chapter 8 - wpc 470

disadvantages of firms

- Administrative costs - Low-powered incentives - Principal-agent problem

When does vertical integration make sense?

-When there are shortages of raw materials -To enhance the customer's experience

The advantages of firms include:

-command and control (fiat, hierarchical lines of authority) -coordination -transaction specific investments -community of knowledge

Dogs

-easy to identify, underperforming businesses. hold a smaller market share in a low-growth market, low and unstable earnings, combined with neutral or negative cash flows -harvest/divest

advantages of markets

-high powered incentives -increased flexibility

Star (BCG Matrix)

-hold high market share in a fast growing market -earnings are higher and either stable or growing -recommendation: invest sufficient resources to hold the star's position or even increase investments for future growth

Benefits of Vertical Integration

-lowering costs -improving quality -facilitating scheduling and planning -facilitating investments in specialized assets -securing critical supplies and distribution channels

disadvantages of markets

-search costs -opportunism (hold up) -incomplete contracting (specifying and measuring performance, information asymmetries) -enforcement of contracts

Types of Corporate Diversification

-single business -dominant business -related diversification -unrelated diversification

implications of strategic leaders

-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

Why firms need to grow

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

4 options to formulate corporate strategy via core competencies

1. leverage existing core competencies to improve current market position 2. build new core competencies to protect and extend current market positions 3. redeploy and recombine existing core competencies to compete in markets of the future 4. build new core competencies to create and compete in markets of the future

joint venture

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

unrelated diversification strategy

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.

related diversification

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.

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

short-term contract

Firms send out a Request for Proposal (RFP), competitive bidding ensues, the buying firm can often demand lower prices.

parent-subsidiary relationship

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.

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.

conglomerate

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

Boston Consulting Group (BCG) 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). SBU's are plotted into four categories (dog, cash cow, star, and question mark) each of which warrants a different investment strategy

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

related constrained diversification strategy

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 linked diversification strategy

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

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

transaction cost economics

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

strategic alliance

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

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

Dominant Business

between 70% and 95% of revenue comes from a single business

which quadrant in the core competence-market matrix is the hardest to pursue?

building new core competencies to create and compete in markets of the future

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

Cash Cows (BCG Matrix)

compete in low-growth market but hold considerable market share earnings and cash flow are high and stable

geographic diversification strategy

corporate strategy in which a firm is active in several different countries

product diversification strategy

corporate strategy in which a firm is active in several different product markets

product-market diversification strategy

corporate strategy in which a firm is active in several different product markets and several different countries

external transaction costs

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

internal transaction costs

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

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

Question Marks (BCG Matrix)

earnings are low and unstable, cash flow is negative, strategy for increasing market share or harvest/divest

Long-term contracts

help facilitate transaction specific investments

Risks of Vertical Integration

increasing costs, reducing quality, reducing flexibility, increasing the potential for legal repercussions

Single Business

low level of diversification; more than 95% of revenue comes from a single business

strategic outsourcing

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

equity alliance

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

Singletechno Industries, a U.S.-based large conglomerate, competes in the hospitality, education, telecommunications, entertainment, airlines, and chemical industries. It currently operates in about 30 nations, and is planning to expand its portfolio by investing in rapidly developing countries. Which of the following strategies is Groundswell Industries pursuing?

product market diversification strategy

Since Coca-Cola focuses on selling only soft drinks, a low degree of product diversification, we would conclude that they compete in a(n) ________ market versus their main competitor PepsiCo, that sells a wide variety of products.

single product

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

diversification premium

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

About 20 years ago, Sturdy Light, Inc., produced a sturdy, lightweight backpack in a market that was rapidly growing. Sturdy Light became a leader in this market. Eventually, the backpack market reached the maturity stage and slowed down. However, by this time, Sturdy Light had developed a strong brand name and continued to steadily lead the market. Which of the following describes this scenario? A. Sturdy Light was a star that developed into a cash cow. B. Sturdy Light was a question mark that developed into a star. C. Sturdy Light was a dog that developed into a question mark. D. Sturdy Light was a cash cow that developed into a star.

sturdy-light was a star that developed into a cash cow

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

Vertical Integration

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

Hatfan Inc. is a large automobile company. The company's petrol cars strategic business unit (SBU) has been recognized as a cash cow, and its hybrid electric cars SBU has been categorized under stars. Which of the following can be inferred from this scenario?

the petrol cars SBU operates in a low-growth market, whereas the hybrid electric cars SBU operates in a high growth market

vertical market failure

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