Essential Unit Vocabulary

Acquisition – Acquisition is the act of a company buying most/all of the assets of another company. It is a growth strategy where one company uses their excess capital to take over another company instead of expanding its own product line or operation. The acquirer earns full profit from both operations after the acquisition. Companies often use this strategy to avoid risk of failure when entering a new industry. Moreover, they use this strategy to gain market share within an existing industry when expanding an existing product or service may not be sufficient to create a big impact in market share.

Backward and Forward Integration – Refers to the type of integration within a firm’s value chain. In Backward Integration, the company purchases or develops the expertise currently performed by suppliers or firms “earlier” in the value chain in order to control the inputs to their production. In Forward Integration, the company purchases or develops expertise currently performed by the firm’s distributors or retailers in order to gain control of the activities that are closer to their end customer.

Blue Ocean Strategy – Refers to a business theory describing new, uncontested market space and expanding market boundaries which avoids direct market competition and rivalry; the strategy creates new value while decreasing costs. This theory often suggests companies are better off choosing a brand new market by innovating rather than engaging in traditional competition. Blue Ocean Strategy is often contrasted with Red Ocean Strategy, which is the portion of the market where rivalry is most intense and there is much “blood in the water”.

Competitive Rivalry – Firms that are competing in an industry and the extent to which they put pressure on one another to gain market share and profit. Not all competitors are necessarily rivals; primary rivals are usually those who are offering products/services at a similar price and/or going after the same consumer market and are most likely to affect the firm’s market share or profit.

First Mover Advantage – The advantages of being the first Business in a given Segment of the market. To be the First Mover the company must be a pioneer in a given industry. A few advantages to being the first mover are industry leadership, capturing uncontested market share, gaining early knowledge and experience to adapt products as the market shifts, and preemptively acquiring scarce resources to protect the firm from competition. Unfortunately, being a first-mover can also entail a great deal of risk if the pioneering effort is not well received.

Joint Venture – Combining and/or pooling of two or more organizations in which they take part in a single project. The two or more parties retain their separate legal identities as businesses/organizations aside from the one-time shared project.

Late Mover Advantage – Describes a firm that waits for a market to mature before deciding to enter. The Advantages of being a late mover include lower risk, learning from your predecessors’ mistakes, copying what they have done and offering the product at a lower price because the late mover’s Cost of Goods Sold does not need to cover development costs. Additionally, because they have no stakes in maintaining the status quo, late movers can often reinvent the product in ways not considered by earlier movers and gain a market advantage.

Merger – The combination of two or more companies in which one company remains after the action is completed. Typically, this is done through an exchange of cash or stock between the owners of the various companies. This typically takes place in a “friendly” arrangement in which both firms expect to retain some identity in the new organization.

Outsourcing – An effective cost-saving strategy when used properly. It is the practice used to reduce costs by transferring non-core activities or functions to external specialists or suppliers rather than performing the tasks internally.

Strategic Alliance – When two or more companies combine their efforts to generate more sales than otherwise would have been possible. In a strategic alliance both partners retain their independent corporate identities but they have the opportunity to enjoy shortened development times, increased target market, and most importantly, using the strengths (core competencies) of each company involved to create a venture neither could create on their own.

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Strategic Management 2E by John Morris is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License, except where otherwise noted.

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