Chapter 8 Flashcards
What is corporate strategy?
Corporate strategy covers 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
What are the three dimensions of corporate strategy?
(1) Vertical integration, “In what stages of the industry value chain should the company participate?”
(2) Diversification, “What range of products and services should the company offer?”
(3) Geographic scope, “Where should the company compete geographically in terms of regional, national, or international markets?”
What are the four underlying concepts that guide the three dimensions of corporate strategy?
(1) Core competencies – unique strengths embedded deep within a firm which, ultimately, allow firms to achieve competitive advantages.
(2) Economies of scale – when a firm’s average cost per unit decreases as its output increases.
(3) 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.
(4) Transaction costs – all the costs associated with an economic exchange. Considering the logic of transactions cost economics enables managers to answer the question of whether it is cost-efficient for their firm to expand its boundaries through vertical integration or diversification.
What are transaction costs?
Transaction costs are all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets. The exhibit below illustrates this logic
What are information asymmetries?
Information asymmetries represent the situation in which one party is more informed than another because of the possession of privation information.
What are strategic alliances?
(2) 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. They can facilitate investments in transaction-specific assets without encountering the internal transaction cost involved in owning firms in various stage of the industry value chain
What are the three types of strategic alliances?
a. Long-term contracts work similarly to short-term contracts. However, they have a duration superior to one year, which helps overcoming the drawbacks of short-term contracts. Long-term contracts can come through different forms such as licensing and franchising. Licensing is a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent. While franchising is 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.
b. Equity alliances refer to a partnership in which at least one partner takes partial ownership in the other partner. This can be done through the purchase of stock or assets. This is useful as it enables the buying firm to get insights in the other firm, which wouldn’t have been possible with a mere short- or long-term contract. Thus, it can help the buying company in many ways.
c. Joint ventures are stand-alone organizations created and jointly owned by two or more parent companies. Since the partners contribute equity to a joint venture, they make a long-term commitment, which in turn facilitates transaction-specific investments.
What is vertical integration?
Vertical integration refers to the firm’s ownership of its production of needed inputs or of the channels by which it distributes its outputs. This is a key concept as the first question when formulating corporate strategy is: “In what stages of the industry value chain should the firm participate?” Vertical integration can be measured by a firm’s value added: “What percentage of a firm’s sales is generated within the firm’s boundaries?”
What are the two types of vertical integration?
(1) Backward vertical integration, which refers to the changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain, and
(2) Forward vertical integration, which refers to the changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.
What is vertical market failure?
Vertical market failure occurs when transactions within the industry value chain are too risky, and alternatives too costly in time or money.
What are the two alternatives for vertical integration?
(1) Taper integration, which is 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-markets firms for some of its distribution.
(2) Strategic outsourcing involves moving on or more internal value chain activities outside the firm’s boundaries to other firms in the industry value chain. When using this technique, a firm reduces its level of vertical integration. When outsourced activities take place outside the home country of the firm, we refer to offshoring, or offshore outsourcing
What are the three general diversification strategies?
(1) Product diversification strategy, which is a corporate strategy in which a firm is active in several different product markets,
(2) Geographic diversification strategy, which is a corporate strategy in which a firm is active in several different countries, and
(3) Product-market diversification strategy, which is a corporate strategy in which a firm is active in several different product markets and several different countries.
What are the four main types of diversification?
(1) Single businesses, which are characterized by a low level of diversification (it derives more than 95% of its revenues form one business),
(2) Dominant businesses, which derives between 70 and 95% of their revenues from a single business, but also pursue at least one other business activity that accounts for the remained of the revenue. Usually, the dominant business shares competencies in products, services, technology, or distribution.
(3) Related diversification, which is a corporate strategy in which a firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity. There are two variations of this type according to how much the other lines of business benefit from the core competencies of the primary business activity:
a. Related-constrained diversification, in which executives purse only business where they can apply the resources and core competencies already available in the primary business. Specifically, the choices of alternative business activities are limited by the fact that they need to be related through common resources, capabilities, and competencies.
b. Related-linked diversification strategy, in which executives pursue various businesses opportunities that share only a limited number of linkages.
(4) Unrelated diversification: the conglomerate, in which a firm derives less than 70% of its revenues from a single business and there are few, if any, linkages among its businesses. A company that combines two or more strategic business units under one overarching corporation is called a conglomerate (and follows an unrelated diversification strategy).
What is a diversification discount?
A situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units.
What is a diversification premium?
A situation in which the stock price of related-diversification firms is valued at greater than the sum of their individual business units.
