Deck 7: Assessment of Liver Function

Question 1

List the means available to a company for horizontal growth and explain why a company might pursue one over another.

Answer 1

A firm can achieve horizontal growth by expanding its operations into other geographic locations and/or by increasing the range of products and services offered to current markets. Horizontal growth can be achieved by internal development or externally through acquisitions and strategic alliances. Depending on the company's comfort with risk as well as the resources they have available, a company may select any of these strategies for horizontal growth.

Question 2

How does transaction cost economics apply to vertical growth? To concentric versus conglomerate diversification?

Answer 2

Transaction cost economics is especially applicable to the question of vertical growth versus outsourcing (i.e., the classic make-or-buy decision). It argues that vertical growth is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market become too great. The transaction costs become too great when the transactions (a) involve a high level of uncertainty, (b) involve highly specialized assets, and (c) must occur frequently. However, when highly integrated firms become excessively large and bureaucratic, the costs of managing the internal transactions may become greater than simply purchasing the goods on the open market, thus justifying outsourcing over vertical growth.
The second part of the question is a "mind stretcher." Because the text does not apply transaction cost economics to either concentric or conglomerate diversification, this question really forces the student to do some original thinking. Transaction cost economics might suggest that diversification of any kind is more efficient than just concentrating in one industry when the costs of one firm's operating in two industries are lower than the summed costs of two separate firms. This phenomenon can occur when synergies exist to provide economies of scale or scope. Given that such synergies are more likely to exist when a firm engages in concentric diversification, transaction cost economics would propose that concentric diversification should be generally more efficient than conglomerate diversification. (Try this question out on your grad students to see what they can do with it!)

Question 3

Evaluate the types of retrenchment strategies that might be used by companies in stagnant industries.

Answer 3

Retrenchment refers to reducing the company's level of activities. A turnaround strategy emphasizes the improvement of operational efficiency and is probably the most appropriate when a company's problems are pervasive but not yet critical. A captive company strategy involves giving up independence in exchange for security. A company with a weak competitive position may not be able to engage in this strategy. The sell-out strategy makes sense if management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the entire company to another firm. Bankruptcy involves giving up the firm to the courts in return for some settlement of the corporation's obligations. Finally, liquidation is the termination of the firm all together.

Question 4

How is a diversification strategy related to the sustainable growth and development of an organization?

Question 5

What is the value of portfolio analysis? Its dangers?

Question 6

How is corporate parenting different from portfolio analysis? How is it alike? Is it a useful concept in a global industry?

Question 7

What concepts or assumptions underlie the BCG growth-share matrix? Are these concepts valid? Why or why not?

Question 8

Is stability really a strategy or just a term for no strategy?

Question 9

Must a corporation have a common thread running through its many activities in order to be successful? Why or why not?

Question 10

What are the major factors that an organization needs to analyze before it can consider entering a foreign market?