Chapter 8: Corporate Strategy: Vertical Integration and DiversificationDiversification

Question 1

Define corporate strategy

Answer 1

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.

Question 2

What does strategy formulation concern itself with? (2)

Answer 2

Where and how to compete

Question 3

What does business strategy concern itself with

Answer 3

how to compete in a single product market

Question 4

Executives must determine their corporate strategy by answering these 3 questions.

Answer 4

1. ) In what stage of the industry value chain should the company participate?
2. ) What range of products and services should the company offer?
3. ) Where should the company compete geographically?

Question 5

What are the 5 reasons that firms need to grow?

Answer 5

1. ) increase profits
2. ) lower costs
3. ) Increase market power
4. ) reduce risks
5. ) managerial motives

Question 6

Define transaction cost economics

Answer 6

a theoretical framework in strategic management to explain and predict the boundaries of a firm, which is central to formulating a corporate strategy that is more likely to lead to a competitive advantage.

Question 7

Define transaction costs

Answer 7

all internal and external costs associated with an economic exchange, whether within a firm or in markets.

Question 8

Define external transaction costs

Answer 8

costs of searching for a firm or individual with whom to contract, and then negotiating, monitoring and enforcing the contract.

Question 9

Define internal transaction costs

Answer 9

costs pertaining to organizing an economic exchange within a hierarchy. Ex: employees’ salaries and benefits, setting up shop floor etc.

Question 10

When should firm’s vertically integrate?

Answer 10

When its cheaper for a firm to produce on its own than it would be to go to the market for production, distribution channels, etc.

Question 11

Advantages of producing within a firm (4)

Answer 11

1. ) command and control decisions
2. ) Can coordinate tasks
3. ) transaction-specific investments
4. ) community knowledge

Question 12

Disadvantages of producing within a firm (3)

Answer 12

1. ) administrative costs
2. ) low-powered incentives (hourly vs entrepreneurial which is more attractive to employees).
3. ) principal-agent problem

Question 13

Define principal-agent problem

Answer 13

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

Question 14

What are the advantages of using the market to produce? (2)

Answer 14

1. ) High-powered incentives- employees needed for more specialized jobs.
2. ) increased flexibility- can compare prices and providers.

Question 15

What are the disadvantages of using the market to produce? (4)

Answer 15

1. ) Search costs
2. ) Opportunism by other parties
3. ) Incomplete contracting
4. ) Enforcement of contracts

Question 16

Define information asymmetry

Answer 16

situation in which one party is more informed than the other because of the possession of private info.

Question 17

What are the alternatives to making or buying for a firm? (3)

Answer 17

1. ) Short-term contracts
2. ) Strategic alliances
3. ) parent-subsidiary relationship

Question 18

Define strategic alliances

Answer 18

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

Question 19

Define licensing

Answer 19

A form of long-term contracting in the manufacturing sector that allows firms to commercialize intellectual property.

Question 20

Define franchising

Answer 20

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 franchisers name.

Question 21

Define equity alliance

Answer 21

a partnership in which at least one partner takes partial ownership in the other partner.

Question 22

Define credible commitment

Answer 22

a long-term strategic decision that is both difficult and costly to reverse.

Question 23

Define joint-venture

Answer 23

a stand-alone organization created and jointly owned by 2 or more parent companies.

Question 24

Explain a parent-subsidiary relationship

Answer 24

parent company owns the subsidiary and can direct it via command and control. This is the most integrated alternative to performing an activity within one’s own corporate family.

Question 25

Define vertical integration

Answer 25

The firm’s ownership of its production of needed inputs or the channel by which it distributes its outputs.

Question 26

Define industry value chain

Answer 26

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.

Question 27

What are the 2 types of vertical integration?

Answer 27

Backwards and forwards

Question 28

What is backwards vertical integration?

Answer 28

moving ownership of activities upstream to the originating (inputs) point of the value chain.

Question 29

What is forward vertical integration?

Answer 29

moving ownership of activities closer to the end (customers) point of the value chain.

Question 30

What is strategic outsourcing?

Answer 30

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

Question 31

Define product-market diversification strategy

Answer 31

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

Question 32

Define diversification

Answer 32

an increase in the variety of products and services a firm offers or markets and geographic regions in which it competes.

Question 33

Define geographic diversification strategy

Answer 33

corporate strategy in which a firm is active in several different countries.

Question 34

Define diversification strategy

Answer 34

corporate strategy in which a firm is active in several different product markets.

Question 35

What are the 4 main types of business diversification?

Answer 35

1. ) single business
2. ) dominant business
3. ) related diversification
4. ) unrelated diversification

Question 36

What is a single business firm?

Answer 36

A firm that derives more than 95 percent of its revenues from one business. Ex- Google draws it from online advertising.

Question 37

What is a dominant business firm

Answer 37

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

Question 38

What is a related diversification strategy?

Answer 38

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.

Question 39

What is a related-constrained diversification strategy?

Answer 39

a kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages.

Question 40

What is unrelated diversification strategy?

Answer 40

corporate strategy in which a firm derives 70 percent of its revenues from a single business and there are a few, if any, linkages among businesses. (conglomerate)

Question 41

What is a conglomerate?

Answer 41

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

Question 42

What is a core competence-market matrix?

Answer 42

a framework to guide corporate diversification strategy by analyzing possible combinations of existing/ new core competencies and existing/ new markets.

Question 43

What are the 4 options managers have to formulate a corporate strategy via core competencies?

Answer 43

1. ) leverage existing core competencies to improve current markets position.
2. ) Build new core competencies to protect and expand current market position
3. ) Redeploy and recombine existing core competencies.
4. ) Build new core competencies to create and compete in markets of the future.

Question 44

Define diversification discount

Answer 44

situation in which the stock price of a highly diversified firm is valued at less than the sum of their individual business units. -happens with unrelated diversification

Question 45

Define diversification premium

Answer 45

situation in which the stock price of related-diversification firms is valued greater than the sum of their individual business units. -happens with related diversification.

Question 46

For diversification to enhance firm performance, it must do at least one of the following three things:

Answer 46

1. ) Provide economies of scale, which reduces costs.
2. ) Exploit economies of scope, which increases value.
3. ) Reduce costs and increase value

Question 47

What is restructuring?

Answer 47

The process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully