SEVI Exam 2
joint venture
2 or more partners create or jointly own a new organization, a long term commitment facilitating investment
dominant business diversification
70-95% of revenues from a single business, pursues at least 1 other business and shares competencies
long term contracts
Licensing and franchising, longer than 1 year
disadvantages of keeping activities within the firm (3)
administrative costs low powered incentives principal-agent problem
characteristics of the maturity stage (5)
aggregate industry demand slows, market becomes saturated, few new adopters, direct competition becomes predominant, and marginal competitors exit
key activities of cost leadership (6)
aggressive construction of efficient scale facilities vigorous pursuit of cost reductions from experience tight cost and overhead control avoidance of marginal customer accounts cost minimization in all activities of the value chain competitive parity
benefit of short term contracts
allows for longer planning period
diversification
an increase in the variety of products and services a firm offers or the markets/geographic areas in which it competes
options considered when turnaround is needed
asset and cost surgery, selective product and market pruning, or piecemeal productivity improvements
4 approaches to combining low cost and differentiation
automated and flexible manufacturing using data analytics exploiting the profit pool unsealing to create combination strategy
market growth and intensity of competition in the introduction stage
both low
new core competency in a new market
build competencies to compete in future markets, this is the most challenging
new core competency in an existing market
build competencies to protect and extend current position
what strategies do firms employ during the growth stage
building customer preferences for specific brands
focus
choice of a narrow scope within an industry, selects segment and tailors strategy to serve it
advantages of keeping activities within the firm (4)
command and control coordination transaction specific investments community of knowledge
key activities of differentiation (3)
cost parity integration at multiple points of the value chain differentiation on multiple fronts
differentiation dealing with industry conditions(4)
creates higher entry barriers higher margins to deal with supplier power reduces buyer power establishes customer loyalty
Cost Leadership
creating a low cost position, manage relationships within the value chain to lower costs throughout the entire chain
Differentiation
creating differences in firms products/services by creating something that is perceived as unique and valued
combination strategies provide
differentiated attributes and lower prices
what strategies do firms employ during the introduction stage
emphasis on research and development and marketing
pitfalls of focus
erosion of cost advantage within the narrow segment highly focused offerings are subject to competition from new entrants can become too focused to meet the buyers needs
cost focus
exploits differences in cost behavior
differentiation focus
exploits the special needs of a buyer
geographic diversification
firm is active in several different countries
product diversification
firm is active in several different product markets
taper integration
firm is backwardly integrated but also relies on outside market firms for some supplies, or the firm is forwardly integrated but relies on some outside firms for distribution
product-market diversification
firm pursues both product and geographic diversification
short term contracts
firm sends out requests for proposals (RFPs) to several companies to start bidding, contracts less than 1 year
vertical integration
firms ownership of the inputs needed for the production or the channels through which it distributes output
core competencies market matrix
framework to guide diversification strategy by analyzing possible combinations of existing or new core competencies and existing or new markets
what to do with a dog
harvest/divest
star
high market growth and high market share, earnings are high, stable, or growing and cash flow is neutral
question mark
high market growth and low market share, earnings low or growing and cash flow is negative
advantages of contracting in the market (2)
high powered incentives flexibility
combination strategy and industry conditions (4)
higher barriers of entry due to cost leadership or differentiation higher margins to deal with supplier power reduce buyer power because of few competitors value proposition reduces threat from substitutes
focus strategy and industry conditions (4)
higher barriers of entry due to cost leadership or differentiation higher margins to deal with supplier power reduces buyer power because of specialized product/service focus niche less vulnerable to substitution
what to do with a cash cow
hold
what to do with a star
hold or invest for growth
experience curve
how businesses learn to lower costs as they gain experience with the production process
Key question business strategy should answer
how do you overcome the 5 forces and gain competitive advantage?
existing core competency in a new market
how to re-deploy current competencies to compete in a new market
when is a conglomerate advantageous
in emerging economies
what to do with a question mark
increase market share or harvest/divest
5 key motivations for firms to grow
increase profitability lower costs increase market power reduce risk motivate management and employees
risks of vertical integration (4)
increasing costs reducing quality reducing flexibility increasing potential for legal repercussions
characteristics of the decline stage (3)
industry sales and profits fall, price competition increases, and industry consolidation occurs
transaction costs
internal or external costs associated with economic exchange, can take place in firm or market
stages of the industry life cycle
introduction, growth, maturity, decline
corporate diversification strategy enhances firm performance when
its value creation is greater than the cost it incurs
related diversification
less than 70% of revenues come from a single business, goal of benefiting from scale and scope, constrained and linked
unrelated diversification
less than 70%of revenues come from a single business and there are few, if any, linkages among businesses, a conglomerate
existing core competency in an existing market
leverage competencies to improve current position
strategic alliances within the make-buy continuum
long term contracts, equity alliances, and join ventures
single business diversification
low level of diversification, over 95% of revenues from one business
cash cow
low market growth and high market share, high earnings and stable cash flow
dog
low market growth and low market share, low or unstable earnings and cash flow is neutral or negative
benefits of vertical integration (5)
lowering cost improving quality facilitating scheduling and planning facilitating investments in specialized assets securing critical supplies and distribution channels
market growth and intensity of competition in the maturity stage
market growth is low to moderate and competition is intense
market growth and intensity of competition in the decline stage
market growth is negative and competition is changing
market growth and intensity of competition in the growth stage
market growth is very large and competition is increasing
parent subsidiary relationship
most integrated, corporate parent owns subsidiaries and directs them via command and control
strategic outsourcing
move one or more internal value chain activities outside the firm boundaries to other firms within the industry value chain
con of short term contracts
no incentives to make transaction specific investment
related constrained diversification
other lines of business relate to the primary business activity, constrained by the fact that they have to be related to the main business
equity alliances
partnership where at least one partner takes partial ownership of the other, partner buys stock or assets thus making an equity investment, "try before you buy" option
how can brands differentiate themselves? (7)
prestige/brand image quality technology innovation features customer service dealer network
characteristics of the introduction stage (4)
products are unfamiliar to customers, market segments are not clearly defined, product features are not specified, and competition is limited
cost leadership dealing with industry conditions (5)
protects against rivalry from competitors protects against powerful buyers provides flexibility provides substantial entry barriers put firm in favorable position
benefits of diversification (3)
provides economies of scale (reduce costs) exploits economies of scope (increases value) reduces cost and increases value
value chain stages in order
raw materials components/intermediate goods final assembly/manufacturing marketing/sales after service care and support
restructuring
reorganizing and divesting business units and activities in order to refocus a company and leverage core competencies more fully
disadvantages of contracting in the market (4)
search costs opportunism incomplete contracting enforcement of contracts
turnaround/retrenchment strategy
selectively cutting unprofitable market segments and asset investments to reverse performance and decline and improve profitability
related linked diversification
some business activities relate to the main business focus while some do not
What is business level strategy
strategy at the product market level, strategy that went into the manufacturing, marketing, etc. of everyday products
characteristics of the growth stage (3)
strong increase in sales, attractive to potential competitors, and firms building brand recognition
restructuring tool
the BCG matrix
corporate strategy
the decisions leaders make and the goal directed actions that they take in order to gain competitive action
degree of vertical integration corresponds to
the number of stages in the value chain in which it participates
diversification premium
the stock price of related diversification firms is valued greater than the sum of their individual units
diversification discount
the stock price of unrelated diversified firms is generally valued at less than the sum of their individual business units
risks of combination strategy (3)
they can end up with neither and become stuck in the middle they can underestimate the challenges and expenses they can miscalculate sources of revenue and profit pools
how do cost leaders benefit from the experience curve
they translate cost advantages directly into higher profits
pitfalls of cost leadership (6)
too much focus on one or few value chain activities increased cost of inputs on which advantage is based strategy too easily imitated lack parity on differentiation reduced flexibility obsolescence on the basis of cost advantage
external transaction costs
transactions in the open market, the search for a firm with which to contract and the negotiating, monitoring, and enforcing of the contract
internal transaction costs
transactions within the firm, cost of recruiting and retaining employees, paying salaries and benefits, setting up shop floor, providing office space and supplies, and organizing, monitoring, and supervising work
pitfalls of differentiation (5)
uniqueness that is not valuable too much differentiation too much of a price premium easily imitated differentiation too many product line extensions that dilute brand identification
3 dimensions of corporate strategy
vertical integration, diversification, and geographic scope
strategic alliances
voluntary arrangements between firms that involve the sharing of knowledge, capabilities, and resources with the intent of developing processes, products, or services
horizontal diversification
what range of products and services should the company offer
vertical integration question
what stages of the industry value chain should firms participate
when should a firm vertically integrate
when the costs of pursuing activities in house are less than the cost of transacting that activity in the market
geographic scope
where should the company compete geographically
corporate strategy provides answers to key question
where to compete