Chapter 8 - Test 2 Flashcards
Corporate Strategy
Goal-directed actions that leaders take in the quest for competitive advantage
Boundaries of the firm
Vertical integration
Diversification
Geographic scope
Why Firms Need to Grow
- To increase profits and shareholder returns
- To increase market power
- To reduce risk through diversification
Three Dimensions of Corporate Strategy
- Vertical integration
- Diversification
- Geographic scope
Underlying concepts that guide the Three Dimensions of Corporate Strategy
- Core Competencies
- Economies of Scale
- Economies of Scope
- Transaction Costs
External transaction costs
Negotiating, monitoring, and enforcing contracts
Internal transaction costs
Recruiting and retaining employees
If Costs in-house < Costs market
Vertically integrate own production of the inputs or own output distribution channels
If Costsmarket < Costsin-house
The firm should consider purchasing instead
The Principal-Agent Problem
A major disadvantage of organizing economic activity
within firms
Principal
the owner of the firm
Agent
manager or employee
Agency Problem
Agents pursue their own interests (corporate jets, golf outings)
One Solution to the Principle Agent Problem
Stock options to make agents owners
Information Asymmetry
One party is more informed than another due to the possession of private information
Information Asymmetry Examples
used cars, e-commerce, mortgage backed securities, R&D projects
Backward Vertical Integration
Owning inputs of the value chain
Forward Vertical Integration
Owning activities closer to the customer
Vertical Integration
The ownership of inputs or distribution channels
Benefits of Vertical Integration
- Lowering costs
- Improving quality
- Facilitating scheduling and planning
Risks of Vertical Integration
- Increasing costs
- Reducing quality
- Reducing flexibility
- Increasing the potential for legal repercussions
When Does Vertical Integration Make
Sense?
When there are issues with raw materials and to enhance the customer experience
Alternatives to Vertical Integration
Taper Integration and Strategic Outsourcing
Strategic Outsourcing
Moving internal value chain activities to other firms (Ex: HR systems)
