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44 Cards in this Set
- Front
- Back
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Corporate Strategy
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The quest for competitive advantage when competing in multiple industries. (Where to compete)
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Corporate strategy concerns the scope of the firm (3)
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1) What stages of industry value chain and degrees of "vertical integration (Industry Boundaries)"
2) What range of products and services and degrees of horizontal integration or "diversification (Product Scope)" 3) Where in the world to compete and "global strategy" |
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Economies of Scale
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Average per-unit cost decreases as its output increases
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Economies of Scope
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Savings that come from producing more outputs or providing different services at less cost
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Managing Transaction Cost
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The cost associated with economic change; the "Make or Buy" decision
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Transaction Cost Economics
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Explains and predicts the scope
of the firm. Insights gained from transaction cost economics help managers decide what activities to do in-house versus what services and products to obtain from the external market. Markets versus firms— have different costs attached. If you want to switch internet providers, how much time do you spend looking at various options? How much time is spent reporting what you do to your supervisor? |
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Transaction Costs
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Costs associated with economic exchanges either in the firm or in the markets. Ex) Finding, negotiating and enforcing contracts
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Firs vs. Markets: Make or Buy?
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Should a firm do things in-house (to make)? Or obtain externally (to buy)?
If SumCin-house<SumCmarket, then the firm should vertically integrate. |
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Disadvantage of "make" in-house
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Principal–Agent Problem: can arise when an agent (such as a manager), performing activities on behalf of the principal (the owner) of the firm, pursues his/her own interests.
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Disadvantage of "buy" from markets (4)
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-Search costs: when they must
scour the market to find suppliers from among the many firms competing to offer similar products and services. -Opportunism: behavior characterized by seeking self-interest. -Incomplete contracting -Enforce Legal Contracts |
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Information Asymmetries
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One party is more informed than others, mostly due to possession of private information.
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Firms vs. Markets: Goals
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-Max(V-C)
-We want to control both parameters: We allocate to mission critical parts (the gear in a transmission). Less control needed for many items (paper towels) -May require investment in resources and capabilities: Weill employee training, location of services, or a new piece of equipment lead to greater (V-C) |
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Short-term contracts
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Competitive bidding process on contracts that last for less than a one-year term. They give lower prices which leads to cost advantages. The downside is that there are not firm specific investments, not a strategic investment.
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Strategic Alliances
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Facilitate investment without administrative costs. Long-term contacts, equity alliances (one owns another) (licensing, franchising), join ventures (two make new).
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Parent-subsidiary relationship
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parent companies have command and control
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Vertical Value Chain
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In what stages of the industry value chain should the firm participate?
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Vertical Integration
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Ownership of its inputs production, and outputs in the value chain
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Horizontal Value Chain
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internal, firm-level value chains
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Backward Vertical Integration
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designing phones for other companies and their own
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Forward Vertical Integration
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moving into sales and branding
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Benefits of Vertical Integration (5)
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-Securing critical supplies
-Lowering costs -Improving quality -Facilitating Scheduling and planning -Facilitating investments in specialized assets |
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Specialized assets (they increase V-C)
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Assets that have significantly more value in their intended use than in the next best use.
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Specialized Assets: Site Specificity
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Co-located such as mining equipment
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Specialized assets: Physical asset specificity
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bottling machinery
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Specialized assets: Human asset specificity
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mastering procedures of a particular organization
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Risks of Vertical Integration (4)
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-increasing costs: internal suppliers lose incentives to compete
-Reducing quality: single captured customer can slow experience effects -reducing flexibility: slow respond to changes in technology or demand -increasing the potential for legal repercussions: FTC carefully reviews plans to make a monopoly |
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Alt to Vert Int: Taper Integration
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Make and buy benefits: provides "market competition" to internal suppliers. Increased power with market transactions. (need 1 million chips, make 600K buy 400K)
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Alt to Vet Int: Strategic Outsourcing
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Moving value chain activities outside the firm's boundaries
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Degrees of Diversification (ex: pepsi)
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Range of products and services a firm should offer.
ex) pepsico also own lays and quaker oats |
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Diversification Strategies (2)
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-Product Diversification: active in several different product categories
-Geographic Diversification: active in several different countries |
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Corporate Diversification
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-Should reduce cost and increase value simultaneously.
-Diversification represents a portfolio of business |
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Types of Corporate Diversification (4)
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-Single Business: google
-Dominant business: microsoft -Related Diversification: constrained>exxonmobil, linked>disney -Unrelated diversification: GE |
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Core Competence (3)
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-Unique skills and strengths
-allows firms to increase the value of product/service -lowers the cost (ex walmart) |
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The core competence - market mix
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provides guidance to executives on how to diversify in order to achieve continued growth
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Diversification discount
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stock price of diversified firms is less than company value
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diversification premium
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stock price of diversified firms is greater than company value
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Restructuring (3)
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-Sometimes you need to sell your investments
-process of reorganizing and divesting business units. -To refocus a company to leverage its core competencies |
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Internal Capital Markets
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can be a source of value creation in a diversification strategy if the firm does a more efficient job of allocating capital than the markets.
-this gives private information and has a lower cost of capital |
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Coordination cost
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a function of number, size, and types of businesses linked to one another
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Influence cost
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political maneuvering by managers to influence capital and resource allocation (bigger firm=bigger pay)
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ABC Test for Diversification
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-Attractiveness
-Better-off -Cost-of-entry |
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Attractiveness
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the industry chosen for diversification must be structurally attractive or capable of being made attractive
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Better-off
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either the new unit must gain competitive advantage from its like with the corporation, or vice versa.
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cost of entry
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the cost of entry must not use up all the future profits
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