Strategic Decisions Flashcards
Combines within a firm production, distribution, selling, or other separate economic processes needed to deliver a product or service to a customer.
Vertical integration
The extent of integration depends on
The balance of economic and administrative benefits and costs
Generic strategic benefits of vertical integration include:
1) Gaining economies of vertical integration,
2) Providing assurance of supply or demand, and
3) Off-setting the bargaining power of strong suppliers and customers
Occurs when throughput is great enough to achieve economies of scale.
Economies of vertical integration
Economies of vertical integration result from
1) Economies of combined operations,
2) Control and coordination, and
3) Information
Generic strategic costs of vertical integration include:
1) Increased requirements in capital investment and
2) Increased exit barriers
Vertical integration includes
1) Upstream integration and
2) Downstream integration
Is acquisition of a capability that otherwise would be performed by external parties that are suppliers of the firm. It allows the firm to protect proprietary knowledge from suppliers.
Upstream (backward) integration
Is acquisition of a capability performed by customers. It may secure access to distribution channel, improve access to market information, and permit higher price realization.
Downstream (forward) integration
Porter’s model of the decision process for capacity expansion has five steps. The firm must
1) Identify the options in relation to their size, type, degree of vertical integration, and possible response by competitors.
2) Forecast demand, input costs, and technology developments.
3) Analyze competitors to determine when each will expand.
4) Predict total industry capacity and the firm’s market shares.
5) Test for inconsistencies.
Capacity expansion: Various factors may lead to overbuilding:
1) Technological factors
2) Structural factors
3) Competitive factors
4) Information flow factors
5) Managerial factors
6) Governmental factors
Requires investments in plant facilities and the ability to accept short-term unfavorable results.
A preemptive strategy
An organization can enter into a new business through:
1) Internal development or by
2) Acquisiton
Ordinarily involves creation of a new business entity. The internal entrant should undertake structural analysis to identify target industries.
Entry by Internal development
Prices are set in the market. The market usually eliminates above-average profits for a buyer, but in certain circumstances (e.g. an imperfect acquisition market) buyers may earn above-average profits.
Entry by Acquisition
Forecasting methods include:
1) Qualitative method
2) Quantitative method
Rely on experience and human intuition. An example is the Delphi method.
Qualitative (judgement) methods
Use mathematical models and graphs and include causal relationship forecasting and time series analysis
Quantitative methods
Types of time series analysis are:
1) Trend analysis (projection),
2) Moving average,
3) Exponential smoothing, and
4) Learning curves
Fits a trend line to the data and extrapolates it.
Trend analysis
Is appropriate when the demand for a product is relatively stable and not subject to seasonal variations.
A moving average
Places greater weight on the most recent data, with the weight assigned to older data falling off exponentially. It is useful when large amounts of data cannot be retained.
Exponential smoothing
