Essential Unit Vocabulary
Cash Cow – A business or asset that once paid off, provides a steady stream of income. In the Boston Consulting Group’s (BCG) growth share matrix, the bottom left quadrant is the cash cow quadrant which means that it demonstrates high market share in a low growth industry.
Cash Hog – Relates to the financial strength of different business units. A cash hog is a business unit that generates too little cash flow to completely fund its own operation. Such a business often requires cash from other sources or other business units to survive. For example, if a cash hog needs to purchase new equipment or upgrade its computer system to keep up with orders, the parent company will need to provide the capital — it would be unable to make the investment otherwise. If a cash hog continues to be a financial drain on the company with little outlook for improvement, management may have to consider selling, spinning off or otherwise dismantling the operation. Corporations are less likely to unload a cash hog if its products or services provide greater value than will the freed up capital.
Corporate Restructuring – The process involved in changing the organization of a business. Corporate restructuring can involve making dramatic changes to a business by cutting out or merging departments that often has the effect of displacing staff members.
Dominant Business – A Dominant Business can be looked at as a firm/business that controls at least half the market in which it operates and has no significant competition. The dominant firm/businesses competitors are mostly small firms that compete against each other for the remaining market share. Dominant firms/businesses have a competitive advantage by virtue of their size, name recognition, and resources. They usually hold onto their dominance through various strategies, including innovation, brand extension, and price wars, that trailing firms do not have the resources to compete against. See this video explaining Dominant Business.
Economies of Scope – A theory in economics that explains achievable savings in resource costs as a byproduct of increasing the number of goods that use similar resources. For example, Kleenex Corporation has diversified its product line by offering paper products for a variety of users (i.e. sanitation wipes for hospitals, paper towels for schools and businesses, etc.) All of these require a similar input (paper) and Kleenex is able to experience cost saving by spreading these inputs through a number of different products.
Horizontal Integration – A type of diversification that leverages the corporate relatedness of the firm’s various value chains. In horizontal diversification, the firm develops or acquires products or services that will appeal to its current customers in an effort to expand their offerings without competing with existing offerings. Also known as horizontal integration, this is a move that leverages existing competencies such as marketing, warehousing or logistics to benefit multiple products.
Market Power – Reflects a company’s ability to manipulate the price of its product by influencing the item’s supply, its demand or both. Firms with market power are said to be “price makers” as they are able to set a premium price for the product while maintaining market share.
Reasons to Diversify – Firms diversify to gain market power in terms of reducing overall costs of operation, create synergy between existing products or services, and to expand competition to multiple markets. They also diversify to leverage the operational or corporate relatedness of their value chains and to obtain technologies or competencies needed to remain competitive.
Strategic Fit – An integrated and systematic matching of a company’s resources and capabilities to the opportunities at hand within the external environment. As resources and capabilities differ it is important that resources can be classified as two different groups, as tangible (Financial, Physical) or intangible (Technology, Human Resources, Reputation, Culture).
Vertical Integration – An arrangement in which a firm absorbs activities or functions earlier or later in the industry value chain either through acquisition, through expansion of existing capabilities or by developing the capability organically. By integrating vertically, the firm gains more control over its product and may reduce the threat of competition.
Unrelated Diversification – When a company enters a new field of business that is not related to its previous business in anyway at all. On the continuum of diversification, unrelated bears the greatest levels of risk and has historically proven to provide the least likely path to profitability.