Corporate Strategy Flashcards
Define corporate strategy
Selecting and managing a group of different businesses competing in different product markets.
What are the pros of diversification of corporations?
- low vulnerability to market risks
- lots of growth opportunities
- less vulnerability to buyers and suppliers
- lots of opportunities for economies of scope
What are the cons of diversification or corporations?
- Less competence and expertise (spread thin)
- Opens up to mistakes since you don’t know markets as well
- Hard to categorize corporation, unclear image
What is the difference between backward and forward vertical integration and what are 2 pros of each?
Backward = into supplier function - assures constant supply of inputs - protects against price increases Forward = into distribution functions - assures proper distribution of outputs - captures additional profits beyond activity costs
What is transaction cost theory?
There are always costs associated with sub-contracting, so it’s important to analyze whether these costs exceed doing it in-house (eg. contracts, fees, legal stuff)
What are the advantages of vertical integration?
- build barriers to entry
- facilitates investments in highly-specific assets that avoid “hold ups”
- assures supply and distribution channels
- protects product quality
- improves internal scheduling
- protects proprietary information and technology
What are the disadvantages of vertical integration?
- cost disadvantages of internal supply
- obsolescent technology
- lack of strategic flexibility
- increased costs (eg. coordination)
What are alternatives to vertical integration?
- contracting
- strategic alliance and long-term contracting
- outsourcing
What are the pros and cons to outsourcing?
Pros: - it can reduce costs if efficient - concentrate resources in core activities - more flexibility and responsive Cons: - failure to learn from activity - dependence on a single supplier - danger of outsourcing value creation activity
What are the 3 relationships in horizontal integration that are important to competitive advantages?
- Tangible
- Intangible
- Competitive
What are tangible relationships in horizontal integration?
They arise from the ability to share activities in the value chain since the savings are greater than the costs of sharing.
Example: have a joint sales force
What are intangible relationships in horizontal integration?
They arise from the ability to transfer core competencies among separate value chains. Basically, sharing skills and know hows when you can’t share activities
What are competitive relationships in horizontal integration?
Actual or potential competition with competitors that spill into other businesses - when you compete with someone in multiple business units
What is a conglomerate?
A corporation with 2 or more businesses engaged in unrelated industries.
Why would a company purse unrelated diversification?
- Anti-trust regulations
- Tax laws
- Low performance
- Uncertain future cash flows
- To reduce risks
- Counter-cyclical businesses
