MGMT 310 - Chapter 6

Damage to firm's internal core competencies and capabilities, isolates firms from its external market

Disadvantages of outsourcing

Higher admin. costs for internal coordination, potential for obsolescence in tech or processes, tendency for complacency or lack of efficiency, lack of strategic flexibility

Disadvantages of vertical integration

Diversify

Ff the two businesses cannot add value above the value they create on their own as independently owned operations, the firm should not:

Owns or controls the distribution channels for its main products

Forward integration occurs when a firm:

Attractiveness test

Is the industry profitable or capable of being profitable?

The opportunity to leverage core assets or skills between different businesses, the opportunity for growth, the potential to manage or minimize risk, the potential for personal gain

Managers seek to diversify for:

Synergy

Many firms spend too much time on the potential benefits of --- but not enough time on the hard work necessary to make that potential a reality.

Cost of entry

Many managers also fall into the trap of diversifying into unattractive industries because the --- is low.

Corporate advantage

Occurs when a firm maximizes its resources to build a competitive advantage across its business units.

Forward integration

Occurs when a firm owns or controls the customers or distribution channels for its main products.

Backward integration

Occurs when a firm owns or controls the inputs it uses.

Vertical integration

Occurs when one corporation owns business units that make inputs for other business units in the same corporation.

Unrelated diversification

Performance increases from a single-product strategy to related diversification, and decreases to:

Opportunity to leverage core assets or skills & growth, potential to manage or minimize risk & attain personal gain

Reasons organizations diversify

Sick or dying company

unrelated diversification can allow a --- to use capital generated in a profitable division to prop it up for a short period of time.

Transfer of skills

The --- can occur when the business units have similar buyers, value activities, or similarities in the configuration of the value chain.

Ownership test

The test that a manager can use to determine the viability of international diversification involves two components - a "better off" test and a(n):

Financial economies

The ultimate goal of an unrelated diversification strategy is to create some type of ---.

Overall risk

The underlying rationale for unrelated diversification is that the efficient distribution of capital between business units will reduce the --- of the business.

Corporate advantage

A company derives a --- when it is able to secure collective benefits from its businesses that would not exist if the businesses were owned independently.

Maximizes its resources to build a competitive advantage across its various business lines

A corporate advantage occurs when a firm:

Efficiently allocating capital among units, purchasing a new business and restructuring its assets with the goal of selling it back into the marketplace at a higher price

A firm can achieve financial economies by:

Factor cost differences

A firm can pass the "better-off" component of an international scope test if its international diversification strategy offers:

Reduces costs of firm's noncore value chain activities, allows firms to focus more on core functions in its value chain

Advantages of outsourcing

Potential cost reductions in prod., improved coordination and quality control, protection of proprietary technology or processes, reduction in marketing costs

Advantages of vertical integration

Business unit

By adding another ---, a firm may be able to increase revenues while maintaining the same level of costs, because it can share these resources among units.

Synergy

Created when a firm generates sustainable cost savings by combining duplicate activities or deploying underutilized assets across multiple businesses.

Economies of scope

Exists when the costs of operating two or more businesses or producing two or more products with the same corporate structure is less than the costs of operating the businesses independently or producing each product separately.

Related diversification

Horizontal diversification is also known as ---.

Cost of entry test

How costly is it to enter the new industry?

Buy some farms that grow cocoa beans

If you owned a chocolate manufacturing company and wanted to implement backward integration to this business, you should:

Economies of scope

--- exist when the costs of operating two ore more businesses are less than the costs of operating the business independently.

Financial economies

--- involve(s) the cost savings that firm achieves through the distribution of capital among different business units.

Diversification

--- is defined as a strategy in which a firm engages in several different businesses that may or may not be related in order to create more value than if the businesses existed as stand-alone entities.

Market power

Achieved when a firm attempts to increase the price at which it sells products to levels above the normal price seen in the market.

Potential cost reductions in production, improved coordination and quality control, protection of proprietary technology or processes, reduction in marketing costs

Advantages of vertical integration

Spot contracts, outsourcing

Alternatives to vertical integration

Local laws

An obstacle that firms may face when diversifying internationally includes differences in:

Horizontal diversificaiton

Another name for related diversification where a firm pursues businesses that share a similar set of tangible and intangible resources.

Controlling the distribution channels for your product

As a manger, you would vertically integrate your business by:

Related diversification

A firm that owns more than one business that uses a similar set of tangible and intangible resources.

Diversification

A strategy in which a firm engages in several different businesses that may or may not be related in an attempt to create more value than if the businesses existed as stand-alone entities.

Single-product strategy

A strategy in which a firm focuses on one specific product, typically in one market.

Better-off test and Ownership test

Two components of the international scope test are:

The restructuring of business units

Unrelated diversification strategies can also achieve financial economies through:

Lack of strategic flexibility

Which of the following is a disadvantage of vertical integration?

Better-off test

Will the new industry provide the firm with a competitive advantage?

Transaction costs

Costs to obtain products or services from a contractor or supplier as well as the costs associated with writing and administering the contracts for these products and services.

Lack of strategic flexibility

You work as an operations manager at a firm that has decided to vertically integrate its business. You would most likely have concerns about implementing this corporate-level strategy because of its:

Unrelated diversification

A firm that manages several businesses with no reasonable connection.

Outsourcing

Contracting with a firm outside the corporation to perform certain tasks or functions that the corporation used to do on its own.

Spot contracts

Contracts that allow a buyer to purchase a commodity at a specific price.

Factor cost differences

Cost savings achieved by access to raw materials or other factors such as low-cost labor.

Financial economies

Cost savings that a firm achieves through the distribution of capital among business units.

The resources of a firm

The choice between related or unrelated diversification often results from an assessment of:

Administrative costs

The costs of coordinating activities between business units.