Corporate Strategy: Vertical Integration and Diversification

These flashcards cover key concepts from corporate strategy, focusing on vertical integration, diversification, transaction costs, and organizational factors.

Vertical Integration

A strategy where a company expands its businesses into different steps on the same production/service path through ownership.

Transaction Cost Economics (TCE)

A theory that helps explain and predict the boundaries of the firm based on incurred internal and external costs.

Internal Transaction Costs (ITC)

Costs associated with recruiting, retaining employees, and administrating activities within a firm.

External Transaction Costs (ETC)

Costs incurred in the open market, such as searching for contractors and enforcing contracts.

Principal-Agent Problem

A situation where an agent performs activities on behalf of a principal but may pursue their own interests.

Transaction-specific Investments

Investments that are highly valuable to a firm but of little or no use in the external market.

Opportunism

Behavior characterized by self-interest seeking with guile; using deceitful means to achieve personal gain.

Strategic Alliances

Voluntary arrangements between firms to share knowledge, resources, and capabilities for developing products or services.

Franchising

A right to use a franchisor’s trademark and business processes to offer goods and services under the franchisor’s name.

Backward Integration

A type of vertical integration that incorporates businesses toward the original source of raw materials.

Geographic Diversification

An increase in the variety of markets or geographic regions that a firm operates in.

Related Diversification

A strategy where a firm increases variety while maintaining related product lines or services.