GLOSSARY

360-degree peer review A review that occurs when an employee’s supervisor, coworkers, and subordinates are all asked to provide information regarding that employee’s performance

accommodated entry Entry is accommodated if structural entry barriers are low, and either

(a) entry-deterring strategies will be ineffective, or (b) the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out

activity-cost analysis A method of assigning costs that views the firm as a set of value-creating activities and then assigns costs accordingly. Templates such as Porter’s value chain or the McKinsey Business System Framework can be used to identify the relevant activities for this analysis

agency costs Costs associated with slack effort by employees and the costs of administrative controls designed to deter slack effort

agency efficiency Agency efficiency refers to the extent to which the exchange of goods and services in the vertical chain has been organized to minimize coordination, agency, and transactions costs

agency theory A theory that examines the use of financial incentives to motivate workers

agent One to whom responsibility has been delegated arm’s-length market transaction A market

transaction in which autonomous parties exchange goods or services with no formal agreement that the relationship will continue in the future

assignment problem Assurance that the right people do the right jobs with minimal duplication of effort

benefit drivers directly from survey responses and then calculating overall benefits on the basis of attribute scores

autonomous work units Business units in which the unit managers control information about operating decisions, and in which the flow of information between units is minimal

backward integration An organizational arrangement in which a downstream firm owns the assets of an upstream firm, so that the downstream firm has control over both operating decisions

barriers to entry Factors that allow incumbent firms to earn positive economic profits by making it unprofitable for newcomers to enter the industry

benefit advantage One of the major strategies to achieve a competitive advantage. When pursuing a benefit advantage, firms seek to attain a higher perceived benefit while maintaining a cost that is comparable to competitors

benefit drivers Attributes of a product that form the basis on which a firm can differentiate itself, including: the physical characteristics of the product the quality and characteristics of the services or complementary goods the firm or its dealers offer for sale; characteristics associated with the sale or delivery of the good; characteristics that shape consumers’ perceptions or expectations of the product’s performance or its cost in use; and the subjective image of the product

blockaded entry A condition where the incumbent need not undertake any entry-deterring strategies to deter entry

bounded rationality Limits on the capacity of individuals to process information, deal with complexity, and pursue rational aims

broad coverage strategy A targeting strategy that is aimed at serving all segments in the market by offering a full line of related products

bundling A situation that occurs when a combination of goods or services is sold for less than what it would cost to buy the same items separately

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buyer power The ability of individual customers to negotiate purchase prices that extract profits from sellers

capabilities Clusters of activities that a firm does especially well in comparison with other firms

causal ambiguity A term coined by Richard Rumelt to refer to situations in which the causes of a firm’s ability to create more value than its competitors are obscure and only imperfectly understood

certainty equivalent (of a gamble) Payment which must be offered to a risk-averse individual to willingly accept the gamble

certification bias Any of a number of factors that may cause certifiers to issue biased quality ratings certifiers Individuals or firms that certify the quality

of products and services

Chaebol South Korean firms doing business through a complex web of institutional linkages, often with family connections

competitive advantage The ability of a firm to outperform its industry, that is, to earn a higher rate of profit than the industry norm

complementarities Synergies among organizational practices, whereby one practice is more effective when others are in place

complete contracts Stipulate each party’s responsibilities and rights for each and every contingency that could conceivably arise during the transaction

complex hierarchy Involves multiple groups and multiple levels of groupings. Complex hierarchy arises from the need not just to organize individuals into groups, but to organize groups into larger groups

composite scores Aggregation of several individual scores into a single score. Composite scores often represent weighted averages of individual components

conjoint analysis A set of statistical tools used by market researchers to estimate the relative benefits of different product attributes

constant returns to scale Indicates that average costs remain unchanged with respect to output

consumer surplus The perceived benefit of a product per unit consumed minus the product’s monetary price

contestable market A situation in which the threat of entry limits a monopolist’s ability to raise prices

control The location of decision-making rights and rule-making authority within a hierarchy

cooperative pricing Refers to situations in which firms are able to sustain prices in excess of those that would arise in a noncooperative single-shot price or quantity-setting game

coordination The flow of information within an organization to facilitate subunit decisions that are consistent with each other and with organizational objectives

corporate culture A set of collectively held values, beliefs, and norms of behavior among members of a firm that influences individual employee preferences and behaviors

corporate governance The mechanism through which corporations and their managers are controlled by shareholders

cospecialized assets Assets that are more valuable when used together than when separated

cost advantage One of the major strategies to achieve a competitive advantage. When pursuing a cost advantage, firms seek to attain lower costs while maintaining a perceived benefit that is comparable to competitors

cost drivers The basic economic forces that cause costs to vary across different organizations

cost of capital The rate of return just sufficient to induce investors to provide financial capital to the firm

creative destruction When quiet periods in markets are punctuated by fundamental “shocks” or “discontinuities” that destroy old sources of advantage and replace them with new ones

credence goods Goods whose quality is difficult to ascertain even after purchase and use

cross-price elasticity of demand Given two products x and y, the cross-price elasticity of demand measures the percentage change in demand for good y that results from a 1 percent change in the price of good x

cube-square rule As one increases the volume of a vessel (e.g., a tank or a pipe) by a given proportion, the surface area increases by less than this proportion. A source of scale economies

customer specialization A targeting strategy in which the firm offers a variety of related products to a particular class of consumers

delegation Determination of which decisions will be made by individuals higher up in the corporate hierarchy and which will be left to individuals at lower levels

departmentalization The division of an organization into formal groupings

design attributes Attributes of a production process that need to relate to each other in a precise fashion

deterred entry Occurs when an incumbent can keep an entrant out by employing an entry-deterring strategy

differentiation advantage One of the major strategies to achieve competitive advantage. When pursuing a differentiation advantage, firms seek to offer a higher perceived benefit while maintaining costs that are comparable to competitors

direct competitor When firms are direct competitors, the strategic choices of one directly affect the performance of the other

direct labor costs The costs of labor that are physically traceable to the production of the finished goods

direct materials costs The costs of all materials and components that can be physically traced to the finished goods

disclosure The process of revealing information about product quality

diseconomies of scale Indicates that average costs increase as output increases

disruptive technologies Class of technologies that has higher B-C than their predecessors, but does so primarily through a combination of lower B and much lower C

division of labor Refers to the specialization of productive activities, such as when a financial analyst specializes in startup biotech

companies

dominant strategy A strategy that is the best decision for the firm, no matter what decision its competitor makes

dynamic capabilities Ability of a firm to maintain and adapt the capabilities that are the basis of its competitive advantage

dynamic efficiency The achievement of long-term growth and technological improvement

early-mover advantages Once a firm acquires a competitive advantage, the early-mover advantage increases the economic power of that advantage over time. Sources of early-mover advantages include: the learning curve, brand name reputation buyer uncertainty about product quality, and consumer switching costs

economic profit A concept that represents the difference between the profits earned by investing resources in a particular activity, and the profits that could have been earned by investing the same resources in the most lucrative alternative activity

economies of scale Indicates that average costs decrease as output increases

economies of scope Cost savings that the firm achieves as it increases the variety of activities it performs, such as the variety of goods it produces

efficiency effect Refers to the fact that the benefit to a firm from being a monopolist as compared with being one of two competitors in a duopoly is

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greater than the benefit to a firm from being a duopolist as compared with not being in the industry at all

efficiency wage A wage payment made to an agent that exceeds his opportunity cost of working. The extra payment is made to discourage the agent from shirking

endogenous sunk costs Sunk investments by incumbents that create barriers to entry

exclusive dealing A practice whereby a retailer agrees to sell only the products made by one manufacturer

experience good A product whose quality can be assessed only after the consumer has used it for a while

explicit incentive contract Incentive contract that can be enforced by an outside third party such as a judge or an arbitrator

five-forces analysis A method, developed by Michael Porter, which systematically and comprehensively applies economic tools to analyze an industry in depth. The five forces are internal rivalry, entry, substitute and complement products, supplier power, and buyer power

fixed costs Costs that must be expended regardless of total output

focal point A strategy so compelling that it would be natural for a firm to expect all others to adopt it focus strategy A targeting strategy that concentrates either on offering a single product or serving a single

market segment or both

folk theorem An idea that concerns the possibilities for achieving an equilibrium result in repeated play of games, such as the prisoner’s dilemma. Its general result is that many Nash equilibria are possible in infinitely repeated games

forward integration An organization arrangement in which an upstream firm owns the assets of a downstream firm, so that the upstream firm has control over both operating decisions

franchising A business format franchise agreement allows one firm (referred to as the franchisee) to use the trade name and business plan of another firm (the franchisor) for a specified period of time

free-rider problem Problem that affects teams. Because every team member receives only a fraction of the total benefit from his actions, every team member will elect not to undertake actions that would be in the best interests of the entire team

fundamental transformation A situation that occurs after parties invest in relationship-specific assets, when their relationship changes from a “large numbers” to a “small numbers” bargaining situation

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game theory The branch of economics concerned with the analysis of optimal decision making when all decision makers are presumed to be rational, and each is attempting to anticipate the likely actions and reactions of its competitors

geographic specialization A targeting strategy in which the firm offers a variety of related products within a narrowly defined geographic market

grim trigger strategy A strategy that relies on the threat of an infinite price war to keep firms from undercutting their competitors’ prices

hedonic pricing Uses data about actual consumer purchases to determine the value of particular product attributes

Herfindahl index The sum of the squared market shares of all the firms in a market

hidden action Situations in which aspects of the agent’s action that are important to the principal cannot be observed

hidden information Situations in which aspects of the productive environment that are important to the principal cannot be observed

hierarchy of authority An organizational arrangement in which one member of a group specializes in monitoring and coordinating the work of the other members

holdup problem A problem that arises when a party in a contractual relationship exploits the other party’s vulnerability due to relationshipspecific assets. For example, a seller might attempt to exploit a buyer who is dependent on

the seller by claiming that production costs have risen and demanding that the price be renegotiated upward

horizontal differentiation Differences between products that increase perceived benefit for some consumers but decrease it for others

human capital theory A theory, developed by Gary Becker, which suggests that workers might accept very low wages early in their careers if they receive on-the-job training that enhances their productivity and job opportunities later on

implicit incentive contract Contract based on information that cannot be observed by courts or arbitrators

indifference curve The set of price-quality combinations that yields the same consumer surplus to an individual

indirect competitor When firms are indirect competitors, the strategic choices of one also affect the performance of the other, but only through the strategic choices of a third firm

indirect labor costs Salaries of production workers whose efforts usually are not directly traceable to the finished good, including personnel, quality-control workers, and inspectors

influence costs A concept, developed by Paul Milgrom and John Roberts, that denotes

the costs of activities aimed at influencing the distribution of benefits inside an organization

informative signal A signal is informative only if it is more profitable for the high-quality firm to offer the signal

innovator’s dilemma A problem that arises when innovative investments by incumbents cannibalize their successful business model while failure to innovate may invite entry

institutional logics Interrelated beliefs, values, material practices, and norms of behavior that exist in an industry at any given time

internal capital markets Used to describe how firms allocate financial and human resources to internal divisions and departments

internal rivalry Competition for share by firms within a market

isolating mechanisms A term coined by Richard Rumelt that refers to economic forces that

limit the extent to which a competitive advantage can be duplicated or neutralized through the resource-creation activities of other firms

joint venture A particular type of strategic alliance in which two or more firms create, and jointly own, a new independent organization

keiretsu Japanese firms doing business through a complex web of institutional linkages

key success factors The skills and assets a firm must possess to achieve profitability in a given market

learning curve An idea that refers to the cost advantages that flow from accumulating experience and know-how

legitimate power Formal authority one receives by occupying a high-ranking position

limit pricing The practice whereby an incumbent firm can discourage entry by charging a low price before entry occurs

M-form See multidivisional structure macrodynamics The evolution of overall market

structure

make-or-buy decision The decision of a firm whether to perform an upstream, downstream, or professional supporting activity itself or to purchase it from an independent firm

management by objective system System whereby an employee and a supervisor work together to construct a set of goals for the employee

manufacturing overhead All the costs associated with manufacturing other than direct labor and indirect materials

marginal cost Refers to the rate of change of total cost with respect to output

margin strategy Strategy by which a firm maintains price parity with its competitors and profits from its benefit or cost advantage primarily through high price-cost margins, rather than through a higher market share

market definition The process of identifying the market or markets in which a firm competes

market for corporate control An idea, first proposed by Henry Manne, which states that control of corporations is a valuable asset that exists independently of economies of scale and scope. If this is so, then a market for this control exists and operates such that the main purpose of a merger is to replace one management team with another

market segment A group of consumers within a broader market who possess a common set of characteristics

market structure The number and size distribution of the firms in a market

matrix organization An organizational form in which employees are subject to two or more sets of managers at once

mean reversion See regression to the mean merchant coordinators Independent firms that

specialize in linking suppliers, manufacturers, and retailers

merit rating system A system whereby employees are given numerical performance evaluation scores

microdynamics Unfolding of competition, over time, among a small number of firms

minimum efficient scale The smallest level of output at which economies of scale are exhausted

misread problem A problem that occurs when a firm either mistakenly believes a competitor is charging one price when it is really charging another or when it misunderstands the reasons for a competitor’s pricing decision

monopolistic competition A theory of competition for markets in which there are many sellers and each seller is slightly differentiated from the rest

monopsonist A firm that faces little or no competition in one of its input markets

most favored customer clause A provision in a sales contract that promises a buyer that it will pay the lowest price the seller charges

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multidivisional structure An organizational form that is comprised of a set of autonomous divisions led by a corporate headquarters office, assisted by a corporate staff that provides information about the internal and external business environment. Rather than organizing by function or by task, a multidivisional structure organizes by product line, related business units, or customer type

multitask principle Principle stating that when allocating effort among a variety of tasks, employees will tend to exert more effort toward those tasks that are rewarded

N-firm concentration ratio The combined market share of the N largest firms in a market

Nash equilibrium Indicates an outcome of a game where each player is doing the best it can, given the strategies of all of the other players

net present value (of an investment) The present value of the cash flows the investment generates minus the cost of the investment

network externality Refers to a situation where, when additional consumers join a “network” of users, they create a positive external benefit for consumers who are already part of the network

network structure An organizational form in which work groups may be organized by function, geography, or customer base, but where relationships between work groups are governed more by oftenchanging implicit and explicit requirements of common tasks than by the formal lines of authority that characterize other structures

niche strategy A targeting strategy in which the firm produces a single product for a single market segment

numbers-equivalent The number of equal-sized firms that can generate a given Herfindahl index in a market. The numbers-equivalent is also equivalent to the reciprocal of the Herfindahl index

oligopoly A market in which the actions of individual firms materially affect industry price levels

opportunity cost A concept which states that the economic cost of deploying resources in a particular activity is the value of the best foregone alternative use of those resources

option value The expected net present value that arises when a firm leaves itself with options that allow it to better tailor its decision making to the underlying circumstances it faces

organizational structure Describes how a firm uses a division of labor to organize tasks, specify how its staff performs tasks, and facilitate internal and external information flows. Structure also

506 • Glossary

defines the nature of agency problems within the firm

overserve A broad-coverage competitor overserves a customer group when it offers costly product attributes that customers in that group do not especially value

own-price elasticity of demand The percentage change in a firm’s sales that results from a 1 percent change in its own price

patent race A term used to characterize the battle between firms to innovate first

path-dependence A process shows path-dependence if past circumstances could exclude certain actions or outcomes future

pay-for-performance Contract by which the value of the compensation depends on the measured performance of the employee

perceived benefit The perceived gross benefit of a product minus the user cost of the product, purchasing costs, and transactions costs

percentage contribution margin The ratio of profit per unit to revenue per unit on additional units sold

perfectly contestable market A market in which a monopolist cannot raise price above competitive levels because of concern over possible entry

performance measure Piece of information on which an incentive contract (explicit or implicit) can be based

performance standard The output that a hardworking agent can be expected to produce

perpetuity A level cash flow received each year forever

piece-rate contract A contract that pays a fee for each unit of output

pooled interdependence Exists when two or more positions are not directly dependent on each other, but are associated through their independent contributions to the success of the firm

predatory act Entry-deterring strategies that work by reducing the profitability of rivals

predatory pricing The practice of setting a price with the objective of driving new entrants or existing firms out of business

price elasticity of demand The percentage change in quantity demanded brought about by a 1 percent change in price

principal One who delegates responsibility to another, known as the agent

private information A firm’s private information is information that no one else knows. It may pertain to production know-how, product design, or consumer information

product performance characteristics A product’s performance characteristics describe what it does for consumers. Though highly subjective, listing product performance characteristics often clarifies whether products are substitutes

product specialization A targeting strategy in which the firm concentrates on producing a single type of product for a variety of market segments

productivity effect Used to evaluate the potential advantages of incumbency in the innovative process; assesses whether the incumbent is more productive at research

profit center Autonomous groups within a firm whose managers are rewarded on the basis of a target profit goal

promotion tournament Situation in which a set of employees competes to win a promotion

quality report card A grade or list of grades used to compare quality to evaluate quality

quasi-rent An amount equal to the difference between (a) the revenue a seller would actually receive if its deal with a buyer were consummated according to the original terms of the implicit

or explicit contract, and (b) the revenue the seller must receive to be induced not to exit the relationship after it has made its relationshipspecific investments

real option A real option exists when a decision maker has the opportunity to tailor a decision to information that will be received in the future regression analysis A statistical technique for estimating how one or more factors affect some

variable of interest

regression to the mean A process shows regression to the mean if its shocks are not persistent over time

related acquisition A purchase of one firm by another, where both firms are active in similar lines of business

relationship-specific asset An investment made to support a given transaction

rent An amount equal to the difference between the revenue a seller receives in a transaction and the minimum amount it must receive to make it worthwhile for it to enter into a relationship with the buyer

rent-seeking behavior Costly activities intended to increase the chances of landing available profits

replacement effect A phenomenon whereby, despite equal innovative capabilities, an entrant is willing to spend more to develop an innovation. The reasoning behind this phenomenon is that through innovation the entrant can potentially

replace the monopolist in the industry; however, the monopolist can only “replace” itself

reservation price The maximum monetary price the consumer is willing to pay for a unit of a product or service

residual rights of control All rights of control that are not explicitly stipulated in a contract

resource dependence (view of power) Theory in which individuals and firms seek to gain power by reducing their dependence on other actors, while increasing the dependence of other actors on them resource-based theory of the firm A framework used in strategy based on resource heterogeneity.

It posits that for a competitive advantage to be sustainable, it must be underpinned by resource capabilities that are scarce and imperfectly mobile, which means that well-functioning markets for the resources and capabilities do not or cannot exist

resources Firm-specific assets such as patents and trademarks, brand-name reputation, installed base, and organizational culture. Resources can directly affect the ability of a firm to create more value than other firms, and can also indirectly impact valuecreation because they serve as the basis of the firm’s capabilities

responsibility center A self-contained group that focuses on other performance measures besides profit, such as cost, revenue, or investment goals risk adjustment The process of adjusting report card scores to account for differences across sellers in the products or services sold. Risk adjustment is often used in hospital and physician report cards risk averse Describes an agent who prefers a sure

thing to a gamble of equal expected value

risk neutral Describes an agent who is indifferent between a sure thing and a gamble of equal expected value

risk premium An extra payment above and beyond the expected outcome of a gamble which must be offered to a risk-averse individual to willingly accept the gamble

risk-sharing contract A contract that guarantees an agent some payment, but provides enough incentive so that the agent does not shirk

search goods Goods whose quality is relatively easy to evaluate before purchase

selection In the context of report cards, a process whereby sellers may practice selection by choosing not to sell to certain customers in order to boost their report card score

self-managed team A collection of individuals, each member of which works with others to set and pursue some common set of objectives

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sequential search A search that occurs when consumers learn about the attributes of products one at a time. Consumers usually incur an additional cost with each additional search

share strategy Strategy by which a firm exploits its benefit or cost advantage through a higher market share rather than through high price-cost margins shirking A practice that occurs when managers and workers knowingly do not act in the best interests

of their employer

shopping problem The problem faced by consumers attempting to determine the quality of a good or service

short run The period of time in which the firm cannot alter key choices of interest (such as price or capacity)

SIC code Standard Industrial Classification (SIC), as defined by the U.S. Bureau of the Census. SIC codes identify products and services by a seven-digit identifier, with each digit representing a finer degree of classification

signal A message that conveys information about vertical positioning

simultaneous search A search that occurs when consumers simultaneously learn about the attributes of several products

social exchange A transfer between two or more parties of resources, or rights to control resources, that occurs outside the terms of a market context

soft commitment A commitment made by a firm such that, no matter what its competitors do, the firm will behave less aggressively than if it had not made the commitment. Thus, in a Cournot game a soft commitment will cause the firm to produce relatively less output, while in a Bertrand game a soft commitment will induce the firm to charge a higher price than if it had not made the commitment

SSNIP criterion According to the DOJ, an analyst has identified all of the competitors of a given firm if a merger among those firms would facilitate a small but significant nontransitory increase in price

stakeholders Shareholders, employees, and others with a stake in the firm

static efficiency The optimal allocation of society’s resources at a given point in time

strategic alliance An agreement between two or more firms to collaborate on a project or to share information or productive resources

whose reaction functions are upward sloping with respect to the actions taken by one another

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strategic intent An idea, developed by Gary Hamel and C. K. Prahalad, describing fundamental focus

of a firm’s strategy that commits it well beyond its current resource profile

strategic substitutes Two or more products whose reaction functions are downward sloping with respect to the actions taken by one another

structural hole A relationship in a social network in which one actor is the critical link between individuals or entire groups. The presence of a structural hole allows the individual who can span the hole to use the control of information or resource flows to his or her own advantage

structure (of a market) The number and characteristics of the firms that compete within a market

stuck in the middle The idea—argued by Michael Porter—that firms which attempt to pursue both

a cost advantage and differentiation advantage simultaneously will be ineffective, providing both a lower perceived benefit to consumers than those firms that pursued a differentiation advantage and incurring higher costs than those that pursued a cost advantage

subgame perfect Nash equilibrium An outcome of a game where each player chooses an optimal action at each stage in the game that it might conceivably reach and believes that all other players will behave in the same way

sunk cost effect A phenomenon whereby a profitmaximizing firm sticks with its current technology or product concept even though the profit-maximizing decision for a firm starting from scratch would be to choose a different technology or product concept sunk costs Costs that have already been incurred

and cannot be recovered

supplier power The ability of input suppliers to negotiate prices that extract profits from their customers

sustainable competitive advantage A competitive advantage that persists despite efforts by competitors or potential entrants to duplicate or neutralize it

switching costs Refers to costs incurred by buyers when they switch to a different supplier

tactical decisions Decisions that are easily reversed and where impact persists only in the short run

tapered integration A mixture of vertical integration and market exchange in which a manufacturer produces some quantity of an input itself and purchases the remaining portion from independent firms

targeting Refers to the selection of segments that the firm will serve and the development of a product line strategy in light of those segments

task interdependence Extent to which two or more positions depend on each other to do their own work

teaching to the test Effort to improve the measured aspects of performance, possibly at the expense of unmeasured aspects. See also multitask principle

technical efficiency The degree to which a firm produces as much as it can from a given combination of inputs. A broader interpretation is that technical efficiency indicates whether the firm is using the least-cost production process

termination-based incentives Implicit contract in which incentives come from the threat by the employer to fire the employee if some easily measurable aspect of performance is below a preset standard

tertius gaudens Providing a valued relationship between two unconnected parties (actors or groups of actors). The tertius is the “third who benefits,” and the strategy involves spanning a structural hole and bargaining with the parties on either side for the most favorable terms

throughput The movement of inputs and outputs through a production process

tit-for-tat strategy A policy in which a firm is prepared to match whatever change in strategy a competitor makes

total cost function Represents the relationship between total cost and output, assuming that the firm produces in the most efficient manner possible given its current technological capabilities

total quality management A management philosophy which teaches that firms can lower their costs and maintain or increase quality by improving the efficiency of their production processes

tough commitment A commitment made by a firm such that, no matter what its competitors do, the firm will behave more aggressively than if it had not made the commitment. Thus, in a Cournot game a tough commitment will cause the firm to produce relatively more output, while in a Bertrand game a tough commitment will induce the firm to charge a lower price than if it had not made the commitment

tournament Competition among workers to outperform one another to earn rewards and move up the hierarchy of the firm. Arises when individuals are ranked relative to one another and when the hardest-working and most able workers are promoted

transactions costs A concept, developed by Ronald Coase, which denotes the costs to using the market—such as costs of organizing and transacting exchanges—which can be eliminated by using the firm

U-form See unitary functional structure

umbrella branding The practice of offering a broad product line under a single brand name. A source of scope economies

underserve A broad-coverage competitor underserves a customer group when it offers insufficient levels of product attributes that customers in the target set especially value

uniform delivered pricing A single delivered price that a seller quotes for all buyers and in which the seller absorbs any freight charges itself

uniform FOB pricing A price that a seller quotes for pickup at the seller’s loading dock, and the buyer absorbs the freight charges for shipping from the seller’s plant to the buyer’s plant

unitary functional structure An organizational form in which there is a single department responsible for each of the basic business functions within the firm. This structure is characterized by a division of labor that allows for specialization of the basic tasks that a business performs. Each department depends on direction from central headquarters and probably could not exist autonomously outside the firm except as contract vendors to a firm that independently secures the other functions

unraveling A market process in which high-quality sellers disclose their quality, followed by mediumquality sellers, and so forth, until all sellers have disclosed

unrelated acquisition A purchase of one firm by another, where the two firms are active in different lines of business

value-added analysis The process of using market prices of finished and semifinished goods to estimate

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the incremental value-created by distinctive parts of the value chain

value chain A concept, developed by Michael Porter, which describes the activities within firms and across firms that add value along the way to the ultimate transacted good or service

value-created The difference between the value that resides in a finished good and the value that is sacrificed to produce the finished good

value net The firm’s “value net” which includes suppliers, distributors, and competitors whose interactions can enhance total industry profits, and the profits of each member of the net

variable costs Costs, such as direct labor and commissions to salespeople, which increase as output increases

vertical chain The process that begins with the acquisition of raw materials and ends with the distribution and sale of finished goods

vertical differentiation Distinction of a product that makes it better than the products of competitors

vertically integrated firm A hierarchical firm that performs many of the steps in the vertical chain itself

warranty A promise to reimburse the consumer if a product fails

winner’s curse The firm that wins the bidding war for an input may be overly optimistic about its value. Unless it accounts for the possibility of overoptimism, the winning bidder may end up overpaying for the asset

zone of indifference The set of issues over which a powerful individual usually prevails