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MANAGING PROJECTS

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Projects represent nonroutine business activities that often have long-term strategic ramifications for a firm. In this chapter, we examined how projects differ from routine business activities and discussed the major phases of projects. We noted how environmental changes have resulted in increased attention being paid to projects and project management over the past decade. In the second half of the chapter, we introduced some basic tools that businesses can use when planning for and controlling projects. Both Gantt charts and network diagrams give managers a visual picture of how a project is going. Network diagrams have the added advantage of showing the precedence between activities, as well as the critical path(s). We wrapped up the chapter by showing how these concepts are embedded in inexpensive yet powerful software packages such as Microsoft Project. If you want to learn more about project management, we encourage you to take a look at the Web site for the Proj...
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Corporate Strategy: Vertical Integration and Diversification

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This chapter defined corporate strategy and then looked at two fundamental corporate strategy topics—vertical integration and diversification.
Defining corporate strategy and describe the three dimensions along which it is assessed.
Corporate strategy addresses “where to compete.” Business strategy addresses “how to compete.”.
Corporate strategy concerns the boundaries of the firm along three dimensions: (1) industry value chain, (2) products and services, and (3) geography (regional, national, or global markets).
To gain and sustain competitive advantage, any corporate strategy must support and strengthen a firm’s strategic position, regardless of whether it is a differentiation, cost-leadership, or integration strategy.
Different options firms have to organize economic activity.
Transaction cost economics help managers decide what activities to do in-house (“make”) versus what services and products to obtain from the external market (“buy”).
When the costs to pursue an activity in-house are less than the costs of transacting in the market (Cin-house  ‹ Cmarket), then the firm should vertically integrate.
Principal–agent problems and information asymmetries can lead to market failures, and thus situations where internalizing the activity is preferred.
A principal–agent problem arises when an agent performing activities on behalf of a principal pursues his or her own interests.
Information asymmetries arise when one party is more informed than another because of the possession of private information.
Moving from less integrated to more fully integrated forms of transacting, alternatives include short-term contracts, strategic alliances (including long-term contracts, equity alliances, and joint ventures), and parent–subsidiary relationships.
Two types of vertical integration along the industry value chain: backward and forward vertical integration.
Vertical integration denotes a firm’s value added—what percentage of a firm’s sales is generated by the firm within its boundaries.
Industry value chains (vertical value chains) depict the transformation of raw materials into finished goods and services. Each stage typically represents a distinct industry in which a number of different firms are competing.
Backward vertical integration involves moving ownership of activities upstream nearer to the originating (inputs) point of the industry value chain.
Forward vertical integration involves moving ownership of activities closer to the end (customer) point of the value chain.
Benefits and risks of vertical integration.
Benefits of vertical integration include securing critical supplies and distribution channels, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets.
Risks of vertical integration include increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions.
Alternatives to vertical integration.
Taper integration is a strategy in which a firm is backwardly integrated but also relies on outsidemarket firms for some of its supplies, and/or is forwardly integrated but also relies on outsidemarket firms for some if its distribution.
Strategic outsourcing involves moving one or more value chain activities outside the firm’s boundaries to other firms in the industry value chain. Off-shoring is the outsourcing of activities outside the home country.
Different types of corporate diversification.
A single-business firm derives 95 percent or more of its revenues from one business.
A dominant-business firm derives between 70 and 95 percent of its revenues from a single business, but pursues at least one other business activity.
A firm follows a related diversification strategy when it derives less than 70 percent of its revenues from a single business activity, but obtains revenues from other lines of business that are linked to the primary business activity. Choices within a related diversification strategy can be related-constrained or related-linked.
A firm follows an unrelated diversification strategy when less than 70 percent of its revenues come from a single business, and there are few, if any, linkages among its businesses.
Apply the core competence– market matrix to derive different diversification strategies.
When applying an existing/new dimension to core competencies and markets, four quadrants emerge, as depicted in Exhibit 8.8.
The lower-left quadrant combines existing core competencies with existing markets. Here, managers need to come up with ideas of how to leverage existing core competencies to improve their current market position.
The lower-right quadrant combines existing core competencies with new market opportunities. Here, managers need to think about how to redeploy and recombine existing core competencies to compete in future markets.
The upper-left quadrant combines new core competencies with existing market opportunities. Here, managers must come up with strategic initiatives of how to build new core competencies to protect and extend the firm’s current market position.
The upper-right quadrant combines new core competencies with new market opportunities. This is likely the most challenging diversification strategy because it requires building new core competencies to create and compete in future markets.
When a diversification strategy creates a competitive advantage and when it does not.
The diversification-performance relationship is a function of the underlying type of diversification.
The relationship between the type of diversification and overall firm performance takes on the shape of an inverted U (see Exhibit 8.9 ).
Unrelated diversification often results in a diversification discount: the stock price of such highly diversified firms is valued at less than the sum of their individual business units.
Related diversification often results in a diversification premium: the stock price of related-diversification firms is valued at greater than the sum of their individual business units.
In the BCG matrix, the corporation is viewed as a portfolio of businesses, much like a portfolio of stocks in finance (see Exhibit 8.11 ). The individual SBUs are evaluated according to relative market share and the speed of market growth, and are plotted using one of four categories: dog, cash cow, star, and question mark. Each category warrants a different investment strategy.
Both low levels and high levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance.

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