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MGMT 310: Chapter 6

Corporate Level Strategy
the way a company seeks value through the configuration and coordination of multi-market activities

Corporate Advantages
Occurs when a firm maximizes its resources to build a competitive advantage
-scope – organizational design – ownership

Diversification
A strategy in which a firm engages in several different businesses that may or may not be related in an attempt to create more value than if the businesses existed as stand-alone entities.

Single Product Strategy
A firm focuses on one specific product

Horizontal (Related) Diversification
A firm purses businesses that share a singular set of tangible resources

Economies of Scale
Exists when the costs of operating two or more businesses or producing two or more products with the same corporate structure is less than the costs of operating the businesses independently or producing each product separately.

Unrelated Diversication
A firm that manages several businesses with no reasonable connection.

Why Diversify?
– the opportunity for growth
– opportunity to leverage assets or skills
– potential for personal gain
– potential to manage or maximize profit

Synergy
Created when a firm generates sustainable cost savings by combining duplicate activities or deploying underutilized assets across multiple businesses.

Financial Economies
cost savings that a firm achieves through the distribution of capital among business units

Attractiveness Test
Is the industry profitable or capable of being profitable?

Cost of Entry Test
How costly is it to enter the new industry?

Better Off Test
Will the new industry provide the firm with a competitive advantage?

Vertical Integration
Occurs when one corporation owns business units that make inputs for other business units in the same corporation.

Forward Integration
When a firm owns or controls the customers or distribution channels for its main product
*control outputs

Backward Integration
Occurs when a firm owns or controls the inputs to its users
*central inputs

Administrative Costs
Cost of coordinating activities between business units

Transaction Costs
Costs to obtain products or services from a contractor or supplier as well as the costs associated with writing and administering the contracts for these products and services

Advantages of Vertical Integration
– potential cost reductions
– improved coordination & quality control
– protection of technology or processes
– reduction in marketing costs

Disadvantages to Vertical Integration
– Higher Administrative Costs
– Potential for obsolescence
– Tendency for complacency & lack of efficiency
– Lack of strategic flexibility

Spot Contracts
Allow buyer to purchase a commodity at a specific price

Outsourcing
Contracting with a firm outside the cooperation to perform certain tasks or functions that companies used to do on their own

Market Power
Achieved when a firm attempts to increase the price at which it sells products to levels above the normal price seen in the market.

If Einstein Brothers Bagels backward integrated, what business might they be in?
a: selling coffee
b: selling cream cheese
c: making cement
d: growing petunias
e: refining grains
e: refining grains

If Altria’s cigarette division forward integrates, what business might they be in?
a: cancer research
b: vaporizers
c: retailing
d: trash collection
c: Retailing

If VCU buys Disney corporation, the purchase would be….
a: related diversification
b: unrelated diversification
c: forward integration
d: backward integration
e: horizontal diversification
b: unrelated diversification

Although Starbucks’ ownership of a coffee roasting plant ensures protection of its unique taste, the plant can become inefficient or outdated if not closely managed. Why?
a: Starbucks doesn’t know that industry well
b: The plant is geographically separate from the company
c: The plant is no longer in the competitive environment
d: The capital assets are very expensive to replace
c: The plant is no longer in the competitive environment

Vertical integration make companies
a: more flexible
b: less flexible
b: less flexible

Companies that operate in mature markets and have high cash flow often seek new opportunities through unrelated diversification.
a: True
b: False
a: True

Companies with high levels of unrelated diversification __.
a: post lower levels of performance
b: post higher levels of performance
c: issue fewer dividends
d: have the highest capital costs
a: post lower levels of performance

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