Chapter 8 Vertical Integration and diversification

What is principal-agent problem?

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

What is information asymmetry?

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

what is Joint venture?

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

What is 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 m

What is internal transaction Costs?

Costs pertaining to organizing an economic exchange within a hierarchy: administrative costs

What is core strategy?

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

What is diversification?

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

What is a conglomerate?

a company that combines two or more strategic business units under one over-arching corporation; follows an unrelated diversification strategy

What is the boston consulting group? (BCG)

a corporate planning too 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 in four categories (dogs, cash, cow, star, and question mark) each of which warrants a different investment strategy

What is Licensing?

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

what is core competence market matrix?

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

What is related-constraint diversification strategy?

a kind of related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in primary markets

What is 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

What is Franchising?

a long term contract in which a franchisor grants a franchisee the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisors brand name

What is a credible commitment?

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

What is 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

What is transaction costs?

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

What is 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

What is Forward vertical integration?

changes in an industry value chain that involves moving ownership of activities closer to the end (customer) point of the value chain

What is unrelated diversification strategy?

corporate strategy in which a firm derives less than 70 percent of its revenues from a single businesses and there are few if any linkages among its business

What is 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

What is Geographic diversification strategy?

corporate strategy in which a firm is active in several different countries

What is external transaction costs?

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

What is 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

What is product diversification strategy?

firm is active in several different product markets

what is product-market diversification strategy?

firm is active in several different product markets and several different countries

What is strategic outsourcing?

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

What is diversification discount?

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

What is diversification premium?

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

What is vertical integration?

the firms ownership of its production of needed inputs or of the channel by which it distributes its outputs

What is specialized assets?

unique assets with high opportunity costs. They have significantly more value in ther intented use than in the next best use. They come in tree types: Site specificity: equipment Physical-assets specificity: physical and engineering Human-asset: human capital

What is strategic alliances?

voluntary arrangements between firms that involve the sharing of knowledge, resources and capabilities with the intent of developing processes, products or services

What is vertical market failure?

when the markets along the industry value chain are too risky, and alternatives too costly in time or money