MGT 499 Final Exam Chap. 9 - Corporate-level Strategy : Horizontal Integration and Vertical Integration

What are the benefits of horizontal integration?

- lowers the cost structure -Increasing value of products (can help differentiate) -Increased bargaining power over buyers and suppliers (our industry has become more concentrated) - leverages a competitive advantage more broadly - reduces rivalry within the industry

What are the disadvantages of vertical integration?

-Cost •Bureaucratic -managerial inefficiencies -Rapid change in the industry -technological change -demand unpredictability

What are the limitations of horizontal integration?

-Cultural difference between acquired and acquiring company -High management turnover -tendency for managers to overestimate the potential benefits form a merger or acquisition and underestimate the problems involved in merging their operations - potential for future abuse of power, Antitrust

Credible Commitment

A believable promise or pledge to support the development of a long-term relationship between companies.

Acquisition

A company purchases another compan

Hostage Taking

A means of exchanging valuable resources to guarantee that each partner to an agreement will keep its side of the bargain.

Parallel Sourcing Policy

A policy in which a company enters into long-term contracts with at least two suppliers for the same component to prevent any problems of opportunism.

What are the benefits of vertical integration?

Facilitating investments in specialized assets Enhancing product quality Improved scheduling •Greater control over supply chain activities -Build barriers to entry

Strategic Alliances

Long-term agreements between two or more companies to jointly develop new products or processes that benefit all companies that are a part of the agreement.

Make or Buy

Should a firm do things in-house (to make)? Or obtain externally (to buy)? If Cost in-house < Cost market, then the firm should make If Cost in-house > Cost market, then the firm should buy the functions

Strategic Outsourcing

The decision to allow one or more of a company's value-chain activities to be performed by independent, specialist companies that focus all their skills and knowledge on just one kind of activity to increase performance.

Transfer Pricing

The price that one division of a company charges another division for its products, which are the inputs the other division requires to manufacture its own products.

Quasi Integration

The use of long-term relationships, or investment into some of the activities normally performed by suppliers or buyers, in place of full ownership of operations that are backward or forward in the supply chain.

Merger

Two firms are combined on a relatively co-equal basis

Corporate Strategy

What is corporate strategy? -Identifying the businesses in which a company should participate, the value creation activities in those businesses, and best means of expanding and contracting those businesses Corporate-level decisions: -Globalization -Horizontal and Vertical Integration -Diversification -Strategic Alliances

Horizontal Integration

What is horizontal integration? -The process of acquiring or merging with industry competitors to gain competitive advantages

Vertical Integration

What is vertical integration? -The expansion of operations either backward or forwards •This decision affects both value creation activities and where you compete, why? -You not only supply or distribute the product yourself, but you compete in those industries that perform these activities

Vertical Disintegration

When a company decides to exit industries either forward or backward int the industry value chain to its core industry to increase profitability.

Hold-up

When a company is taken advantage of by another company it does business with after it has made an investment in expensive specialized assets to better meet the needs of the other company.

Tapered Integration

When a firm uses a mix of vertical integration and market transactions for a given input. The firms makes some of the input and buys some of the input.

Virtual Corporation

When companies pursued extensive strategic outsourcing to the extent that they only perform the central value creation functions that lead to competitive advantage.

Product Bundling

involves offering customers the opportunity to purchase a range of products at a single combined price.

Cross-Selling

is when a company takes advantage or "leverages" its established relationship with customers by way of acquiring additional product lines or categories that it can sell to customers.