Chapter 8

Boston Consulting Group (BCG) growth-share matrix

A corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into four categories (dog, cash cow, star, and question mark), each of which warrants a different investment strategy.

Related-constrained diversification Strategy

A kind related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in the primary business ex)exxon, Nike, Johnson & Johnson

Credible commitment

A long-term strategic decision that is both difficult and costly to reverse

Organizing Economic Activity: Firm

Advantage: - Command and control - Coordination - Transaction-specific investments - Community of knowledge Disadvantages: - Administrative Costs - Low-powered incentives - Principal-agent problem

Organizing Economic Activity: Markets

Advantage: - High-powered incentives - Flexibility Disadvantages: - Search Costs - Opportunism - Incomplete contracting - Specifying and measuring performance - Enforcements of contracts

Transaction costs

All internal and external costs associated with an economic exchange, whether within a frim or in markets

Forward Vertical Integration

Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.

Related Diversification Strategy

Corporate Strategy in which a firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity.

Geographic diversification

Corporate Strategy in which firms is active in several different countries

Product-market diversification

Corporate strategy in which a firm is active in several different product markets and several different countries

what level of diversification lead to the highest levels of performance?

moderate

What is a related-linked diversification strategy?

one in which executives purse various businesses opportunities that share only a limited number of linkages

Equity Alliance

partnership in which at least one partner takes partial ownership in the other partner

Alternatives of Vertical Integration

- Taper Integration - Strategic Outsourcing

Which of the following are the four underlying strategic management concepts that determine the scope of a firm? (Check all that apply.)

- transaction costs - core competencies - economies of scope - economies of scale

Dominant business

-70%-95% of revenues from a single business but it pursues at least one other business activity that accounts for the remainder of revenue

Single Business

-95% of revenue from one business - google gets 95% of its revenues from online advertising

Three Dimension of corporate Strategy

-Core Competencies -Economies of scale -Economies of scope -Transaction costs

Core Competence- Market Matrix

A framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets

Product diversification

Corporate Strategy in which a firm is active in several different product markets

CC Market Matrix - CC - Existing - Market - Existing

Leveraging - Core competencies to improve current market position

CC Market Matrix - CC - Existing - Market - New

Redeploying - and recombining core competencies to compete in markets of the future

Principal-agent problem

Situation in which an agent performing activities on behalf of a principal pursues his or her own interests.

Vertical integration - definition

The firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs

______ costs are all of the costs associated with an economic exchange.

Transaction

Specialized assets

Unique assets with high opportunity cost: They have significantly more value in their intended use than in their next best use. They come in three types: - site specificity, - physical asset specificity, and - human-asset specificity.

Strategic Alliances

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services - long term contracts - equity alliances - joint ventures

Which of the following is a fundamental corporate-level strategic decision?

What products and services should the firm offer?

The geographic scope

Where to compete

In the Boston Consulting Group growth-share matrix, each of the four categories in the matrix represents __.

a different investment strategy

Olivia's, an olive oil company, grows and harvests olives, makes olive oil, and distributes its olive oil to its retail shop. Olivia's is an example of __.

a fully vertically integrated company

Equity Alliances

a partnership with at 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 competitive advantage

Transaction cost economics help managers do which of the following?

choose which activities to do within the firm

Which type of cost in a related-diversification strategy is a function of the number, size, and types of businesses that are linked?

coordination

TWN, a large multinational corporation, chose to spin off one of its SBUs that was unrelated to TWN's core business in order to avoid the ______. When they announced the spin-off, the stock price of TWN went up by 5%.

diversification discount

The persons responsible for forming corporate-level strategy are the

executives

In the __ quadrant of the core competence-market matrix, the focus is on leveraging core competencies to improve current market position

existing competence-existing market

In order for a firm to lower costs, it must ______.

grow

the lemons problem

information asymmetries cause superior goods to be replaces by inferior ones

Information Asymmetry

is a situation in which one party has more knowledge than another due to the possession of private knowledge.

diversification discount

is a situation in which the stock price of a highly diversified firms is valued as less than the sum of their individual business units.

Long-Term Contracts - Licensing

manufacturing sector that enables firms to commercialize intellectual property

Long-term contracts (such as licensing and franchising), equity alliances, and joint ventures are examples of which of the following?

strategic alliances

A state university hires an outside firm to develop and maintain their human resource system. This is called

strategic outsourcing

The most integrated alternative to vertical integration is __.

the parent-subsidiary relationship

A conglomerate fits which type of corporate diversification model?

unrelated diversification

degree of vertical Integration

what stages of the industry value chain to participate

Risks of vertical Integration

- Increasing costs - Reducing quality - Reducing flexibility - Increasing the potential for legal repercussions

Taper Integration - Benefits

- It houses in-house suppliers & distributors to market competition so that performance are possible - Tapper integration also enhances a firm's flexibility. can cut back in stocks it's own stores - Can combine internal & external knowledge

The firm plots its SBUs into one of four categories in the matrix:

- dog - cash cow - star - question mark

Taper integration allows firms to

- gain knowledge from external sources - be more flexible when responding to market changes such as fluctuations in demand.

Which of the following is an example of the principal-agent problem if the principal's goal is to create shareholder value? -a manager controls and limits his business expenses -a manager received generous stock options -a manager files first class on all business trips -a manager makes decisions based on what is best for the company

-a manager files first class on all business trips

Stages of Industry Value Chain

1) Raw Materials 2) Components, Intermediate Goods 3) Final Assembly, Manufacturing 4) Marketing, Sales 5) After-Sales Service & Support

Conglomerate

A company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy

Joint Venture

A stand alone organization created and jointly owned by two or more parent companies

Transaction cost economics

A theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulate a corporate strategy that is more likely to lead to competitve adavantage

SBUs identified as question mark

Earnings: Low, unstable or growing Cash Flow: Negative Strategy: Increase market share or harvest/divest compete in a high-growth market but have a low market share

Long-Term Contracts - Franchising

Franchisor grants a franchisee the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisor's brand name

Why firms need to grow?

Increase Profits Lower Costs Increase market Power Reduce Risk Motivate Management

Boston Matrix - Dog

Market Growth: Low Relative Market Share: Low Earning: Low, unstable Cash Flow: Neutral or negative Strategy: Harvest/Divest

Strategic Outsourcing

Moving one or more internal value chain activities outside the frim's boundaries to other firms in the industry value chain

Industry Value Chain

depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing

The matrix locates the firm's individual SBUs in two dimensions:

- Relative market share (horizontal axis) - Speed of the market growth (vertical axis)

Strategic leaders must determine corporate strategy along these three dimensions and ask three corresponding questions:

1. Vertical Integration 2. Diversification 3. Geographic Scope

Related Linked diversification Strategy

a kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages ex) Amazon expanding pasts books, Disney, GE

Search Costs

are perhaps the major drawback of transacting in markets.

When a manufacturer of computers starts to produce its own computer components, the manufacturer engages in __________ vertical integration.

backward

industry value chain

depicts the transformation of raw materials into finished goods and services along distinct vertical stages, each of which represents a distinct industry in which a number of different firms are competing.

Strategic Alliance

is a voluntary arrangement between firms that involve sharing of resources and capabilities with the intent of developing processes, products, or services.

Product Market Diversification Strategy

refers to a firm that pursues both product and geographic diversification`

Diversification

refers to an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes

Offshoring

refers to the act of of outsourcing some of the firm's activities outside of the home country to another nation.

Vertical Integration

refers to the firms' ownership of its production of needed inputs or of the channels by which is distributes its outputs

Which type of alternative on the make-or-buy continuum involves competitive bidding by external companies hoping to acquire a temporary arrangement with a firm?

short-term contracts

What are the four quadrants of the core competence-market matrix?

- New competencies with existing markets - Existing competencies with existing markets - New competencies with new markets - Existing competencies with new markets

Types of corporate diversification

-Single business -dominant business - Related Diversification -Unrelated Diversification

Four Options to Formulate Corporate Strategy via Core Competencies

1. Leverage existing core competencies to improve current market position 2. Build new core competencies to protect and extend current market position. 3. Redeploy and recombine existing core competencies to compete in markets of the future 4. Build new core competencies to create and compete in markets of the future

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 firms for some of its distribution

Diversification

An increase in the variety of products and services a firm offers or markets and the geographics regions in which it competes

CC Market Matrix - CC - New - Market - New

Building - new core competencies to create and compete in markets of the future

CC Market Matrix - CC - New - Market - Existing

Building - new core competencies to protect and extend current market position

Backward Vertical Integration

Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain

External transactions costs

Costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract

Internal Transaction Cost

Costs pertaining to organizing an economic exchange within a hierarchy; also called administrative costs.

SBUs identified as star

Earnings: High, stable or growing Cash Flow: Neutral Strategy: Hold or invest for growth compete in a high-growth market and a high market share

SBUs identified as dogs

Earnings: Low, unstable Cash Flow: Neutral or negative Strategy: Harvest/divest compete in a low-growth market and low market share

SBUs identified as cash cows

Earnings: high, stable Cash Flow: High, stable Strategy: Hold compete in a low-growth market but have high market share

Boston Matrix - Question Mark

Market Growth: High Relative Market Share: Low Earnings: Low, unstable, or growing Cash Flow: Negative Strategy: Increase market share or harvest/divest

Benefits of Vertical Integration

-Lower costs - Improving quality - Facilitating scheduling and planning - Facilitating investments in specialized assets - Securing critical supplies and distribution channels.

Vertical Integration

In what stages of the industry value chain should the company participate? The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages.

Boston Matrix - Cash Cow

Market Growth: Low Relative Market Share: High Earning: High, Stable Cash Flow: High, Stable Strategy: Hold

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 greater than the sum of their individual business units

Backward and Forward Vertical Integration along an Industry Value Chain

Stage 1: Raw Materials Stage 2: Component and Intermediate Goods Stage 3: Final Assembly and Manufacturing Stage 4: Marketing and Sales Stage 5: After-Sales Service and Support

Corporate Strategy

The decision that senior management makes the goal-directed actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously

Diversification

What range of products and services should the company offer?

The type of diversification

What range of products and services to offer

Google's choice to hire programmers in-house suggests that they decided that the __ costs associated with this strategy are __ than the costs associated with contracting in the open market.

transaction; lower

Boston Matrix - Star

Market Growth: High Relative Market Share: High Earning: High, Stable, or growing Cash Flow: Neutral Strategy: Hold or invest for growth

Information asymmetries

Situation in which one party is more informed than another because of the possession of private information

Transaction Costs

are all costs associated with an economic exchange

When a business answers the question of where to compete, it is determining __.

corporate strategy

If a company moves ownership of activities closer to the end customer, such as providing after-sales support, it is engaging in ______ vertical integration.

forward

A benefit of ___________ is that in-house suppliers and distributors are subjected to market competition, which allows the firm to assess performance in comparison to others.

taper integration

When a firm is more efficient in organizing economic activity than markets are, the firm should _____.

vertically integrate

related diversification strategy

when it derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity.

Boston Consulting Group (BCG) Growth - share matrix

corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) speed of marekt (vertical axis)

Vertical Integrate

When costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market

Geographic Scope

Where should the company compete geographically in terms of regional, national, or international markets?

Unrelated diversification strategy

corporate strategy in which a firm derives less than 70% percent of its revenues from a single business and there are few, if any, linkages among its businesses ex) Yamaha, tata, Berkshire Hathway