CHAPTER 8 - Corporate Strategy: Vertical Integration and Diversification

__________ are a function of the number, size, and types of businesses that are linked

Coordination costs

___________ comprises the decisions that leaders make and the goal-directed actions they take in the quest for competitive advantage in several industries and markets simultaneously

Corporate Strategy

___________ occur when a firm's average cost per unit decreases as its output increases

Economies of scale

___________ are the 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

Economies of scope

__________ investments made in human capital to acquire unique knowledge and skills, such as mastering the routines and procedures of a specific organization, which are not transferable to a different employer.

Human-asset specificity

Why do firms need to grow?

Increase profits, lower costs, increase market power, reduce risk, and motivate management

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

Influence costs

Taper integration has several benefits:

It exposes in-house suppliers and distributors to market competition so that performance comparisons are possible, flexibility, and firms can combine internal and external knowledge, possibly paving the path for innovation.

Four Options to Formulate Corporate Strategy via Core Competencies

Leverage existing core competencies to improve current market position. Build new core competencies to protect and extend current market position. Redeploy and recombine existing core competencies to compete in markets of the future. Build new core competencies to create and compete in markets of the future.

___________ assets whose physical and engineering properties are designed to satisfy a particular customer.

Physical-asset specificity

The four main types of business diversification are

Single business, Dominant business, Related diversification, and Unrelated diversification: the conglomerate.

__________ assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting.

Site specific

__________ provides useful theoretical guidance to explain and predict the boundaries of the firm

Transaction cost economics

___________ are all costs associated with an economic exchange.

Transaction costs

In the Boston Consulting Group growth-share matrix, each of the four categories in the matrix represents

a different investment strategy

To get the benefits of vertical integration without the accompanying risks, companies can

choose strategic outsourcing and use taper integration.

Taken together, the __________ provides guidance to executives on how to diversify in order to achieve continued growth.

core competence-market matrix

A(n) ___________ is a situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units.

diversification discount

The stock price of such highly diversified firms is valued at less than the sum of their individual business units is called what?

diversification discount

A partnership in which at least one partner takes partial ownership in the other partner is called

equity alliance

The persons responsible for forming corporate level strategy are the

executives

Moving ownership of activities closer to the end customer is called

forward vertical integration

Long-term contracts include

franchising and licensing

A firm that is active in several different countries is pursuing a

geographic diversification strategy

One potential way to overcome the principal-agent problem is to

give stock options to managers

__________ in NOT a disadvantage of organizing economic activity in the open market

increased flexibility

Frequently, sellers have better information about products and services than buyers, which creates

information asymmetry

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

information asymmetry

__________ is another special form of strategic alliance, two or more partners create and jointly own a new organization.

joint venture

What are the advantages of organizing economic activity OUTSIDE of a firm?

lower administrative costs and high-powered incentives

Stages four and five of the industry value chain involve

marketing, sales and after-sales service and support

What level of diversification leads to the highest level of performance?

moderate

A __________ company focuses on a single market, whereas a __________ company competes in several different markets simultaneously.

non-diversified, diversified

What is a related-linked diversification strategy?

one in which executives pursue various business opportunities that share only a limited number of linkages

What is a related-linked diversification strategy?

one in which executives pursue various business opportunities that share only a limited number of linkages.

__________ is a major disadvantage of organizing economic activity within firms, as opposed to within markets

principal-agent problem

A firm that is active in several different product markets is pursuing a

product diversification strategy

A company that pursues both a product and a geographic diversification strategy simultaneously follows a

product-market diversification strategy

A firm follows a __________ when it derives less than 70 percent of its revenues from a single business activity and obtains revenues from other lines of business linked to the primary business activity.

related diversification strategy

Long-term contracts are classified as

strategic alliances

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

strategic alliances

___________ is an umbrella term that denotes different hybrid organizational forms—among them, long-term contracts, equity alliances, and joint ventures

strategic alliances

A benefit of ___________ is that in-house suppliers and distributors are subject to market competition, which allows the firm to assess performance in comparison to others.

taper integration

A disadvantage of a short term contract as an alternative on the make-or-buy continuum is that

the supply firm has little reason to perform transaction-specific investments

What is the purpose of the core competence-market matrix?

to provide guidance regarding how to diversify in order to grow the company

__________ are all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm on in markets

transaction costs

___________ in an advantage of a firm in organizing economic activity

transaction-specific investments

A major reason why a firm may choose a related strategy is to take advantage of both economies of scale and of scope.

true

Related diversification is more likely to generate incremental value than unrelated diversification.

true

A conglomerate fits which type of corporate diversification model?

untreated diversification

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

vertical integration

Amazon's explosive success is largely due to

vertical integration and diversification

__________ describes the most-integrated alternative to performing an activity within one's own corporate family (and thus anchors the make-or-buy continuum

parent-subsidiary relationship

In the taper integration system, a firm has __________ reliance on outside markets

partial

What is true about the make-or-buy continuum?

The "make" and "buy" choices anchor each end of the continuum.

Industry value chains are also called _______ _______ _______, because they depict the transformation of raw materials into finished goods and services along distinct _______ stages.

vertical value chains, vertical

Depending on the situation, vertical integration has several risks, some of which directly counter the potential benefits, including

▪ Increasing costs. ▪ Reducing quality. ▪ Reducing flexibility. ▪ Increasing the potential for legal repercussions.

Vertical integration, either backward or forward, can have a number of benefits, including

▪ Lowering costs. ▪ Improving quality. ▪ Facilitating scheduling and planning. ▪ Facilitating investments in specialized assets. ▪ Securing critical supplies and distribution channels.