Ch. 8: Vertical Integration, Diversification (Corporate)
licensing
A form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property
diversification
an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes
Site specificity
assets are required to be co-located
physical asset specificity
assets hos physical and engineering properties are designed to satisfy a particular customer
forward vertical integration
changes in an industry value chain that involve moving ownership of activities closer to the end point of the value chain
backward vertical integration
changes in an industry value chain that involve moving ownership of activities upstream to the originating point of the value chain
related diversification strategy
corporate strategy in which a firm derives less than 70% of its revenue from a single business activity and obtains revenue from other lines of business that are linked to the primary business activity
unrelated diversification strategy
corporate strategy in which a firm derives less than 70% of its revenues from a singles business activity and there are few if any linkages between its businesses
geographic diversification
corporate strategy in which a firm is active in several different countries
product diversification
corporate strategy in which a firm is active in several different product markets
product market diversification strategy
corporate strategy in which a firm is active in several different product markets and several different countries
internal transaction costs
costs pertaining to organizing an economic exchange within a hierarchy also called administrative costs
industry value chain
depiction of the raw materials into finished goods and services along distinct vertical stages, each of which typically represents an industry in which a number of different firms are competing. Raw materials, components, manufacturing, marketing/sales, after sales support
short term contracting
firm sends out RFP to several companies, which initiates a competitive bidding for contracts to be awarded with short duration, generally less than one year
risks of vertical integration
increasing costs, reducing quality, reducing flexibility, increasing the potential for legal repercussions
human asset specificity
investments made in human capital to acquire unique knowledge and skills
strategic outsourcing
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain
joint venture
organizational form in which two or more partners create and jointly own a new organization
principle agent problem
situation in which an agent performing activities on behalf of a principle pursues his or her own interests
diversification discount
situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units
diversification premium
situation in which the stock price of related-diversification firms is valued at more than the sum of their individual business units
information asymmetries
situations in which one party is more informed than another because the possession of private knowledge
corporate strategy
the decision that senior management makes and the goal-directed action it takes to gain and sustain competitive advantage in several industries and markets simultaneously
vertical integration
the firm's ownership of the production of needed inputs or the channels by which it distributes its outputs
strategic alliance
voluntary arrangements between firms that involve knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage
specialized assets
Unique assets with high opportunity cost; they have significant more value in their intended use than in their next best use. Three types site specificity, physical asset specificity, human asset specificity
conglomerate
a company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy
Boston consulting group growth share matrix
a corporate planning tool in which the corporation is viewed as a portfolio of business. graphs businesses by market growth potential and relative market share to recommend an investment strategy. question marks, star, cash cow, dog
core competence market matrix
a framework to guide corporate diversification strategy by analyzing possible combinations of existing/ new core competencies and existing/ new markets
credible commitment
a long term strategic decision that is both difficult and costly
franchising
a long-term contract in which a franchiser grants a franchisee the rights to use the franchiser's trademark and business processes to offer goods and services that carry the franchise's brand name, the franchisee in turn pays up front buy in lump sum and a percentage of revenues
equity alliance
a partnership in which at least one partner takes partial ownership in the other partner
transaction cost economics
a theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to a competitive advantage
taper integration
a way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside market firms for some of its supplies and/or is forwardly integrated but also relies on outside market forms for distribution
transaction costs
all internal and external costs associated with an economic exchange, weather within a firm or in markets