MGT499 exam 3
T/F Firms that pursue extremely high or extremely low levels of diversification perform better than those that pursue moderate levels of diversification
False
Unrelated diversification (conglomerate)
no businesses share competencies
Different types of strategic alliances
non-equity alliances equity alliances joint ventures
For diversification to enhance firm performance, it must do at least one of the following:
-Provide economies of scale, which reduces costs -Exploit economies of scope, which increases value -Both
Benefits of taper integration
-exposes in house suppliers and distributers to market competition so that performance comparisons are possible -enhances firms flexibility -combine internal and external knowledge
Why do firms enter strategic alliances?
-strengthen competitive position -enter new markets -hedge against uncertainty -access critical complementary assets -learn new capabilities
Why do firms engage in M&A's with competitors?
1. It reduces competitive intensity because the M&A leads to fewer competitors in the market 2. It could lower costs as firms pursue economies of scale 3. It could increase the differentiation of a firm's product and service offerings as the firm uses horizontal integration to fill gaps in its product offering 4. To access new markets & distribution channels 5. To access a new capability or competency 6. To preempt rivals
Forward vertical integration
A focal firm entering into its buyers' business in the industry value chain
Which of the following statements is true of an equity alliance?
A) An equity alliance is based on contractual agreements rather than partial ownership. B) In an equity alliance, the partners frequently exchange personnel to make the acquisition of tacit knowledge possible. C) Equity alliance is easy to initiate and terminate compared to non-equity alliance. D) An equity alliance creates stronger ties between the alliance partners when compared to parent-subsidiary relationship B
Horizontal integration
Absorption into a single firm of several firms involved in the same level of production and sharing resources at that level
When should a firm vertically integrate?
If cost to produce in house < Cost to buy
When should a firm outsource?
If cost to produce in house > cost to buy
Merger
Combination of two or more companies into a single firm Tend to be a friendly approach
corporate venture capital (CVC)
Defined as corporate minority equity investment in private startups
Primary purpose of CVC
For corporations: to learn new technologies that new ventures develop • For new ventures: to access complementary assets as well as capital
Decisions relating to the range of products and services a firm will offer determine the firm's ______
Level of diversification
non-equity alliance
Partnership based on contracts between firms. The most frequent forms are supply agreements, distribution agreements, and licensing agreements firms tend to share explicit, codifiable knowledge such as: Patents, user manuals and fact sheets, scientific publications due to its temporary nature, it can result in a lack of trust and commitment
Vertical Integration
Practice where a single entity controls the entire process of a product, from the raw materials to distribution
Onshoring
Relocation of business processes or production to a lower-cost location inside the same country as the business.
geographic diversification strategy
Selling the same product in different markets
BCG Growth-Share Matrix
The Boston Consulting Group planning tool that evaluates business units in terms of their growth potential and market share.
Horizontal integration through M&A's
The process of merging with a competitor at the same stage of the industry value chain, leading to industry consolidation A type of corporate strategy that can improve a firm's strategic position in a single industry
Industry value chain
The transformation of raw materials into finished goods and services along distinct vertical stages
Why Strategic Alliances Are Attractive
They enable firms to achieve goals faster and at lower costs than going it alone They complement or augment the value chain In contrast to M&A, they allow firms to circumvent potential legal repercussion
T/F Firms are more capable than markets at coordinating highly complex tasks, while markets are mor capable of providing high-powered incentives for entrepreneurship
True
T/F Managers have alternatives other than the two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").
True
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 asset specificity, and human-asset specificity.
Speed of market growth
What dimension is on the vertical axis?
Principle-agent problem
When the agent (worker or manager) doesn't act in the best interest of the principle (owner). Due to the separation of ownership and control in public companies, the principal - agent problems are almost inevitable
Single Business Diversification Strategy
a corporate-level strategy wherein the firm generates 95% or more of its sales revenue from its core business area
Backward vertical integration
a focal firm entering into its suppliers' business in the industry value chain
Managerial hubris
a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary
unrelated diversification
a growth strategy whereby a new business lacks any common elements with the present business
related diversification
a growth strategy whereby the current target market and/or marketing mix shares something in common with the new opportunity
Related diversification
a growth strategy whereby the current target market and/or marketing mix shares something in common with the new opportunity Constrained: ALL businesses share competencies Linked: SOME businesses share competencies
Relative market share
a measure of the product's strength in a particular market, defined as the sales of the focal product divided by the sales achieved by the largest firm in the industry Horizontal
Equity alliances
a partnership in which at least one partner takes partial ownership in the other partner Equity alliances often involve exchange of personnel, so they allow the sharing of tacit knowledge that cannot be codified, in addition to explicit knowledge tends to produce stronger ties and greater trust than non-equity, contractual relationship
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
Transaction cost
all internal and external costs associated with an economic exchange, whether within a firm or in markets
business level strategy
an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
Site specificity
assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting
Physical asset specificity
assets whose physical and engineering properties are designed to satisfy a particular customer
Dominant business diversification
between 70% and 95% of revenue comes from a single business Additional business activity pursued
Global expansion
can enable companies to increase their profitability and grow their profits more rapidly
low market growth, high market share
cash cow
Economies of scope
cost savings from leveraging core competencies or sharing related activities among businesses in a corporation
Internal transaction costs
costs associated with organizing an economic exchange within a firm; administrative costs and etc Often increases as a firm becomes more vertically integrated
External transaction cost
costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
low market growth, low market share
dog
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
Risks of Vertical Integration
increasing costs, reducing quality, reducing flexibility, increasing the potential for legal repercussions
Human-asset specificity
investments made in human capital to acquire unique knowledge and skills
M&A
mergers and acquisitions
Outsourcing
moving some of a firm's internal activities and decision responsibility to outside providers
Corporate Strategy
quest for competitive advantage when competing in multiple industries
high market growth, low market share
question mark
Geographic scope
scope of the geographic area to be covered by advertising media
Benefits of vertical integration
securing critical supplies, lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets
product diversification
selling different kinds of products
Product-market diversification
selling different kinds of products in different regions/countries
high market growth, high market share
star
Backward integration
takes information entered into a given system and sends it automatically to all upstream systems and processes
Off-shoring
the practice of basing some of a company's processes or services overseas, so as to take advantage of lower costs.
Restructuring
the process of reorganizing and divesting business units and exiting industries to refocus upon a company's core business and rebuild its distinctive competencies
diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases
Acquisition
the purchase of a company by another company Can be friendly or unfriendly
Strategic alliances
voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services
Joint ventures
when two or more companies join forces - sharing resources, risks, and profits, but not actually merging companies - to pursue specific opportunities Long-term commitment - Exchange both tacit and explicit knowledge via frequent interactions of personnel -Steppingstone toward full integration of the partnership • Often used to enter foreign markets