Corporate Strategy: Vertical Integration and Diversification

Question 1

What are the 2 types of mechanisms within a capitalist economy?

Answer 1

Market Mechanisms & Firm Mechanisms

Firm - one stop shop
market - Each person has autonomy to carry out a specific function.

Question 2

What is vertical integration?

Answer 2

The amount of control over different activities within

your supply chain; More control means a higher level of vertical integration

Question 3

What is Backward Vertical Integration?

Answer 3

The purchase of suppliers

Question 4

What is forward vertical integration?

Answer 4

The purchase of distributors

Question 5

what are some examples of vertical integration?

Answer 5

Spot sales/purchases, long-term contracts, agency agreements, franchises, joint ventures, supplier/customer partnerships,

Question 6

What is a strategic sourcing framework?

Answer 6

Helps to understand decisions to make or buy an
activity or process within the value system

High strategic value of the activity / High relative competence of the firm compared to the supplier - Make or buy.

High strategic value of the activity / low relative competence of the firm compared to the supplier - buy.

High strategic value of the activity / low relative competence of the firm compared to the supplier - partnership.

low strategic value of the activity / low relative competence of the firm compared to the supplier - buy.

Question 7

When Does Diversification Create Shareholder Value?

What are the 3 diversification tests Michael Porter suggests?

Answer 7

1) Attractiveness test
2) cost of entry test
3) better off test

Question 8

What are the 5 levels of diversification?

Answer 8

Low Levels of Diversification
1) Single-business, multiproduct strategy: Derives
greater than 95 percent from one business
2)Dominant-business, multiproduct strategy: 70 to 95
percent from one business

Moderate to High Levels of Diversification

3) Related-constrained
4) related-linked
5) unrelated diversification