MGT 460 TEST 2

Types of Vertical Integration

-full vertical integration -partial integration -tapered integration

Narrowly diversified firms:

Are comprised of a few related or unrelated businesses.

What is the name of the process for developing new businesses as an outgrowth of a company's established business operations?

Corporate venturing

Multi-business enterprises:

Have a business portfolio consisting of several unrelated groups of related businesses.

Dominant-business enterprises:

Have a major "core" firm that accounts for 50 to 80% of total revenues and a collection of small related or unrelated firms that accounts for the remainder.

Broadly diversified firms:

Have a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both.

is the range of the product and service segments that the firm serves within its market.

Horizontal scope

acquisition

Is a combination in which one firm, the "acquirer," purchases and absorbs the operations of another firm, the "acquired."

what is the rule for organizing the work effort to support good strategy execution?

Match the firm's organizational structure to it's unique strategy

joint venture

a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. two or more companies create a single legal entity in which each owns a share.

Companies engaged in a single line of business most commonly utilize an organizational structure that can be

a functional (departmental) organizational structure

The five generic competitive strategies are not characteristics by

a high-cost strategy.

According to the value-price-cost framework, deploying a differentiation strategy involves costs that might well exceed those of the average competitor, but with a successful differentiation strategy, that disadvantage is more than made up for by

a rise in the perceived value of the differentiated good, giving the differentiator a clear competitive advantage over the average rival.

· Identify and explain the meaning and strategic significance of each of the following terms.

a. Related diversification- possess competitively valuable cross-business value chain and resource matchups. It has strategic significance Because it leverages strategic fit, companies that engage in related diversification are more likely to achieve gains in shareholder value. b. Economics of scope- re cost reductions that flow from cross-business resource sharing in the activities of the multiple businesses of a firm. It has strategic significance because it can increase a firm's value and lead to increases in performance and higher returns to shareholders. c. Unrelated diversification- have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level. It has strategic significance because it provides the opportunity to change to industries that are more profitable.

· Identify and briefly explain what is meant by each of the following terms:

a. vertical integration strategy: can expand the firm's range of activities backward into its sources of supply or forward toward end users of its products b. First-mover advantage: an advantage gained by a company that first introduces a product/service to market c. Horizontal scope- set of products and services offered vertical scope- a business expands by acquiring another company that operates before or after them in the supply chain

Steps to update a company's capabilities to match changing market conditions and customer expectations take place often include

acquiring, developing, and strengthening key resources and capabilities

the process of recruiting and retaining capable employees is

always an essential ingredient of successful strategy execution

best-cost strategies

are a hybrid of low cost and differentiation strategies, incorporating features of both simultaneously. They may target either a broad or narrow (focused) base of value-conscious customers.

A company's competitive strategy should

be well matched to its internal situation and predicted on leveraging its collection of competitively valuable resources and competencies.

Offensive strategic moves involve all of the following except

blocking the avenues open to challengers.

WHAT ARE THE 5 GENERIC COMPETITIVE STRATEGIES?

broad low-cost, broad differentiation, focused low-cost, focused differentiation, and best-cost provider.

Successful broad differentiation allows a firm to

command a premium price for its product, and/or increase unit sales, and/or gain buyer loyalty to its brand.

focused differentiation strategy

concentrating on a narrow buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals' products

focused low-cost strategy

concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals.

Low-Cost Advantage

cumulative costs across the overall value chain must be lower than competitors' cumulative costs.

A low-cost provider strategy can defeat a differentiation strategy when

customers are basically satisfied and don't think extra attributes are worth a higher price.

the most common approaches to capability building include all of the following except

divesting underperforming units

The task of crafting a company's overall corporate strategy for a diversified company encompasses all of the following except

divesting well-performing businesses.

Differentiation

enhances profitability whenever a company's product can command a sufficiently higher price or produce sufficiently greater unit sales to more than cover the added costs of achieving the differentiation.

Strategic offensives should, as general rule, be based on

exploiting a company's strongest competitive assets- its most valuable resources and capabilities.

Best-cost (Hybrid) Strategy

giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes.

The purposes of a defensive strategy do not include

increasing the risk of having to defend an attack.

The principal offensive strategy options include all of the following except

initiating a market threat and counterattack simultaneously to affect a distraction.

the most common building blocks for a companys organizational structure

involve a functional or departmental structure that includes process, geographic, product or customer groups performing one or more major processing steps along the value chain

value driver

is a factor that can have a strong differentiating effect.

A cost driver

is a factor that has a strong influence on a firm's costs. A low-cost advantage over rivals can translate into better profitability than rivals attain.

strategic alliance

is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. each company works together but no new legal entity is created.

merger

is the combining of two or more firms into a single corporate entity that often takes on a new name.

A low-cost leader's basis for competitive advantage is

meaningful lower overall costs than rivals on comparable products.

A competitive strategy of striving to be the low-cost provider is particularly attractive when

most buyers use the product in much the same ways, with user requirements calling for a standardized product.

The essence of a broad differentiation strategy is to

offer unique product attributes in ways that are valuable and appealing and that buyers consider the cost worth it.

A dynamic capability is the

ongoing capacity to modify existing resources and capabilities to create new ones.

The big dilemma an acquisition-minded firm faces is whether to

pay a premium price for a successful company or buy struggling company at a bargain price.

Once a company has decided to employ a particular generic competitive strategy, then it must make the following additional strategic choices, except whether to

pay special attention to buyer segments that a rival is already serving.

Accessing capabilities through an external source can be accomplished through all of these EXCEPT

promoting qualified people with the right know-how in timely and cost-effective manner

Good strategy execution requires which of the following?

pulling those resources and capabilities into places, strengthening them as needed, and then modifying them as market conditions evolve

Economies of scope

re cost reductions that flow from cross-business resource sharing in the activities of the multiple businesses of a firm.

broad differentiation strategy

seeking to differentiate the company's product/ service offering from rivals in ways that will appeal to a broad spectrum of buyers

The three components of building a capable organization are

staffing the organization, building core competencies and competitive capabilities, and structuring the organization and work effort.

broad low-cost strategy

striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals.

broad differentiation strategy

the essence of it is to offer unique product attributes that a wide range of buyers find appealing and worth paying for

A broad differentiation strategy improves profitability when

the higher price the product commands exceeds the added costs of achieving the differentiation.

The timing of a strategic move can be just as important as the choice of move to make, therefore a company's best option with respect to timing of an action is

to carefully weigh the first-mover advantage against the first-mover disadvantages and act accordingly.

A pitfall to avoid in pursuing a differentiation strategy is

trying to differentiate on the basis of attributes or features that are easily and quickly copied.

____ is the extent to which a firm's internal activities encompass one, some, many, or all of the activities that make up an industry's entire value chain system.

vertical scope

A blue-ocean market space

where the industry has not yet taken shape, with no rivals and wide-open long-term growth and profit potential for a firm that can create demand for new types of products.

While there are many routes to competitive advantage, the two biggest factors that distinguish one competitive strategy from another are

whether a company's target market is broad or narrow and whether the company is pursuing a low-cost or differentiation strategy.

The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves assessing whether the move will

will produce a synergistic outcome such that the company's different businesses perform better together than apart and the whole ends up being greater than the sum of the parts.

What are value drivers?

· A set of factors (analogous to cost drivers) that are particularly effective in having a strong differentiation effect

The Attractiveness Test

· Are the industry's profits and return on investment as good or better than present business(es)?

Vertical Integration Strategy

· Can expand the firm's range of activities backward into its sources of supply or forward toward end users of its products

The Better-Off Test

· How much synergy (stronger overall performance) will be gained by diversifying into the industry?

The Cost-of-Entry Test-

· Is the cost of overcoming entry barriers so great as to cause delay or reduce the potential for profitability?

vertical integrated firm

· One that participates in multiple segments or stages of an industry's overall value chain

What is the difference between economics of scale and economics of scope?

· Scale refers to cost savings that accrue directly from large-sized operations, while scope stems directly from strategic fit along the value chains of related businesses.

How would you explain the difference between a one-business company and a diversified company?

· The first uses a business-level strategy, while the second uses a set of business strategies and a corporate strategy.

What does the scope of the firm refer to?

· The range of activities the firm performs internally and the breadth of its product offerings, the extent of its geographic market, and its mix of businesses.

Economies of scale

· accrue when unit costs are reduced due to the increased output of larger-size operations of a firm.

The three tests for judging whether a particular diversification move can create value for shareholders are the

· attractiveness test, the cost of entry test, and the better-off test.

To create value for shareholders via diversification, a company must

· diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent stand-alone businesses.

Unrelated businesses

· have dissimilar value chains and resource requirements with no competitively important cross-business commonalities at the value chain level.

A blue-ocean strategy

· involves abandoning efforts to beat out competitors in existing markets and instead invent a new industry or new market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand.

outsourcing

· involves contracting out certain value chain activities that are normally performed in-house to outside vendors.

backward integration

· involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system.

forward integration

· involves entry into value chain system activities closer to the end user.

An acquisition premium, or control premium

· is the amount by which the price offered exceeds the pre-acquisition market value of the target company.

The decision to pursue diversification requires management to resolve which industries to enter and whether to enter, and includes such decisions as the following, except

· selecting the approach value chain operating practices to improve the financial outlook.

The transaction costs of completing a business agreement or deal of some sort, over and above the price of the deal, can include all of the following except

· the premium cost.

The essential requirement for the different businesses to be "related" is that

· their value chains exhibit competitively valuable cross-business commonalities.

A company can beat accomplish diversification into new industries by

·acquiring a company already operating in the target industry, creating a new business from scratch, or forming a joint venture with one or more companies to enter the target industry.

Strategic fit

• exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar in present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.