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57 Cards in this Set
- Front
- Back
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Overview of downsizing
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(reengineering) refers to divesting unrelated businesses to focus on the core business. Since the early 1990s, downsizing is common business policy. Downsizing means job cutting especially middle management jobs, partly due to technological change. However majority of firms that went downsizing enjoyed an initial drop in accounting cost but in six months to a year accounting cost went up. The explanation is that work from the dismissed employees are piled up on the remaining employees causing lower productivity and decline in morale.
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What is divestiture?
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Selling a segment of a firm to a third party.
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Spin-off
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distributing on a pro rata basis all the shares a firm owns in a subsidiary to its shareholders, e.g. Tyco International spin-off to three distinct companies.
You may do a spin-off when management within the company has different beliefs/focuses. Tyco International, Tyco Electronics, Coridian |
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Equity carve-out
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distributing on a pro rata basis some of the shares a firm owns in a subsidiary to its shareholders while the rest of the shares are sold to the general public to raise cash to the parent firm, e.g. Altria equity carve-out Kraft Food.
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Split-off
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Some parent firm shareholders receive the subsidiaries shares in return for relinquishing their parent firm shares.
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Outsourcing
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switching from make to buy - parts and services. The most common outsourcing activities are information system, pension management and facility management.
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Supply chain management
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ensures that each transaction in the process of producing a product from raw materials to the final product is efficient. It requires the exchange of technical and managerial knowledge between upstream and downstream firms. It may also require coordination to achieve just-in-time inventory control. Since 1990s three successful cases standout in the application of the concept, for example, Dell, Baxter, and Proctor and Gamble.
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Strategic alliance
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two or more firms that share common interest in expanding into new products, services and/or markets to avoid duplication of efforts.
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Joint ventures
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entities created out of the cooperative efforts of a small part of two or more corporations for a limited time period, for example, joint contract bidding, research and development, and new market penetration. (GM-Toyota’s NUMMI)
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Closely held corporations vs.publicly traded corporations
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Shares of closely held corporations are held by a few shareholders and are not freely traded, while shares of publicly traded corporations are held by the general public and are exchange traded.
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Management buy-out vs. leverage buy-out
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Such reorganization initiated by the existing management is called management buy-out (MBO), and if it is financed by debt it is called a leverage buy-out (LBO). Kohlberg, Kravis, Roberts & Co. is an example of buy-out specialist.
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Dual-class voting shares
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where one class of share has primary claim to the residual profits and few voting rights, while the other class of share has smaller claim to the residual profits but retains more of the voting rights, e.g. Google.
Typical limited voting right stock sells at a discount of over five percent relative to its superior voting right counterpart. |
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Corporate governance
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Organization structure of a firm to monitor and direct the performance of the firm.
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5 internal control mechanisms that limit agency problems in publicly traded corporations:
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1. large shareholders (blockholders--hold a large block of shares, e.g. 3%)
2. shareholder voting (proxy contest) 3. board of directors with outsiders 4. management compensation where straight salary account for only twenty percent of total compensation 5. (internal & external) auditing |
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Proxy contest
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An outside group seeks to obtain representation on the firm’s board of directors. Proxy contest are usually directed against the existing management.
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3 external control mechanisms to limit agency problems in publicly traded corporations:
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1. market of corporate control (takeovers of poorly managed firms)
2. managerial labor market (track record of managers affecting future executive income and employment) 3. product market competition (Economic Darwinism) |
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Tender offer
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In a tender offer, an outside group request existing shareholders of a corporation to sell their shares to the outside group at a pre-set tender price to gain control of the corporate management.
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Bear hug
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A bear hug is a tender offer where the outside group first seek approval from the corporate management and board of directors.
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hostile takeover
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A hostile takeover is a tender offer where the corporate management and board of directors reject the offer but the outside group continue to proceed with the tender offer to win corporate control.
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Greenmail
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A greenmail is a premium repurchase of stocks owned by the takeover party to prevent a takeover usually with an agreement from the takeover party not to pursue another takeover of the corporation in the future, e.g. Occidental Petroleum paid greenmail to David Murdoch in 1984 and Goodyear Tire and Rubber Company paid Sir James Goldsmith $93 million in 1986.
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White knight (alternative to greenmail)
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A white knight is a third party sought by the corporate management and board of directors to take over the corporation that is subject to a hostile takeover, e.g. Nissin paid $314m to buy Myoto Foods after US hedge fund Steel Partners wanted a hostile takeover.
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Poison pill
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A poison pill is restructuring by a corporation subject to a hostile takeover to reduce the attractiveness of the takeover.
Examples of poison pill (anti-takeover defenses): -an immediate large cash dividend financed by debt, -a cash refund to customers in the event of a takeover, e.g. Peoplesoft against Oracle, -golden parachutes: to award large severance pay to existing management if a takeover is successful and the existing management are terminated, e.g. Robert Nardelli walked away with $210 million to resign as chairman and CEO of Home Depot in 2007 -poison put allows bondholders to sell bonds back to the firm at a premium in the event of a takeover of the firm, e.g. a note issued by Grumman Corporation that mature in 1999 -poison call allows management to buy back bonds of the firm at a premium in the event of a takeover of the firm -move the corporate headquarters to a state with strong anti-takeover laws, e.g. Delaware -change corporate governance to require absolute majority to approve a takeover vote |
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In general, defensive strategies of existing management lead to
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lower stock returns.
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50% of top management of target firms are gone within 3 years of takeover.
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50% of top management of target firms are gone within 3 years of takeover.
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Organization capital comes from 3 sources:
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-learning by doing: production, management, customer/government relations & research/innovation.
-learning by matching: workers to job, workers to team -learning by cooperating: team work |
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What are some other sources of corporate capital?
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-liquid assets, e.g. cash and money market instruments,
-real assets, e.g. real estates (e.g. Kmart) and expensive equipment, -patents, trademark, copyrights, e.g. Pfizer, MacDonald, Capital Records -reputation: with consumers, suppliers, workers, and gov’t -earning power, e.g. AT&T and cable companies -market access, e.g. Walmart -funds access, e.g. GE Capital |
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four general pricing approaches
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Mark-up pricing
Value-based pricing (demand pricing) Value pricing Competition-based pricing |
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Mark-up pricing
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Mark-up pricing is to have a fixed mark-up on the cost of the product to set the price, e.g. retail stores.
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Value-based pricing (demand –based pricing
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Value-based pricing (demand –based pricing is setting price based on buyers’ perceptions of value independent of cost, e.g. Louis Voitton & Rolex.
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Value pricing
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Value pricing is offering the right combination of quality & good service at a fair price, e.g. value meal menu.
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Competition-based pricing
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Competition-based pricing is to set price following that of the industry leader, e.g. breakfast cereal pricing according to Kellogg prices.
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four product-quality pricing strategies
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1. Market skimming pricing
2. Market penetration pricing 3. Economy pricing 4. Premium (prestige) pricing |
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Market-skimming pricing
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Market-skimming pricing sets a high price to a low quality product to reap maximum revenues step by step from the market segments, e.g. new high tech products.
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Market penetration pricing
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Market penetration pricing sets a low price for a high quality product to attract a large number of customers & a large market share to enjoy network effect, e.g. Microsoft.
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Economy pricing
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Economy pricing is to set a low price for a low quality product to maximize sale volume, e.g. 99cents Store.
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Premium pricing (prestige pricing)
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Premium pricing (prestige pricing) is to set high price to a high quality product, e.g. Cunard. Godilocks pricing is to provide a “gold-plated” version of a product in order to make the next lower priced option look more reasonably priced, e.g. comic books and sport collectible cards.
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five product-mix pricing strategies
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Product line pricing
Optional product pricing Captive-product pricing By-product pricing Product bundle pricing |
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Market (monopoly) power is:
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Market (monopoly) power is the ability of a seller (buyer) to set the market price.
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Five sources of market power
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-essential inputs (strategic assets)
-economies of scale and scope -product differentiation: quality, warranty, brand name -government regulation -entry barrier (limit pricing vs predatory pricing) |
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Third degree price discrimination
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Third degree price discrimination is the situation where a firm can sell to different consumers (possibly in different markets) at different prices. Profit maximization requires marginal revenue in each market equals to marginal cost. This leads to the inverse demand elasticity rule, for example, movie ticket prices, dry cleaners, best price policy, coupons, and senior citizen, student and group discount.
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Inverse demand elasticity rule
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Inverse demand elasticity rule requires a firm to sell a product to consumers with higher own-price demand elasticity at a lower price and to consumers with lower own-price demand elasticity at a higher price.
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There are three examples where firms with market power can lead to efficient outcome by extracting all consumer surpluses to become monopoly profits:
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-first degree price discriminating monopolist: every unit at a different price
-two-part tariff monopolist: membership fee plus price per unit -all-or-nothing contract monopolist: fixed quantity plus price per unit |
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Second degree price discrimination
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Second degree price discrimination is selling different blocks of units to the same consumer at different prices (increasing vs declining block pricing).
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Fourth degree price discrimination
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Fourth degree price discrimination is selling to different consumers at the same price but the cost of providing the product to different consumers are different.
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Peak-load pricing
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Peak-load pricing is selling to a customer at different prices at different times for the same quality product.
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Five forms of pricing
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1. Discount pricing
2. Segmented pricing 3. Psychological pricing 4. Promotional pricing 5.Geographical pricing |
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Discount pricing
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Discount pricing is a straight reduction in price on purchase in a specified period of time, e.g. cash discount, coupon rebate, cumulative quantity discount, functional discount (trade discount, e.g. airfare special for travel agents) & seasonal discount, e.g. cruises. Allowance pricing is giving promotional money by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way. The effective price is the price of a seller receives less discounts, promotion & other incentives.
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Segmented pricing
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Segmented pricing is selling a product or service at two or more prices, where the difference prices are independent in costs: customer-segment pricing, e.g. textbook & movie ticket prices, location pricing, e.g. airport fast food prices, and yield management. Yield management (revenue management) is the process of understanding, anticipating & reacting to customer behavior in order to maximize profits, e.g. Las Vegas hotel room rates & airline ticket prices.
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Psychological pricing
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Psychological pricing is to set price of a product according to the beliefs of customers, e.g. higher price means higher quality. Reference prices are prices that customers carry in their minds & compare to when contemplate buying a product.
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Promotional pricing
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Promotional pricing is temporarily set the price of a product below the list price, and sometimes even below cost (loss leader), or low-interest financing & extended warranties to increase short-run sale to clear inventory for a new model or to attract customers, e.g. GM employee discount and white sale after Christmas.
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Geographical pricing
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Geographical pricing: FOB(free on board)-origin pricing is pricing a product at the point of sale and customers have to pay the freight from the point of sale to the destination of the customers. Uniform-delivered pricing (freight absorption pricing) is to set the same price including freight to all customers irrespective of distance to destination of customers. Zone pricing is for the seller to set two or more zones with all customers pay the same price within a zone, but the more distant the zone, the higher the price. Basing-point pricing is for a seller to designate a city (where demand is more elastic) as a basing point and charges all customers the freight cost as if the shipping is from that city, hence phantom freight charge.
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Dominant firm price leadership model
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Dominant firm price leadership model can explain coexistence of a low-cost large firm with many high-cost fringe firms.
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Transfer Pricing
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Transfer Pricing is the pricing of an intermediate good sold from one division of a firm to another division of the firm.
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How should transfer pricing be set?
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From the managerial point of view, transfer price should be set to the competitive market price of the intermediate good if a competitive market for the product exists; or to the marginal cost of producing the intermediate good by the firm so as to clear the internal market for the intermediate good if a competitive market for the product does not exist.
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Describe a non-profit organization
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A nonprofit organization prohibits persons who control the organization from receiving the organization’s residual profits. Residual profits must be used for the arts, education, or charity. Nonprofit organizations are private and self-governing. They are exempted from federal, state, and local taxes. They must be financed through debt, internally generated funds, and donations. Nonprofit organizations cannot pay top managers equity-based compensation. Board members are typically community leaders and major donors.
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Describe a for-profit organization
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For-profit organizations have owners to receive the residual profits. Advantages of for-profit organizations are that they can gain access to capital funds from publicly traded equity markets and use equity based compensation to motivate workers.
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Why would you switch from non-profit hospital to privatized?
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When you need more funding, i.e. not enough govt funding; medical care has a demand
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