Exam 2 - CH8 Flashcards
What is corporate strategy?
The decisions & actions taken to gain & sustain competitive advantage in several industries and markets simultaneously
What are the three dimensions along which corporate strategy is assessed?
- Industry value chain - vertical integration
- Range of products and services - corporate diversification
- Where to compete: geography - regional, global strategy
Why do firms need to grow?
- Increase profits
- Lower costs
- Increase market power
- Reduce risk
- Motivate management
What are transaction costs?
All internal and external costs associated with an economic exchange
What is the principle-agent problem?
A manager may pursue their own interests that conflict with the principal’s goals, such as job security and perks
When should a firm vertically integrate?
If in-house cost < market cost, then vertically integrate (make)
What is vertical integration?
Ownership of its inputs, production, & outputs in the industry value chain
What are the two types of vertical integration?
- Backward vertical integration
- Forward vertical integration
What are the benefits of vertical integration?
- Lowers costs
- Improves quality
- Facilitates scheduling and planning
- Secures critical supplies and distribution channels
What are the risks of vertical integration?
- Increase in costs
- Reduction in quality
- Reduction in flexibility
- Increase in the potential for legal repercussions
What are specialized assets?
Unique assets with high opportunity cost that have significantly more value in their intended use than in their next-best use
What are the three types of specialized assets?
- Site specificity
- Physical asset specificity
- Human asset specificity
What is taper integration?
Backward integrated but also relies on outside market firms for supplies
What are the four types of corporate diversification?
- Single business
- Dominant business
- Related diversification
- Unrelated diversification (conglomerate)
What is product diversification?
Active in several different product categories
What is geographic diversification?
Active in several different countries
What is product-market diversification?
Active in a range of both products and countries
What is the critical question regarding corporate diversification and firm performance?
Are the individual businesses worth more under the company’s management than if each were managed in separate firms?
What is the relationship between diversification and firm performance according to research?
An inverted U-shaped relationship
What must diversification do to enhance firm performance?
- Provide economies of scale
- Exploit economies of scope
- Reduce costs and increase value
- Benefit from financial economies
What is restructuring in the context of corporate strategy?
Reorganizing & divesting business units & activities to refocus a company on its core competencies
What is the Boston Consulting Group (BCG) growth-share matrix?
- Build market share with stars and question marks
- Hold market share with cash cows
- Harvest (milk) as much short-term cash as possible
- Divest a dog business unit
What does effective corporate strategy help achieve?
To gain and sustain a competitive advantage
What does corporate strategy need to be over time?
Dynamic
What is a characteristic of Nike’s corporate strategy?
Started in 1978 as a vertically disintegrated firm
What is a characteristic of adidas’s corporate strategy?
Founded in 1924 focused on athletic shoes. Integrated manufacturing model. Globalization leading to less integration and wider sports apparel
What are the alternatives on the Make-or-Buy Continuum?
Short-term contracts, Strategic alliances, Parent-subsidiary relationships.
What are the advantages and disadvantages of making your own product?
Advantages:
- Command and control
- Coordination
- Transaction specific investments
- Community of knowledge
Disadvantages:
- Administrative costs
- Low-powered incentives
- Principal-agent problem
What is strategic outsourcing?
Moving value chain activities outside the firm’s boundaries.
