Week 9 & 10 Flashcards
(39 cards)
Forward vertical integration
Move to the customer in the value chain
Backwards vertical integration
Move to the raw material in the value chain
Horizontal integration
Remain within the boundaries of an industry but expands via, for instance geographical expansion or versions of products
Product diversification
A compamy operates in multiple industries at the same time
Can be related or unrelated
Advantages of Horizontal expansion
- Economies of scale: The per unit cost of products decreases with higher production levels
- Reduction of competition: Larger firm within an industry industry concentration is increased Competition is reduced Higher expected profitability
Disadvantages of product diversification:
By focusing on industy x, opportunities in y might be overlooked.
Can Vertical integration and product diversification overlap?
Yes! The overlap will generate outside sales and sits in a different stage in same value chain
If the vertical integration is focussed only internal sales, and sits in a different stage in the same value chain & Product diversification is part of a different value chain and generate outside sales
Why is Disney a great example of both vertical integration and product diversification?
Theme parks: Different value chain wich generates outside sales (product diversification)
ICT System: Different stage in same value chain
Generates no outside sales (vertical integration)
Overlapping area: Script preparation
- Different stage in same value chain
- Generates outside sales
What means economies of scope
Costs of P1 and P2 within a firm is lower compared than producing both in different firms
Advantages product diversification: What means Economies of scope
Economies of scope:
-Costs of performing research on both “oncology” and “immunoscience” might be cheaper that two firms researching seperately
Advantages product diversification: Internal capital market (volksbank)
- More information
- More control and monitoring possible
Advantages product diversification. Competition reduction: predatory pricing/ deep pockets
Transferring funds from another market to start offering products in another market to make prices low, and let competitors fall out
Advantages product diversification: Competition reduction: Mutual forbearance
Refraining from competition in a market because of retaliation of competitor in another market
Explain the advantages product diversification: Risk reductions
It can reduce overall risk, depending on the correlation of the cash flows of different businesses. (core has to be -1 or so, why?)
Risk reduction- portfolio management
Maximize expected return for a given level of risk
Disadvantages of product diversification
Increased management cost
Monitoring costs
Losing focus on the firm’s core competence(s)
Advantages and disadvantages of the product diversification
Depends on Related or Unrelated diversification
How to kwantitative determine the relatedness between business units
Resources and Capabilities
Dominant logic
Corporate coherence
Multimarket contact
Industry codes
What means “resources and capabilities?” in the relatedness between firms?
Does a firm use the same resource for two or more of its businesses? (Yes? Related)
What means Dominant logic in the relatedness between firms?
Do businesses have common strategic characteristics? (Yes? Related)
What means Corporate coherence in the relatedness between firms?
Because competitors have created similar portfolios, we conclude that the businesses somehow must be related.
What means Multimarket contact in the relatedness between firms?
We are active in businesses A and B, but so is our competitor. A strategic move in A can have consequences in business B
Industry codes (SIC)
First two digits of the SIC codes are identical.
How to categorize businesses Wrigley/Rumelt
Single Businesses > 95% revenue of one business
Dominant Businesses: 70-95% revenues from one business
Related Business < 70% of revenues from one business
Unrelated Business: < 70% of revenues from one business without relationships between the businesses. (active or passive role)
