Conditions to create economic value Flashcards
Conditions to create economic
value
Vertical Integration
1) Valuable by reducing the threat of opportunism. 2) Valuable in relation to the firm’s capabilities. If the firm’s capabilities are VRIO they should VI. 3) Valuable if a firm’s flexibility to make strategic and organizational decisions is high
Conditions to create economic
value
Corporate Diversification
Exploiting operational, financial, anticompetitive and managerial economies of scope.
Creation of synergy
Conditions to create economic
value
Strategic Alliance
They must be rare and hard to imitate
Pros and cons
Vertical Integration
Pros- When value chain economies can be created and captured. May allow a firm to leverage capabilities. May reduce opportunism.
Cons- Costly if done wrong. Ownership is costly. Less flexibility.
Pros and cons
Corporate Diversification
Pros- Risk reduction, Tax advantages
Pros and cons
Strategic Alliance
Pros- Benefit from economies of scale. ie I Cuba and Barry University health care. Share risk among alliances. Chance to know the company before acquisition.
Cons- Threat of cheating. Moral hazard or not fulfilling agreement.
Pros and cons
Mergers and Acquisitions
Pros- Common way for an acquiring firm to vertically integrate or diversify.
Cons- Difficult to generate real economic profit.
Managerialism
Meaning managers of larger firms receive more compensation since they are incentivized to make the company bigger and are not incentivized on performance
Challenges to value creation and allocation misappropriating value
Adverse Selection- Misrepresenting the value of inputs
Moral Hazard- Providing inputs of lesser value than promised
Holdup- Exploiting the transaction-specific investment of partners
Tacit collusion
Subtle, legal communication within an alliance, whereas the same communication between competitor would be illegal
