Assignment

PART I

BACKGROUND

TerraLoc competes in the market for global positioning devices and services. The company manufactures its own GPS units, which are smaller than those of any other competitor and include a proprietary battery that lasts 200% longer than any other competitor's battery and that TerraLoc manufacturers on-site. TerraLoc also has developed proprietary software that is much faster and more precise than that of any competitor. When developing the proprietary battery, TerraLoc decided to manufacturer the battery in-house to reduce the possibility that the company it outsourced the battery manufacturing to might reverse engineer the battery and sell a similar product to competitors. This possibility was especially troubling given that the company expected a significant increase in demand due to the improved battery life. Additionally, TerraLoc sells its products and services through its own direct sales force to ensure that its representatives highlight the longer battery life of TerraLoc's units.

QUESTIONS

Q I.1. Discuss shortly in theory the three main explanations for vertical integration. Which of the three is most consistent with TerraLoc's decision to manufacture the battery in-house?

Q I.2. Discuss the effects of TerraLoc's development of the new battery technology the vertical integration strategy in terms of reducing/increasing its rarity and imitability.

Q I.3. What kind of vertical integration would it be were TerraLoc to expand into selling its GPS units through company-owned retail stores?

Q I.4. Considering the changes in TerraLoc's strategy, what do you think is the most appropriate organizational structure? If TerraLoc the CEO decided to use budgets as a management control but wanted to make sure that the managers did not become too focused on the short term, what should the CEO do (use an open process in developing budgets or determine budgets for her managers and allow them to focus only on meeting the budgets, use quantitative and/or qualitative evaluations of performance, ...).

PART II

BACKGROUND

At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPitMP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues.

QUESTIONS

Q II.1. Describe in theory different types of corporate diversification. What diversification type best characterizes Peach Computers in 2001 and why? Answer the same for year 2003. If Peach Computers were looking to getting into the business of making telephones, what would its diversification be called?

Q II.2. Which type of economies of scope is Peach Computers experiencing between its units? Now assume that one of the reasons that Peach Computers entered into the electronics industry was to offset weakness in the computer industry because when the computer industry was weak, the electronics industry was strong, and vice versa, Peach Computers would be pursuing which economy of scope?

Q II.3. Describe shortly the concepts of multipoint competition and predatory pricing. If, when Peach Computers introduced its PeachPit in 2001, the company used its profits in the computer industry to subsidize its operations in the electronics industry and used this subsidy to sell the PeachPit for a price that was less than the cost of producing and selling the MP3 players, this would be an example of which of the two?

Q II.4. Assume that in 2001 Peach Computers did not want to employ a diversification strategy to enter the personal electronics industry. What could it use as a substitute for diversification?