3 - Vertical Integration & Strategic Alliances Flashcards

1. Diversification (product scope): How specialized should the firm be in terms of the range of products it supplies?
2. Vertical Integration (vertical scope): What range of vertically linked activities should the firm encompass?
3. International Strategy (geographical scope): What is the optimal geographical spread of activities for the firm?

1. High level of uncertainty
a) inability to predict changes or how environmental changes can affect firms’ operations
2. Small-number problem
a) Limited competition among suppliers/workers/customers
b) Hold up issues
3. Bounded Rationality
a) Cognitive limitation of humans to receive, store, process, and retrieve information. Also, inability to articulate their knowledge (we know more than we can say).
4. Asset Specificity --> All leads to: Opportunistic behavior

1. Bounded Rationality refers to the man’s limitation in formulating and solving complex problems and in processing information (receiving, storing, retrieving, transmitting)
2. Bounded rationality leads to incomplete contracts between exchange parties
3. Bounded rationality is affected by the level of uncertainty

It is a primary type of cooperative strategy in which firms combine some of their resources and capabilities to create a mutual competitive advantage.
a) Involves the exchange and sharing of resources and capabilities to co-develop or distribute goods and services.
b) Requires cooperative behavior from all partners.

1. Sharing the investment risk
a) Joint investment in relation-specific assets
2. Providing access to novel knowledge and resources
a) Knowledge sharing facilitated by mutual trust and consistent information-sharing routines (e.g., integrated IT systems)
3. Complementary resources

1. Two or more firms develop a contractual relationship to share some of their unique resources and capabilities.
2. Partners who own different percentages of equity in a separate company they have formed.
3. Joint Venture: Two or more firms create a legally independent company by sharing some of their resources and capabilities.

1. Complementary Alliances
a) Combine partner firms’ assets in complementary ways to create new value.
b) Include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage
2. Competition Response Alliances
a) Occur when firms join forces to respond to a strategic action of another competitor.
b) Because they can be difficult to reverse and expensive to operate, strategic alliances are primarily formed to respond to strategic rather than tactical actions
3. Uncertainty Reducing Alliances
a) Are used to hedge against risk and uncertainty.
b) These alliances are most noticed in fast-cycle markets
c) An alliance may be formed to reduce the uncertainty associated with developing new product or technology standards
4. Competition Reducing Alliances
a) Created to avoid destructive or excessive competition
b) Explicit collusion: when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal).
c) Tacit collusion: when firms in an industry indirectly coordinate their production and pricing decisions by observing other firm’s actions and responses.

1. Complementary business-level strategic alliances, especially the vertical ones, have the greatest probability of creating a sustainable competitive advantage.
2. Horizontal complementary alliances are sometimes difficult to maintain because they are often between rival competitors.
3. Competitive advantages gained from competition and uncertainty reducing strategies tend to be temporary

1. Motivates members to openly share knowledge
2. Prevents free riders
3. Reduces the costs associated with finding and accessing different types of knowledge
4. Network level processes:
a) Supplier association
b) Toyota’s operations management consulting division
c) Voluntary small group learning teams
d) Interfirm employee transfers

Phase 1: Developing weak ties
Phase 2: Developing strong ties with Toyota
Phase 3: Developing strong ties among suppliers

1. Site specificity 2. Physical asset specificity 3. Human asset specificity

1. The degree to which the businesses in the portfolio are worth more under the management of the company than they would be under other ownership.
2. Corporate strategy is necessary for effective utilization of resources, capabilities and core competences across multiple businesses to create value.