chapter 8 mgmt 493
if costs at market<costs in house
the firms should consider purchasing instead
three dimensions of corporate strategy
-vertical integration -diversification -geographic scope
if costs in house<costs at market
-vertically integrate -own production of the inputs
single business
95% or more of revenue comes from a single business (low level of diversification)
internal transaction costs
Also referred to as admin costs—these are costs related to organizing the economic exchange within a hierarchy. (paying salaries and benefits, providing office space)
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
Alternatives to Vertical Integration
Taper integration; strategic outsourcing
The 3-D television division of a large consumer electronics company has been recognized as a question mark. The company's LCD television division has been categorized under dogs. Which of the following statements will hold well in this scenario?
The 3-D television division operates in a high-growth market, whereas the LCD television division operates in a low-growth market.
Divina Pharma Inc. and MF Electronics Inc. have together invested and created a new organization, FirstHealth Inc., to focus on developing diagnostic devices. Through this new firm, both companies are attempting to combine their core competencies to innovate and reduce their risks associated with transaction-specific investments. However, the new organization operates independent of Divina Pharma and MF Electronics. Which of the following alternatives to integration does this scenario best illustrate?
a joint venture
Dominant Business
additional business activity pursued
transaction costs
associated with an economic exchange
Firms that use taper integration also use ________ when they rely on outside-market firms for some of their supplies.
backward vertical integration
In 2007, Salesforce.com recognized an emerging market for platform as a service (PaaS) offerings and developed a new competency in delivering software development and deployment tools. This allowed its customers to either extend their existing CRM offering or build completely new types of software. This is an example of
building new core competencies to create and compete in markets of the future
external transaction costs
costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
ESB Group is the parent company of many related businesses under its banner. Each share of the parent company is quoted at $220. However, if this had to be assessed by adding the stock prices of each of its strategic business units, the value would only be $200 per share. In this scenario, what has ESB Group created?
diversification premium
related diversification
entering a new business or industry to create a competitive advantage in one or more of an organization's existing divisions or businesses
increased market power=
fewer competitors, more bargaining power, high profitability
Corporate Strategy
goal-directed actions that leaders take in the quest for competitive advantage
lower costs=
growth enables efficiency
When approaching a bank for a loan, the borrower has better knowledge than the lender about his or her own ability to repay the loan without defaulting. What is this situation referred to as?
information asymmetry
Decisions relating to the range of products and services a firm will offer determine the firm's
level of diversification
agent
manager or employee -should act on behalf of principal
strategic outsourcing
moving internal value chain activities to other firms
principal
owner of the firm -goal:create shareholder value
Vertical Integration
ownership of inputs or distribution channels
Forward vertical integration
owning activities closer to the customer (Customer service, marketing, sales)
Backward vertical integration
owning inputs of the value chain (raw materials, assembly and manufacturing)
The core competency of MotorCraft Inc. is its fuel-efficient engine found in its cars. These engines are developed and built in-house. The company realizes that there is a new market opportunity to diversify. Thus, it produces the car engines on a large scale and sells them to other automobile companies. In this scenario, MotorCraft is
redeploying and recombining existing core competencies to compete in future markets
increase profits=
shareholders returns
the principal agent problem
the agent's objectives differ from those of the principal, and one side can pursue hidden actions -solution:create stock option incentives for agents
Which of the following companies will be considered as a conglomerate?
the tata group, active in industries such as tea, steel, IT, power, and automobiles
Decisions relating to "what stages of the industry value chain to participate in" determine a firm's
vertical integration