Bus –J 306 Study GuideExam # 2 Study GuideBARNEY AND HESTERLY BOOK (STRATEGIC MANAGEMENT AND COMPETITIVE ADVANTAGE)Chapter 6 (pp. 162-174):- What is corporate strategy? A firm’s theory of how to gain competitive advantage by operating inseveral business simultaneously -Business strategy: A firm’s theory of how to gain competitive advantage in a single business or industry (cost leadership and product differentiation) - What is vertical integration: The number of steps in the value chain that a firm accomplishes within its boundaries (more steps completed, the more vertically integrated) -value chain: Set of activities that must be accomplished to bring a product or service from raw materials to the point that it can be sold to a final customer-Backward vertical integration: A firm engages in this when it incorporates more stages of the value chain within its boundaries and those stages bring it closer to the beginning of the value chain, closer to gaining access to raw materials (computer companies developing their own software)-Forward vertical integration: When a firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to the end of the value chain, closer to interacting directly with final customers (companies staffed and operated their own call centers) - The value of vertical integration-Question: Which stages of the value chain should be included within a firm’s boundaries and why-Ronald Case: wrote about this question and asked, “given how efficiently markets can be used to organize economic exchanges among thousands, even hundreds of thousands, of separate individuals, why would markets, as a method for managing economic exchanges, ever be replaced by firms? A-Adam Smith’s “invisible hand” coordinates the quantity and quality of goods and services produced with the services demanded through the adjustment of prices – all without centralized controlling authority vs centralized bureaucrats monitoring and controlling subordinates -Sometimes vertical integration can increase or decrease revenues-One of the best-known explanations of when vertical integration can be valuable focuses on using vertical integration to reduce the threat of opportunism -Opportunism: exists when a firm is unfairly exploited in an exchange-this reduces the economic value of a firm -can reduce threat of opportunism by bringing the exchange within the boundary of the firm, to vertically integrate into this exchange -Managers can monitor and control this exchange instead of relying on the market- If exchange brings firm closer to its ultimate suppliers backward integration-if exchange brought within the boundary of a firm brings a firm closer to its ultimate customer forward vertical integration-Firms should only bring market exchanges within their boundaries when the cost of vertical integration is less than the cost of opportunism -threat of opportunism is greatest when a party to exchange has made transaction-specific investments -Transaction-specific investment: Any investment exchange that has significantly more value in the current exchange than it does in alternative exchanges -Vertical integration is valuable when it reduces threats from firm’s powerful suppliers or powerful buyers due to transaction-specific investments a firm has made-2nd approach to vertical integration decisions focuses on a firm’s capabilities and its ability to generate sustained competitive advantages 1. Firms should vertically integrate into those business activities where they possess valuable, rare, and costly-to-imitate resources and capabilities 2. Firms should not vertically integrate into business activities where they do not possess the resources necessary to gain competitive advantages (bc would not be a source of profit)-Capabilities approach sometimes conflicts with decisions derived from opportunism-based explanations of vertical integration -3rd perspective on vertical integration focuses on impact of this decision on a firm’s flexibility-Flexibility: Refers to how costly it is for a firm to alter its strategic and organizational decisions-Flexibility is high when cost of changing strategic choices is low and vice a versa -In general, vertically integrating is less flexible than not bc cost of exiting is greater and firm has committed its organizational structure, its management controls, and its compensation policies to a particular vertically integrated way of doing business-Flexibility is not always valuable, only when the decision-making setting a firm is facing is uncertain-Uncertain: When the future value of an exchange cannot be known when investments in that exchange are being made -A flexibility-based approach to vertical integration suggests that rather than vertically integrating into a business activity whose value is highly uncertain, firms should not vertically integrate, but form a strategic alliance to manage this exchange-Strategic alliance is more flexible than vertical integration, but still gives enough info about an exchange to estimate its value over time-Downside risks associated with investing in a strategic alliance are known and fixed-They equal the cost of creating and maintaining the alliance(max amount they can lose)-3 different approaches sometimes contradict eachother, but more often than not, they are complementary (generally lead to the same conclusion) -Sometimes easier to choose and apply one approach-Multiple approaches can be helpful to highlight trade-offs - Vertical integration and sustained competitive advantage-In order for vertical integration to be a source of competitive advantage, it must be valuable(bc it responds to threats of opportunism, enables a firm to exploit its own or other firms valuable, rare and costly-to-imitate resources, or gives them flexibility), it must also be rare and costly to imitate, and a firm must be organized to implement it correctly-A firms vertical integration strategy is rare when few competing firms are able to create value byvertically integrating in the same way -Can be rare if can VI efficiently or is one of a few firms to adopt a non-vertically integrated approach to managing an exchange -rare transaction-specific investment and vertical integration-There can be rare vertical dis-integration -Substitute for vertical integration is strategic alliance -READ pgs 181-182Chapter 7 (pp. 188-215):- What is corporate diversification? -A firm implements a