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
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
Joint Venture
Organizational form in which two or more partners create and jointly own a new organization
Specialized Assets
Unique assets with high opportunity cost: they have significantly more value in their intended use than in their next-best use.
Strategic Alliance
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
Products and Services
What range of goods to provide; determines the level of diversification
Related-Linked Diversification
When executives consider new business activities that share only a limited number of linkages
Geographic
Where to compete in terms of regional, national, and international markets
Conglomerate
A company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy
Boston Consulting Group 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).
Core Competence-Market Matrix
A framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets
Licensing
A from of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property
Franchising
A long-term contract in which a franchiser grants a franchisee the right to use the franchiser's trademark and business processes to offer goods and services that carry the franchiser's brand name; the franchisee 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
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
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 directly linked to the primary business activity
Product Diversification Strategy
Corporate Strategy in which a firm is active in several different product markets
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
Geographic Diversification Strategy
Corporate strategy in which a firm is active in several different countries
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
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
Related-Constrained Diversification
Strategy where businesses can leverage their existing competencies and resources; the choices of alternative business activities are limited by the fact that they need to be related through common resources, capabilities, and competencies
Vertical integration
The firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs
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
Corporate Strategy
comprises the decisions that senior management makes and the goal-directed actions it takes in the quest for competitive advantage
Industry Value Chain
the transformation of raw materials into finished goods and services along distinct vertical stages. This decision determines the firm's vertical integration
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