MGT 499 Exam 3 UKY

Specialized Assets

Unique assets that are highly valuable within a focal firm, but of little value or no use in the external market

The scope of the firm determines _________ along the three dimensions

boundaries

Strategic Alliances include:

- Arm's-length market transactions - Short-term contracts - Licensing/Franchising - Equity alliances - Joint ventures - Parent-subsidiary relationships - Perform activities in-house

Taper Integration

- Backward integrated but also relies on outside market firms for supplies OR - Forward integrated but also relies on outside market firms for some of its distribution

Outsider CEOs

- Bring fresh perspectives - Openness to change - Tend to be naïve about their new organizations

Disadvantages of in-house production

- Can take longer time - High investment - Need expertise - Administrative costs because of necessary bureaucracy

The Responsibilities of CEOs:

- Decision Maker - Communicator - Leader - Manager

Benefits of Taper Integration

- Exposes in house suppliers and distributers to market competition so that performance comparisons are possible - Enhances firms flexibility - Combine internal and external knowledge

What are the three dimensions?

- Horizontal Integration - Geographic Scope - Vertical Integration

Advantages to use market

- Increased flexibility (to compare prices and services among many different providers) - Useful options for small-medium size firms or those with no expertise

Risks of Vertical Integration

- Increasing costs - Internal suppliers may lose the incentives to increase quality or come up with innovative new products over time compared to external suppliers - Reduces a firm's strategic flexibility in the face of changing environment - Increasing the potential for legal repercussions

Corporate strategy concerns the scope of the firm in terms of

- Industry value chain - Products and services - Geography

How diversification can enhance firm performance

- Provide economies of scale (Reduce costs) - Provide economies of scope (Increases value) - Reduce costs and increase value

Disadvantages to use market

- Search costs - Incomplete contracting (specifying & measuring performance) - Enforcement of contracts for potential opportunistic behaviors by other parties

Benefits of Vertical Integration

- Securing critical supplies - Facilitating scheduling and planning - Facilitating investments in specialized assets

Advantages of in-house production

- The ability to make command and control decisions by fiat along clear hierarchical lines of authority - Coordination of high complex tasks to allow for specialized division of labor - Investment for specialized assets - Creation of a community of knowledge

Insider CEOs

- Understand their organizations' specific issues, actors, and resources - Be wedded to the status quo

Forms of Specialized Assets

- site specificity - physical asset specificity - human asset specificity

Firms may merge/acquire other firms

- to gain access to new industry and distribution channels (i.e.to overcome entry barriers) - to obtain new capabilities or competencies - to preempt rivals from doing so

Why do firms enter strategic alliances?

1. Strengthen competitive position 2. Enter new markets 3. Hedge against uncertainty 4. Access critical complementary assets 5. Learn new capabilities

Radial Autos currently sources components such as airbags, upholstery, and brake pads from various suppliers in the industry value chain. In order to lower costs and reduce the risk of interruptions in the supply of components, Radial should pursue

A: backward integration.

Horizontal Integration

Concerns about the range of a firm's products and services (diversification)

Upper Echelons Theory

Executives' experiences, values, and personalities greatly influence their interpretations of the situations they face and, in turn, affect their choices.

T or F? Corporate strategy is focused solely on determining the stages of industry value chain in which the firm should compete.

F

T or F? Firms that pursue extremely high or extremely low levels of diversification perform better than those that pursue moderate levels of diversification.

False

BCG: Dog strategy

Harvest/divest

BCG Matrix: Stars

High market share; High market growth

BCG Matrix: Cash Cow

High market share; Low market growth

BCG: Cash Cow cash flow

High, stable

BCG: Cash Cow earnings

High, stable

BCG: Stars earnings

High, stable, or growing

BCG: Cash Cow strategy

Hold

BCG: Stars strategy

Hold or invest for growth

BCG: Question Mark strategy

Increase market share or harvest/divest

Outsourcing

Moving one or more internal non-core value chain activities outside the firm's boundaries

Which is not the risk of vertical integration?

It would increase internal transaction cost to search a right partner firm

Decisions relating to the range of products and services a firm will offer determine the firm's

Level of diversification

BCG Matrix: Question Marks

Low market share; High market growth

BCG Matrix: Dog

Low market share; Low market growth

BCG: Dog earnings

Low, unstable

BCG: Question Mark earnings

Low, unstable or growing

BCG: Question Mark cash flow

Negative

BCG: Stars cash flow

Neutral

BCG: Dog cash flow

Neutral or negative

Off-shoring

Outsourcing outside the home country

Vertical Integration

Ownership of its inputs, production, or outputs in the value chain

T or F? Managers have alternatives other than the two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").

T

Who produces external transaction costs?

The market

Diversification premium

The stock price of related diversification is valued at greater than the sum of their individual business units

Diversification discount

The stock price of such highly diversified firms is valued at less than the sum of their individual business units

Which of the following best illustrates physical-asset specificity?

a machine solely designed to give a candy its trademarked shape

Corporate strategy

a quest for competitive advantage when competing in multiple areas

Transaction cost

all internal and external costs associated with an economic exchange

Economies of scope

cost advantages/savings coming from producing two (or more) outputs or providing different services at less cost than producing each individually

Internal transaction cost

cost associated with organizing an economic exchange within a firm; administrative costs and etc.

External transaction costs

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

In the context of the Boston Consulting Group (BCG) growth-share matrix, if one of the strategic business units of a corporation is categorized under dogs, the management should

divest the strategic business unit.

TimeEnoughInc. entered the low-priced digital watch market several years ago. This firm's earnings have been unsteady, but might be growing. According to the BCG growth matrix, TimeEnough is a

question mark.

Product diversification

selling different kinds of products

Product-market diversification

selling different kinds of products in different regions/countries

Geographic diversification

selling the same product in different markets

If In-House Cost < Market Cost,

the firm should make internally (vertical integrate)

If In-House Cost > Market Cost,

the firm should outsource