Chapter 8

Diversification Premium

Situation in which the stock price of related-diversification firms is valued at greater than the sum of their individual business units.

Information Asymmetries

Situations in which one party is more informed than another, because of the possession of private information.

Conglomerate

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

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.

Licensing

A form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property.

Core Competence- Market Matrix

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

Franchising

A long-term contract in which a franchiser grants a franchisee the right to use the franchiser's trademark and business processes to offer goods and services that carry the franchiser's brand name; the franchisee in turn pays an up-front buy-in lump sum and a percentage of revenues.

Credible Commitment

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

Transaction Cost Economies

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.

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.

Transaction Costs

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

Diversification

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

Product-Market Diversification Strategy

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

Product Diversification Strategy

Corporate strategy in which a firm is active in several different product 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.

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.

Related Diversification Strategy

Corporate strategy in which a firm derives less than 70 percent of its revenues from a single business activity and obtains revenues 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 percent of its revenues from a single business activity and there are few, if any, linkages among its business.

Geographic Diversification Strategy

Corporate strategy in which a firm is active in several different countries.

External Transaction Costs

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

Internal Transaction Costs

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

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.

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.

Principal-Agent Problem

Situation in which an agent performing activities on behalf of a principal 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.

Corporate Strategy

The decisions that senior management makes and the goal direction actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously; addresses where to compete along three dimensions: products and services, industry value chain, and geography (regional, national, or global markets).

Vertical Integration

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

Specialized Assets

Unique assets with high opportunity cost: They have significantly more value in their intended use than in their next-base 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 to lead to competitive advantage.