6650 Chapter 8: Corporate Strategy: Vertical Integration and Diversification
single-business firm
derives 95% or more of its revenues from one business
dominant-business firm
derives between 70- and 95% of its revenues from a single business, but it pursues at least one other business activity and shares competencies in products, services, technology, or distribution
parent-subsidiary relationship
describes the most integrated alternative to performing an activity within one's own corporation. The corporate parent owns the subsidiary and can direct it via command and control
restructuring
describes the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully
RFP
request for proposals
economies of scope
savings that come from producing two or more outputs or providing different services at less cost than producing each individually though using the same resources and technology
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
after-sales service and support
stage five of the industry value chain include
marketing sales
stage four of the industry value chain include
final assembly manufacturing
stage three of the industry value chain include
principal-agent problem
A situation in which an agent performing activities on behalf of a principal (the owner of the firm) pursues his or her own interests
conglomerate
a company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy
disadvantages for firms
Are administrative costs an advantage/disadvantage for firms/markets
advantages of markets
Are high-powered incentives an advantage/disadvantage for firms/markets
disadvantages for firms
Are low-powered incentives, such as hourly wages and salaries an advantage/disadvantage for firms/markets
disadvantage of markets
Are search costs an advantage/disadvantage for firms/markets
advantages for firms
Are transaction-specific investments, such as specialized robotics equipment that is highly valuable within the firm, but of little or no use in the external market an advantage/disadvantage for firms/markets
product-market diversification strategy
a company that pursues both a product and geographic diversification strategy simultaneously
risks of vertical integration
Increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions are considered?
advantages for firms
Is coordination of highly complex tasks to allow for specialized division of labor an advantage/disadvantage for firms/markets
disadvantage of markets
Is enforcement of contracts an advantage/disadvantage for firms/markets
disadvantage of markets
Is incomplete contracting an advantage/disadvantage for firms/markets
advantages of markets
Is increased flexibility an advantage/disadvantage for firms/markets
disadvantage of markets
Is opportunism by other parties an advantage/disadvantage for firms/markets
advantages for firms
Is the ability to make command-and-control decisions by fiat along clear hierarchical lines of authority an advantage/disadvantage for firms/markets
advantages for firms
Is the creation of a community of knowledge an advantage/disadvantage for firms/markets
disadvantages for firms
Is the principal-agent problem an advantage/disadvantage for firms/markets
make managers owners through stock options
One way to overcome the principal-agent problem is?
dogs
SBU that are under performing businesses; holds a small market share in a low-growth market, recommended to divest the business or to harvest it
cash cow
SBUs that compete in a low-growth market but hold considerable market share. the earnings and cash flows are high and stable
star
SBUs that hold a high market share in a fast-growing market. Earnings are high and either stable or growing.
question marks
SBUs that hold an unclear standing. earnings are low and unstable, but might be growing. cash flow is negative
benefits of vertical integration
Securing critical supplies and distribution channels, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets are considered?
raw material
Stage one of the industry value chain include
components intermediate goods
Stage two of the industry value chain include
licensing franchising
Two types of long-term contracts
internal transaction costs
costs pertaining to organizing an economic exchange within a hierarchy; also called administrative costs
increased flexibility
The transaction in markets that enables those who wish to purchase goods to compare prices and services among many different providers
product diversification strategy geographic diversification strategy product-market diversification strategy
Three general diversification strategies
site specificity physical-asset specificity human asset specificity
Three types of specialized assets?
long-term contracts equity alliances joint ventures
What are the 3 hybrid organizational forms of strategic alliances?
core competencies economies of scope economies of scale transaction costs
What are the four underlying strategic management concepts that determine the scope of a firm?
single business dominant business related diversification unrelated diversification
What are the main types of business diversification
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).
higher than
a diversification premium is a situation in which the stock price of a related-diversification firm is valued______________________the sum of their individual business units
related diversification strategy
a firm that derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business linked to the primary business activity
licensing
a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent
core competence-market matrix
a framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets
coordination costs
a function of the number, size, and types of businesses that are linked to one another
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 franchisor's brand name
credible commitment
a long-term strategic decision that is both difficult and costly to reverse
equity alliance
a partnership in which at least one partner takes partial ownership int he other partner
joint venture
a special form of strategic alliance where two or more partners create and jointly own a new organization
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 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
fully vertically integrated
all activities are conducted within the boundaries of the firm
transaction costs
all internal and external costs associated with an economic exchange, whether within a firm or in markets
vertical integration
allows firms to increase operational efficiencies through improved coordination and the fine-tuning of adjacent value chain activities
transaction cost economics
allows leaders to explain which activities a firm should pursue in-house (make) versus which goods and services to obtain externally (buy)
industry value chain
also called vertical value chains
short-term contracts long-term contracts (licensing & franchising) equity alliances joint ventures
alternatives in the make-or-buy continuum include?
diversification
an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes
site specificity
assets are required to be co-located, such as the equipment necessary for mining
physical-asset specificity
assets whose physical and engineering properties are designed to satisfy a particular customer
opportunism
behavior characterized by self-interest seeking with guile
business strategy
concerns the question of how to compete in a single product market
long-term contracts
contracts that help facilitate transaction-specific investments and generally are greater than one year
geographic diversification strategy
corporate strategy in which a firm is active in several different countries
product diversification strategy
corporate strategy in which a firm is active in several different product markets
search costs
costs incurred when a firm must scour the market to find reliable suppliers from among the many firms competing to offer similar products and services
external transaction costs
costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
corporate strategy
determines the boundaries of the firm along three dimensions: industry value chain, products and services, and geography (regional, national, or global markets)
degree of diversification
determines the range of products and services the firm should offer
vertically disintegrated
firms that focus on only one or a few stages of the industry value chain
dog cash cow star question mark
four categories of the BCG growth share matrix that SBU's are potted into
human-asset specificity
investments made in human capital to acquire unique knowledge and skills
strategic outsourcing
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain
forward vertical integration
moving ownership of activities in the value chain closer to the end customer
backward vertical integration
moving ownership of activities in the value chain upstream to the originating inputs of the value chain
influence costs
occur due to political maneuvering by managers to influence capital resource allocation and the resulting inefficiencies stemming from the suboptimal allocation of scarce resources
economies of scale
occur when a firm's average cost per unit decreases as its output increases
corporate strategy
the decisions that senior management makes and the goal-directed actions it takes in the quest for competitive advantage in several industries and markets simultaneously
vertical integration
the firm's ownership of its production of needed inputs or the channels by which it distributes its outputs
industry value chain
they depict 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
specialized assets
unique assets with high opportunity cost: they have significantly more value in their intended use than in their next-best use.
core competencies
unique strengths embedded deep within a firm and allow a firm to differentiate its products and services from those of its rivals
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
related-constrained related-linked
what are the two types of related diversification
related-constrained diversification
when executives consider business opportunities only where they can leverage their existing competencies and resources, (must be related through common resources, capabilities, and competencies) the firm is using?
related linked diversification
when executives consider new business activities that share only a limited number of linkages the firm is using?
unrelated diversification strategy
when less than 70% of a firms revenues comes from a single business and there are few, if any, linkages among its businesses
off-shoring
when outsourced activities take place outside the home country
vertically integrate
when the costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market, then the firm should?