Ch 8: Corporate Strategy -- Vertical Integration and Diversification

Core competence market matrix

Framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets

Diversification premium

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

Transaction costs

All internal and external costs associated with an economic exchange (firm or in markets)

Product market diversification strategy

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

Forward vertical integration

Changes in an industry value chain that involve moving ownership of activities closer to the endpoint of the value chain

Backward vertical integration

Changes in an industry value chain that involve moving ownership of activities upstream to the originating point of the value chain

Conglomerate

Company that combines two or more strategic business units under one overarching corporation (follows an unrelated diversification strategy)

Boston consulting group growth share matrix

Corporate planning tool in which the corporation is viewed as a portfolio of business units represented graphically along relative market share and market growth

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

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 linkages among its businesses

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

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 (administrative costs)

Costs pertaining to organizing an economic exchange within a hierarchy

Corporate strategy

Decisions and goal-directed actions to gain and sustain competitive advantage in several industries and markets simultaneously

Industry value chain

Depiction of the transformation of raw materials into finished goods and services along distinct vertical stages

Vertical integration

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

Diversification

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

Licensing

Long-term contract in the manufacturing sector that enables firms to commercialize intellectual property

Franchising

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

Long-term strategic decision that is both difficult and costly to reverse

Strategic outsourcing

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

Related constrained diversification strategy

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

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

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

Joint venture

Standalone organization created and jointly owned by two or more parent companies

Transaction cost economics

Theoretical framework to explain and predict the boundaries of the firm

Specialized assets

Unique assets with high opportunity cost (more value in their intended use than in their next-best use)

Strategic alliances

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

Taper integration

Way of orchestrating value activities in which a firm is backwardly/forwardly integrated but also relies on outside-market firms for some of its supplies/distribution

Vertical market failure

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