Strategic Management Ch 8

product-market diversification strategy

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

related constrained diversification

in this type of diversification, all businesses share competencies in products, services, technology, or distribution

related linked diversification

in this type of diversification, only some businesses share competencies in products, services, technology, or distribution

geographic diversification strategy

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

disadvantages of firm transactions

- administrative costs - low-powered incentives - principal-agent problem

advantages of firm transactions

- command and control -coordination - transaction-specific investments - community of knowledge

advantages of market transactions

- high-powered incentives - flexibility

risks of vertical integration

- increasing costs - reducing quality - reducing flexibility - increasing the potential for legal repercussions

disadvantages of market transactions

- search costs - opportunism - incomplete contracting - enforcement of contracts

product diversification strategy

corporate strategy in which a firm is active in several different product markets

BCG Cash Cow

These are classified as High market share and low market growth; high and stable earnings. Strategy: Hold

BCG Star

These are classified as high market share and high market growth; high earnings. Strategy: hold or invest for growth.

BCG Question Mark

These are classified as low market share and high market growth. The earnings are low, unstable, or growing with negative cash flows. Strategy: Increase market share or harvest/divest.

BCG Dogs

These are classified by low market share and low market growth; underperforming SBUs. Strategy: Harvest or divest.

conglomerate

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

BCG growth-share matrix

a corporate planning tool in which the corporate is viewed as a portfolio of business units which are represented graphically along relative market share and speed of growth. 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/ner core competencies and existing/new markets

franchising

a long-term contract in which an organization grants another the right to use the former's trademark and business processes to offer goods and services that carry their brand name; the latter 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

principal-agent problem

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

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

taper integration

a way of orchestrating value activities in whic 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

forward vertical integration

changes in an industry value chain that involve moving ownership of activities closer to the end point of the value chain

backwards vertical integration

changes in an industry value chain that involve moving ownership of activities upstream to the originating 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 businesses

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

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

information asymmetries

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

corporate strategy

the decisions that senior management makes and the goal-directed 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

industry value chain

the 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.

vertical integration

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

restructuring

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

internal capital markets

these can be a source of value creation in a diversification strategy if the conglomerate's headquarters does a more efficient job of allocating capital through its budgeting process than what could be done in external capital markets.

dominant business firm

this type of firm derives between 70 and 95 percent of its revenues from a single business

single business firm

this type of firm derives move than 95 percent of its revenue from on business activity

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-assets 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