SEVI 3013 - Ch. 8 - Corporate Strategy: Vertical Integration and Diversification 100% Solved

SEVI 3013 - Ch. 8 - Corporate Strategy: Vertical Integration and Diversification 100% Solved corporate strategy the decisions that senior management makes and the goal-directed actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously why firms need to grow 1. increase profits and shareholder returns 2. lower costs and achieve economies of scale 3. increase market power 4. reduce risk through diversification 5. motivate management corporate strategy questions 1. in what stages of the value chain should the firm compete? vertical integration 2. what range of products and services? diversification 3. where should the firm compete? geographic scope 4. how should we organize the firm for success? transaction cost economics a theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to competitive advantage transaction costs all internal and external costs associated with an economic exchange, whether within a firm or in markets external transaction costs searching for contracts, negotiating, monitoring, and enforcing contracts include third party purchase or sale of goods, incurring of expenses etc. costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract internal transaction costs recruiting and retaining employees, setting up shop on floor internal stock transfers from one department to another, charge of depreciation, amortization of prepaid expenses etc. vertical integration the firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs industry value chain depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing (firm) MAKE: if costs in house costs in market - vertically integrate - own production of the inputs / or own output distribution channels advantages of firm MAKING - command and control (fiat, hierarchical lines of authority) - Coordination - Transaction-specific investments - Community of knowledge disadvantages of firm MAKING - Administrative costs - Low-powered incentives - Principal-agent problem (markets) BUY: if costs in market costs in house - firm shoulder consider purchasing instead advantages of market BUY - high powered incentives - flexibility disadvantages of market BUY - search costs - opportunism (hold up) - incomplete contracting (specifying and measuring performance, information asymmetries) - enforcement of contracts Principal-Agent problem major disadvantage of organizing economic activity within firms - Principal: owner of firm - Agent: manager or employee, should act on behalf of principal Problem: agents pursue their own interests (corporate jets, golf outings) Solution: stock options to make agents owners information asymmetry situation in which one party is more informed than another because of the possession of private information can result in the crowding out of desirable goods and services by inferior ones If a firm is considered to be fully integrated, this means that it is: A) A single-business organization B) A conglomerate C) Reliant on certain key suppliers in the industry value chain D) Conducting all business activities within the boundaries of the firm D backward vertical integration owning inputs of the value chain forward vertical integration owning activities closer to the customer benefits of vertical integration -lowering costs -improving quality -facilitating scheduling and planning -facilitating investments in specialized assets -securing critical supplies and distribution channels risks of vertical integration -increased costs -reduced quality -reducing flexibility -increasing the potential for legal repercussions when vertical integration makes sense - when there are issues with raw materials (tesla and lithium ion batteries) - to enhance the customer experience: eliminate annoyances and poor interfaces (apple having retail stores) - vertical market failure: when transactions are too risky or costly Amazon has decided to enter the college bookstore market with a line of university-specific websites offering textbooks and logo apparel. This is an example of: A) Geographic expansion B) Product diversification C) Vertical integration D) Horizontal integration B product diversification - Increase in variety of products / services - active in several product markets geographic diversification - Increase in variety of markets / geographic regions - Regional, national, or international markets product-market diversification product and geographic diversification single business corporate diversification low level of diversification 95% of revenue comes from a single product line EX: birkenstocks dominant business corporate diversification additional business activity pursued 70-95% of revenue EX: harley davidson related diversification Constrained: all businesses share competencies ex: Exxon Mobile, Nike Linked: some businesses share competencies ex: Amazon, Disney unrelated diversification (conglomerate) corporate strategy where a firm derives les than 70% of revenue from a single business no businesses share competencies conglomerate a company that combines 2+ strategic business units under 1 overarching corporation - follows unrelated diversification joint venture A stand-alone organization created and jointly owned by two or more parent companies. restructuring reorganizing and divesting business units and activities - helps refocus a company - helps leverage core competencies more fully *Corporate executives can restructure the portfolio of their firm's businesses, much like an investor can change a portfolio of stocks. BCG Growth-Share Matrix The Boston Consulting Group planning tool that evaluates business units in terms of their growth potential and market share. - guides portfolio planning - each category warrants a different strategy This matrix locates the firm's individual SBUs in two dimensions: Relative market share (horizontal axis). Speed of market growth (vertical axis). The firm plots its SBUs into one of four categories in the matrix: dog, cash cow, star, and question mark. Each category warrants a different investment strategy. All four categories shape the firm's corporate strategy.