide what activities to do in-house versus what services and products to obtain from the external market.

requests for proposals (RFPs)

___ ___ ___ initiates competitive bidding for contracts to be awarded with a short duration, generally less than one year. Benefits: allows a somewhat longer planning period than individual market transactions. Drawbacks: firms responding to the ___ have no incentive to make any transaction-specific investments

Vertical market failure

___ ___ ___ occurs when transactions within the industry value chain are too risky, and alternatives to integration are too costly or difficult to administer.

High powered incentives

___ ___ ___ of the open market include the entrepreneur's ability to capture the venture's profit, to take a new venture through an initial public offering (IPO), or to be acquired by an existing firm.

Long term contracts

___ ___ ___ which work much like shortterm contracts but with a duration generally greater than one year - Help facilitate transaction-specific investments.

Transaction costs

___ ___ are all costs associated with an economic exchange. A strategic management framework, and enables managers to answer the question of whether it is cost-effective for their firm to expand its boundaries through vertical integration or diversification.

Transaction costs

___ ___ are all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets.

Site specificity

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

Core competencies

___ ___ are unique strengths embedded deep within a firm - allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost.

Strategic alliances

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

search costs

___ ___ are when a firm must scour the market to find reliable suppliers from among the many firms competing to offer similar products and services. - the biggest disadvantage of transacting in markets

strategic alliances

___ ___ can facilitate investments in transaction-specific assets without encountering the internal transaction costs involved in owning firms in various stages of the industry value chain. - is also known as an umbrella term

Vertical integration

___ ___ is the firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs. - Can be measured by the firm's value added

lower left

___ ___ quadrant of core competence market matrix combines existing core competencies with existing markets. Here, managers must come up with ideas of how to leverage existing core competencies to improve the firm's current market position.

lower right

___ ___ quadrant of core competence market matrix combines existing core competencies with new market opportunities. Here, managers must strategize about how to redeploy and recombine existing core competencies to compete in future markets.

resource based

___ ___ view of the firm, a firm's boundaries are delineated by its knowledge bases and core competencies.

strategic outsourcing

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

vertically integrate

___ ___ which is owning production of the needed inputs or the channels for the distribution of outputs.

Strategy

___ formulation centers around the key questions of where and how to compete.

Opportunism

___ is behavior characterized by self-interest seeking with guile

Economies of scope

___ of ___ are the 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

Economies of scale

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

corporate strategy

____ ___ determines the boundaries of the firm along three dimensions: - vertical integration (along the industry value chain) - diversification (of products and services) - geographic scope (regional, national, or global markets).

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.

Licensing

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

related constrained

a ___ ___ diversification strategy when it derives less than 70 percent of its revenues from a single business activity and obtains revenues from other lines of business related to the primary business activity.

diversified

a ____ company competes in several different markets simultaneously.

caveat emptor

means buyer beware.

upper right

the ___ ___ quadrant of core competence market matrix combines new core competencies with new market opportunities.