STG. MGMT Ch. 8

For diversification to enhance firm performance, it must do at least one of the following

1. Provide economies of scale, and thus reduce costs. 2. Exploit economies of scope and thus increase value. 3. Reduce costs and increase value.

Executives can enhance performing using a diversification strategy by

1. Restructuring 2. Using internal capital markets

Boston Consulting Group (GCG)

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 make) each of which warrants a different investment strategy.

Coordination Costs

A function of the number, size, and types of businesses that are linked to one another.

Credible Commitment

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

Equity Alliance (Strategic Alliances)

A partnership in which at least one partner takes partial ownership in the other partner; A partner purchases an ownership share by buying stock (making an equity investment).

Transaction Cost Economics

A theoretical framework in strategic management to explain and predict the scope of the firm which is central to formulating a corporate level strategy that is more likely to lead to competitive advantage. Insights gained from this help mangers decide what activities to do in-house versus what services & products to obtain from the external market.

Diversification

An increase in the variety of products or markets in which to compete

Forward Integration

Changes in an industry value chain that involve moving ownership activities close to the end (customer) point of the value chain. Allows companies to more effectively plan for and respond to changes in demand.

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 businesses. This arrangement helps firms gain and sustain competitive advantage because it allows the conglomerate to overcome institutional weaknesses in emerging economies.

Product Diversification Strategy (General Diversification Strategies)

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

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. Two intersecting value-chains: The industry value chain running vertically from upstream to downstream and the firm-level value chain funning horizontally.

Dominant-Business Firm (Type of Corporate Diversification)

Derives 70-95 percent of its revenues form a single business, but it pursues at least one other business activity (Ex: Microsoft)

Single-Business Firm (Type of Corporate Diversification)

Derives 95 percent or more of its revenues from one business (Ex: Google)

Bandwagon Effects

Firms copying moves of industry rivals.

Related-Linked Diversifications

If executives consider new business activities that share only a limited number of linkages (Ex: GE)

Strategic Outsourcing

Moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. Reduces the level of vertical integration.

Influence Costs

Occur due to political maneuvering by mangers to influence capital and resource allocation and the resulting inefficiencies stemming from suboptimal allocation of scarce resources.

Core Competence-Market Matrix

Once managers have a clear understanding of their firm's core competencies, they have four options to formulate corporate strategy: 1. Leverage existing core competencies to improve current market position. 2. Build new core competencies to product 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.

Joint Venture

Organizational form in which two or more partners create and jointly own a new organization.

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.

Internal Capital Markets

Source of value creation in a diversification strategy if the conglomerate's headquarters does a more efficient job at allocating capital through its budgeting process that what could be achieved in external capital markets.

Scope of the Firm

The boundaries of the firm along Three Dimensions: Industry value chain, Products and services, and Geography.

Corporate Level Strategy

The decisions that senior management makes and the actions it takes in the quest for competitive advantage in several industries and markets simultaneously; Addresses WHERE to compete. Must align with and strengthen a firm's business level strategy. Concerns the scope of the firm.

Vertical Integration (Along the Industry Value Chain)

The firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs. The degree of vertical integration tends to correspond to the number of industry value-chain stages in which it directly participates.

Restructuring

The process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully.

Three Dimensions of Corporate Strategy

To determine boundaries, executives must decide: In what stages of the industry value chain (the transformation of raw materials into finished goods and services along distinct vertical stages) to participate. This decision determines the firm's vertical integration. What range of products and services the firm should offer. This decision determines the firm's horizontal integration or diversification. Where in the world to compete. This decision determines the firm's global strategy.

Strategic Alliances (Alternatives on the Make-or-Buy Continuum)

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

Short Term Contracting (Alternatives on the Make-or-Buy Continuum)

When engaging in short-term contracting, a firm sends out Requests for Proposals (RFPs) to several companies which initiates competitive bidding for contracts to be awarded with a short duration, generally less than one year [contractual agreement].

Related-Constrained Diversification

When executives consider business opportunities only where they can leverage existing competencies and resources (Ex: Johnson and Johnson)

Product-Market Diversification Strategy (General Diversification Strategies)

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

Parent Subsidiary Relationship (Alternatives on the Make-or-Buy Continuum)

Describes the most integrated alternative to performing an activity within one's own corporate family. The corporate parent owns the subsidiary and can direct it via command and control.

Less Vertically Disintegrated

Focus on only one of a limited few stages of the industry value chain.

Taper Integration (Alternatives to Vertical 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. Ex: Apple and Nike both use Taper Integration - they both own retail outlets but also use other retailers, both brick and mortar and online. Benefits: 1. Exposes in-house suppliers and distributors to market competition. 2. Enhances a firm's flexibility. 3. Firms can combine internal and external knowledge, possibly paving the path for innovation.

Fully Vertically Integrated

All activities are conducted within the boundaries of the firm.

Transaction Costs

All costs associated with economic exchange, whether within a firm or in markets. Enables managers to answer the question of whether it is cost-effective for their firm to grow its scope by taking on greater ownership of the production of needed inputs or of the channels by which it distributes its outputs. When costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market, then the firm should vertically integrate by owning production of the needed inputs or channels for the distribution of outputs.

Administrative Costs

All costs pertaining to organizing an economic exchange within a hierarchy, including recruiting and retaining employees, paying salaries and benefits, and setting up a business. Tend to increase with organization size and complexity.

Backward Integration

Changes in an industry value chain that involve moving ownership 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 but obtains revenues from lines of business that are linked to the primary business activity.

Geographic Diversifications Strategy (General Diversification Strategies)

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

Long Term Contracts (Strategic Alliances)

Licensing - A form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property. Franchising - A form of long-term contract in which a franchisor grants a franchisee the right to use the franchisors trademark and business processes to offer goods and service that carry the franchisor's brand name; the franchisee in turn pays an up-front buy-in lump sum and percentage of the revenues.