Business Policy Exam 3
Terms in this set (51)
All internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets.
Transaction Cost Economies
are 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.
Short-Term Contracts Drawback:
o That firms responding to request for proposals (RFP) have no incentives to make any transaction-specific investments (e.g., buy new machinery to improve product quality) due to the short duration of the contract.
Long-Term Contracts Drawback:
o Once the license is either yanked or ends. The initial firm is left without a source of revenue.
o Lump-sum money up-front, before results are completed.
Make or Buy Continuum
The "make" and "buy" choices anchor each end of the continuum from firms to markets. Several alternatives are available between these two extremes. Moving from transacting in the market ("buy") to full integration ("make"), alternatives include short-term contracts as well as various forms of strategic alliances (long-term contracts, equity alliances, joint ventures) and parent-subsidiary relationships.
a long-term strategic decision of commitment to the other firm that is both difficult and costly to reserve.
Backward Vertical Integration:
changes in an industry that involve moving ownership of activities upstream to the originating (inputs) point of the value chain.
Backward versus Forward Integration
moving ownership of activities closer to the end customer.
Benefits of Vertical Integration:
-facilitating scheduling and planning
-facilitating investments in specialized assets
-securing critical supplies and distribution channels
Alternatives to Vertical Integration:
Taper integration and strategic outsourcing
A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside-market firms for some of its suppliers and/or is forwardly integrated but also relies on outside-market firms for some of its distribution.
Moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain.
Various Diversification Strategies
Product Diversification Strategy
Corporate strategy in which a firm is active in several different product markets.
Geographic Diversification Strategy:
Corporate strategy in which a firm is active in several different countries.
Product-Market Diversification Strategy
Corporate strategy in which a firm is active in several different product markets and several different countries.
- Pursues both product and geographic diversification
4 main types of business diversification
1. single business: single business leverages its competencies
ex: Coca-cola, Google, Facebook
2. dominant business: dominant and minor businesses share competencies
ex: Harley Davidson, Nestle, UPS
3. related diversification
A. Related constrained: all businesses share competencies
ex: related constrained: exxonmobile, nike
B. Related linked: some businesses share competencies
ex: related link: amazon, disney
4. Unrelated diversification (conglomerate): no businesses share competencies
ex: berkshire hathaway
Situation in which the stock price of related diversification firms is valued at greater than the sum of their individual business units.
o Companies that pursue are more likely improve their performance
o Often results in diversification premium
The purchase or takeover of one company by another; can be friendly or unfriendly
occurs when both management teams believed that joining the companies was a good idea.
occurs when the target firm does not want to be acquired
Principal Agent Problem from acquisition
Size also affects the combination to look like a merger if the firms acquired are different in size
Disadvantages of Horizontal Integration:
o Integration failure
o Reduced flexibility
o Increased potential for legal repercussions
Why do government authorities need to sometimes be involved in horizontal integration?
Because of the potential to reduce competitive intensity in an industry, government authorities such as FTC in the US usually must approve any large horizontal integration activity
Relational View of Competitive Advantage:
Strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries.
Cross-Border Strategic Alliances:
When entering new geographic markets, some governments may require that foreign firms have a local joint venture partner before doing business in their countries.
Advantages and Drawbacks of Cross-Border Strategic Alliances
-Local expertise and contacts
- Some of its proprietary know-how may be appropriated by the foreign partner.
Partnership based on contracts between firms
i.e. Supply agreements, distribution agreements, and licensing agreements
knowledge that can be codified concerns knowing about a process or product.
i.e. Patents, user manuals, fact sheets, and scientific publications are all ways to capture explicit knowledge, which concerns the notion of knowing about a certain process or product.
Knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task.
Knowledge that can be codified concerns knowing about a process or product.
A standalone organization created and jointly owned by two or more parent companies.
i.e. Hulu is jointly owned by NBC, Disney-ABC, and Fox
Build, Borrow, or Buy Decision Framework:
Conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy).
When do you utilize VRIO?
- Resources that are valuable, rare, and difficult to imitate are often embedded deep within a firm, frequently making up a resource bundle that is hard to unplug whole or in part.
- When acquiring a firm, you buy an entire "resource bundle", not just a specific resource.
Mergers and acquisitions and competitive positions—how does this relationship work?
- In some instances, mergers are not motivated by gaining competitive advantage, but by the attempt to overcome a competitive disadvantage.
- In most cases, mergers and acquisitions do NOT create competitive advantages
- Many times, they merge or acquire for the following reasons:
o Principal-agent problems
o The desire to overcome competitive disadvantage
o Superior acquisition and integration capability.
How do economic and political integration between countries influence the world economy?
The EU is an example of coordinated economic and political integration by 28 countries, of which 19 use the euro as a common currency. This coordinated integration took place over several decades following World War II, precisely to prevent future wars in Europe.
Liability of Foreignness:
Additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances.
Loss of Reputation:
A firm's reputation can have several dimensions, including a reputation for innovation, customer service, or brand reputation.
Loss of Intellectual Property
The issue of protecting intellectual property in foreign markets also looms large. The software, movie, and music industries have long lamented large-scale copyright infringements in many foreign markets
- When partnering, companies may find intellectual property being siphoned off and reverse-engineered
Disadvantages of going global:
1. Liability of foreignness
2. Loss of reputation
3. Loss of intellectual property
Distance- between administrative and political. What happens when this distance is decreased?
- Administrative and political distances are captured in factors such as the absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal and financial institutions
- Strong legal and ethical pillars as well as well-functioning economic institutions such as capital markets and an independent central bank reduced distance.
- Strong institutions, both formal and informal, reduce uncertainty and thus reduce transaction costs.
- Companies from wealthy countries also trade with companies from poor countries to benefit from economic arbitrage
- Economic arbitrage is highlighted as one of the main benefits of going global: access to low-cost input factors.
- Used to profit from the imbalances in the price.
Assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous
Strategy pursued by MNEs that attempts to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies.
Why would firms pursue a multidomestic strategy?
o Faces reduced exchange-rate exposure because the majority of the value creation takes place in the host-country business units, which tend to span all functions
o Use multidomestic when entering host countries with large and/or idiosyncratic domestic markets.
What is international strategy
Strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets.
Which of the following firms is least integrated?
A firm that buys all the required raw materials from multiple external vendors.
Silca Electronics Inc. is a consumer-electronics company based in the country of Palo. It has approximately 300 stores across the country and is already active in three foreign countries. It attempts to establish itself successfully in the country of Zevar and uses its low-cost strategy to do so. However, due to the additional costs associated with training, coordinating across geographic distances, and other costs associated with doing business in an unfamiliar cultural and economic environment, Silca Electronics Inc. incurs huge financial losses in Zevar. In this scenario, Silca Electronics Inc.'s failure to establish itself successfully in Zevar occurs most likely because...
It underestimates its liability of foreignness when entering the Zevar market.
It is necessary for government authorities such as the Federal Trade Commission (FTC) and/or the European Commission to approve any large horizontal integration activity because...
The horizontal integration activity has the potential to reduce competitive intensity in an industry.
Green Things Inc., a company popular for its dairy products, successfully follows a multidomestic strategy. Trans Gold Inc., a large conglomerate, pursues a transnational strategy. Which of the following statements is most likely true of this scenario?
Both Green Things Inc. and Trans Gold Inc. will have to duplicate key business functions in multiple host countries.
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