Chapter 8 - Corporate Strategy: Vertical Integration and Diversification

Product-market diversification strategy

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

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

Site specificity

Assets required to be co-located

Physical-asset specificity

Assets whose physical and engineering properties are designed to satisfy a particular customer

Specialized assets

Unique assets with high opportunity cost: They have significantly more value in their intended use than in their next-base use. They come in three types: site specificity, physical-asset specificity, and human-asset specificity

Vertical market failure

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

Parent-subsidiary relationship

- Describes the most-integrated alternative to performing an activity within one's own firm boundaries - Corporate parent owns the subsidiary and can direct it via command and control (fiat)

Strategic alliances

- Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services - Umbrella term that denotes different hybrid organizational forms

Core competencies

- unique strengths embedded deep within a firm - allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost

Conglomerate

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

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). 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/new core competencies and existing/new markets

Coordination costs

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

Related-constrained 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 the primary business

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

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

Forward vertical integration

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

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

Single-business firm

Characterized by a low level of diversification, if any, because it derives more than 95 percent of its revenues from one business. The remainder of less than 5 percent of revenue is not (yet) significant to the success of the firm.

Diversified company

Competes in several different markets simultaneously

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 and there are few, if any, linkages among its businesses

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

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 (Also called administrative costs)

Costs pertaining to organizing an economic exchange within a hierarchy

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

Dominant-business firm

Derives between 70 and 95 percent of its revenues from a single business, but it pursues at least one other business activity that accounts for the remainder of revenue.

Restructuring

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

Non-diversified company

Focuses on a single market

Human-asset specificity

Investments made in human capital to acquire knowledge and skills which are not transferable to a different employer

Strategic outsourcing

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

Influence costs

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

Economies of scale

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

Principal-agent problem

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

Information asymmetry

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

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 grater than the sum of their individual business units

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

Vertical integration

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

Economies of scope

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

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 in the other partner

Joint venture

A standalone organization created and jointly owned by two or more parent companies

Transaction cost economies

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