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153 Cards in this Set
- Front
- Back
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The Strategic Management Process
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Mission Statement
Objectives External/Internal Analysis Decision Implementation Competitive Advantage |
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Under Strategic Choice lays...
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Corporate Level Strategy
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Corporate Level Strategy Answers What Question?
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Which business should we enter?
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Logic of Corporate Level Strategy...
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- Such that the value of the corporate whole increases
- Such that businesses forming the corporate whole are worth more than they would be under independent ownership - That equity holders cannot create through portfolio investing |
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A corporate level strategy should create synergies that are not available in _____ ______
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equity markets
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Backward integration—
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a firm produces its own inputs.
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Forward integration—
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a firm operates its own distribution system for delivering its outputs.
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2 Things a Focal Firm Can do...
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1) Focal firm is able to
create synergies: - cost reduction, revenue enhancement 2) Capture above normal economic returns |
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‘forms’ in which economic exchange can take place......
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Market: Transaction occurs outside the firm (Leprino buys milk from dairy farms)
Integrated: Transaction occurs inside the firm (Leprino buys dairy farms) |
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Economic exchange should be conducted in the form that......
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maximizes value for the focal firm
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Benefits of outsourcing
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flexibility (can outsource to whoever you want)
costs less Core Competency (can focus on your core firm objectives, while they are doing the mundane) |
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Disadvantages of Outsourcing
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Hurts reputation
Costs of Hiring/Firing Decentralized management (loose some control) Quality Concerns Culture Issues Transportation Costs |
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Benefits of being in a market:
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Powerful and unambiguous incentives to perform
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Costs of being in a market:
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Having to create the contract and monitor their compliance
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Benefits of Integration Hierarchy
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Clear lines of authority and communication. Ease of coordination.
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Costs of Integration Hierarchy
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Costs of coordinating the relationships
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Economies of Scope
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Increasing the product offering
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Economies of scope:
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result from spreading activities across multiple products or businesses
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Factor endowments:
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resources that firms can draw on in a given country to produce goods and services
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Potential Sources of Economies of Scope in International Markets
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To gain access to new customers for current products or services
To gain access to low-cost factors of production To develop new core competencies To leverage current core competencies in new ways To manage corporate risk |
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Alternative International Strategies (just list, basic features)
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Global- HIGH competition for low cost, LOW competition for local development
Transnational- HIGH competition for low cost, HIGH competition for local development International- LOW competition for low cost, LOW competition for local development Multidomestic- LOW competition for low cost, HIGH competition for local development |
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What are alternative entry modes?
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Export
License Franchise Joint Venture Wholly owned subsidiary Greenfield ventures: can be more expensive and take more time than acquiring existing facilities |
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What are alternative entry modes risk and returns?
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Wholly owned subsidiary- HIGH RISK, HIGH RETURN
Joint Venture- HIGH RISK, HIGH RETURN Export- LOW RISK, LOW RETURN License- LOW RISK, LOW RETURN Franchise- LOW RISK, HIGH RETURN |
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The ability to develop detailed local knowledge of nondomestic markets may require firms to have management teams with a great deal of ________ experience.
A) foreign B) technical C) corporate D) functional |
A) foreign
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Determinants of the Ability to Learn in International Markets
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The intent to learn
The transparency of business partners Receptivity to learning |
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The Local Responsiveness vs. International Integration Trade-off
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Local Responsiveness:
Non-standard product High variance in tastes & preferences Decentralized control Focused on satisfying tastes & preferences International Integration: Standardized product Little variance in tastes & preferences Centralized control Focused on efficiency |
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Organizing Options for Firms Pursuing International Strategies (just list 3 categories)
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Market Governance
Intermediate Market Governance Hierachical Governance |
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Market Governance (give example)
Intermediate Market Governance (give example) Hierarchical Governance (give example) |
Exporting
Licensing Non-Equity Alliances Equity Alliances Joint Ventures Mergers Acquisitions Wholly owned subsidiaries |
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What needs to be ‘controlled’ in a vertically integrated firm?
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Managers’ efforts to achieve the desired value chain economies
Cooperation and competition among and between functions The integration of new businesses into the existing business |
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Management Controls (just list)
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Budgets
Board Committees |
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Budgets
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separating strategic and operational budgets
Strategic: inputs and outputs Operational: outputs |
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Board Committees
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provide oversight and direction to managers
help ensure that strategic direction is maintained |
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Value chain economies:
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created by integrating a market transaction into the boundaries of the firm
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Integration =
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value chain of current products/business
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Diversification =
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different products/businesses
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Types of Corporate Diversification at a GENERAL level (just list)
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Product
Geographic Product-Market |
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5 Types of Corporate Diversification (just list)
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Limited Diversification
Related Diversification Unrelated Diversification |
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Limited Diversification
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Single Business: >95% of sales in single business
Dominant Business: 70% to 95% in single business |
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Related Diversification
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Related-Constrained: all business related on most dimensions
Related-Linked: some business related on some dimensions |
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Unrelated Diversification
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Businesses are not related
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BIC – disposable razors, cigarette lighters, and pens
Related what?? linked or constrained? |
Related constrained because products share plastic injection molding, retail distribution, and brand name.
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Newell Rubbermaid – cleaning products, home and family, home fashions, office products, tools & hardware
Related what?? linked or constrained? |
Related linked because all share common distribution channels, but sold under different brand names (Sharpie, Levolor) and do not share technology.
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Talk about corporate related and operations related
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High Corporate-High Operations: Dominant Businesses
High Corporate-Low Operations: Related-Linked Low Corporate-Low Operations: Unrelated Low-Corporate-High Operations: Related Constrained |
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Value-Creating Diversification - Reasons
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Economies of scope (related diversification)
Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (unrelated diversification) Efficient internal capital allocation Business restructuring |
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Value-Neutral Diversification-Reasons
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Antitrust regulation
Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources |
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Value-Reducing Diversification-Reasons
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Diversifying managerial employment risk
Increasing managerial compensation |
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Value of Diversification:
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Independent- equity holder could buy shares of each firm from diversification
Combined: Equity holder buys shares in one firm |
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Four types of Economies of Scope (just list):
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Operational
Financial Anti-Competitive Employee and Stakeholder incentives |
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Operational Activities (just list)
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Sharing Activities
Spreading Core Competencies |
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Sharing Activities
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Exploiting efficiencies of sharing business activities; cost born by many businesses
Example: Frito-Lay’s Trucking |
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Spreading Core Competencies
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Exploiting core competencies in other businesses
Competency must be strategically relevant Example: Orbitz & Honda engines |
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Financial Economies of Scope (just list)
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Internal Capital Market
Risk Reduction Tax Advantages |
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Internal Capital Market
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You can exchange money across organizations and product lines easier than if you were to have to work under separate umbrellas
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Internal Capital Market stipulations
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Works only if managers have better information
May protect proprietary information May suffer from escalating commitment However, external capital markets may have more discipline and avoid escalation of commitment |
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Risk Reduction
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Counter cyclical businesses may provide
Decreased overall risk, and thus more stable returns However, individual investors can usually do this more efficiently than a firm risk may also be spread |
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Tax Advantages
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Transfer pricing policy allows profits in one division to be offset by losses in another division
this is especially true internationally Can be used to ‘smooth’ income |
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Anticompetitive Economies of Scope (just list)
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Mutual Forbearance
Market Power |
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Mutual Forbearance
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a firm chooses not to compete aggressively in one market to avoid competition in another market
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Market Power
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Using profits from one business to compete in another business
Using buying power in one business to obtain advantage in another business |
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Employee Economies of Scope
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An economy of scope that accrues to managers at the expense of equity holders
• Managers of larger firms receive more compensation (larger scope/firm size = more compensation) • Therefore, managers have an incentive to acquire other firms and become ever larger • Even though the incentive is there, it is difficult to know if managerialism is the reason for an acquisition |
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Equity Holders and Economies of Scope
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Most economies of scope cannot be captured by equity holders
Risk reduction can be captured by equity holders; thus which type of diversification is most in line with shareholder interests? Managers should consider whether corporate diversification will generate economies of scope that equity holders can capture If a corporate diversification move is unlikely to generate valuable economies of scope, managers should avoid it |
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Imitibility of Economies of Scope-Less Costly
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Less-Costly:
- Employee Compensation - Tax Advantages - Risk Reduction - Shared Activities (may be costly, depending on relationships) |
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Imitibility of Economies of Scope-More Costly
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- Core Competencies
- Internal Capital Allocation - Multipoint competition - Exploiting Market Power |
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Rareness of Diversification
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Economies of scope isn't really rare BUT...
relationships that allow an economy of scope to be exploited may be rare an economy of scope may be rare because it is naturally or economically limited: a soft drink bottler buys the only source of spring water available a hotel in a resort town creates a large water park, there are only enough customers to support one park |
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Corporate Governance (CG)
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Set of mechanisms used to manage the relationships (and conflicting interests) among stakeholders, and to determine and control the strategic direction and performance of organizations (aligning strategic decisions with company values)
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3 Key Aspects of CG:
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Ownership concentration, Board of directors, Executive compensation
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Information Processing Requirements
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As compnaies become larger and more complex, information processing requireents exceed the capacitiy of an individual
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The Agency Relationship (explain 3 flows)
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Principles- Individual Shareholders, Institutional Shareholders
Monitors- Board of Directors and/or Institutional Shareholders Agents- Senior executives, corporate staff, divisional general managers, shared activity managers. |
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What is the Agency Theory?
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Goals of principals and agents may conflict
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Goals of principals and agents may conflict (list examples)
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Difficulty or expensive for the principal to verify what the agent is actually doing:
- Hard for board of directors to confirm that managers are actually acting in shareholders’ interests - Managers may opportunistically pursue their own interests Principal and agent may have different attitudes and preferences toward risk: - Avoid risking job loss - Principal wants high returns/high risk |
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Managerial Opportunism:
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Seeking self-interest with guile (i.e., cunning or deceit) - both an attitude and a set of behaviors
Boards of Directors have a fiduciary duty to shareholders to monitor management |
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Agency Problems: Diversification (just list)
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Increase in Firm Size (often related to coimpensation)
Firm portfolio diversification can reduce top executives’ employment risk (i.e., job loss, loss of compensation and loss of managerial reputation) Firm’s free cash flow Available cash flows |
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Types of Directors (list and explain)
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Insiders- CEO & Top-Level Managers
Related Outsiders- Individuals who aren't involved in day-to-day but have relationships with the firm Outsiders- Individuals independent of day-to-day operations and other relationships |
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Long Time Horizon Incentives:
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Stock Options and Grants
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Short Time Horizon Incentives:
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Cash Bonus
Salary |
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There are only three ways a company can grow and increase in scale, scope, or capacity:
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Internal development (organic growth)
Strategic alliance/joint venture Merger/Acquisition |
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Strategic alliances and M&As are ________________________
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modes of entry
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Pursuing an alliance or M&A _________ _______ necessarily result in vertical integration or diversification
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does not
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Strategic Alliance Definition
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Any cooperative effort between two or more independent organizations to develop,
manufacture, or sell products or services |
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Strategic Alliances Create economic value by (list all reasons)
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Accessing complementary resources and capabilities
Leveraging existing resources and capabilities Improving Current Operations - Exploiting economies of scale -A partner brings increased market share and/or manufacturing capacity Learning from partners - A partner brings technology and/or market knowledge (Toyota (plant operations) & GM (lean production)) Risk and cost sharing |
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An alliance is an organizational form of exchange that:
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Should produce a gain from trade due to some comparative or absolute advantage
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Nonequity alliance (give example)
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Alliance by contract
Licensing agreements, supply agreements, distribution agreements Example: Disney licensing ‘Toy Story’ characters to Random House for children’s books |
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Equity alliance
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One or both firms take an equity position in the other firm
Example: Chrysler and Mitsubishi (Eagle/Eclipse) |
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Joint venture
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New, independent firm is created by the partners
Example: Verizon Wireless (Verizon Communications and Vodafone) |
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Shaping the Competitive Environment
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Facilitating technology standards
Partners may agree on a standard and avoid a market battle for the standard (Blu-Ray (SA between Sony, Sharp, Apple, TDK & others/BDA) & HD-DVD) Facilitating tacit collusion Partners may communicate within an alliance partner in subtle, legal ways whereas the same communication between competitors outside an alliance would be illegal |
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Facilitating Entry and Exit
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Low-cost entry into new industries- Partner provides instant access and legitimacy
Low-cost exit from industries- partner is an informed buyer Managing uncertainty- alliances can be used as a way to explore a new oppurtunity without making a significant commitment Low-cost entry into new geographic markets |
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The sources of value creation within alliances __________
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may be rare.
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Sources of rarity within a strategic alliance
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• firms may form a combination of complementary resources within an alliance that is rare
the stock of such complementary resources may be limited so that first movers have a rare combination |
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Sources of costly to imitate within a strategic alliance
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the value creating combination depends on social complexity (trust), causal ambiguity,
and/or historical uniqueness |
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Incentives to Misappropriate Value (Cheat)
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An alliance is an exchange context in which:
Partner inputs may be difficult to monitor Actual value creation (performance) may be difficult to monitor Value appropriation (allocating the value) may be: Difficult to monitor Subject to power dynamics |
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Three Forms of Misappropriating Value
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Adverse Selection- does not have promised value
Moral Hazard- Providing inputs of lesser value than promised Holdup- exploiting the transaction-specific investment of partners |
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Formal Organization of Strategic Alliances (list and benefits)
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Explicit Contracts
& Legal Sanctions- creates mutual understanding, imposes costs for cheating, conflict resolution Joint Ventures- aligns interests of partners through ownership of independent firm, direct effect Equity Investments- aligns interests of partners through ownership in each other, indirect effect |
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Informal Organization of Strategic Alliances (list and benefits)
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Trust- may allow partners to exploit oppurtunities that wouldn't be possible with other mechanisms
Firm Reputations- the shadow of the future constrains cheating |
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International Strategic Alliances are attractive during ________ because:
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Expansion;
local market knowledge is usually critical governments may require a local partner international expansion may be: fraught with uncertainty high risk Expensive alliance investment may be more easily reversed than internal development or acquisition |
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Merger Definition
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two firms are combined on a relatively co-equal basis
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Acquisitions Definition
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one firm buys another firm
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Types of M&A's
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Vertical- suppliers or customers
Horizontal- competitors Product Extension- complementary products Market Extension- complementary markets Conglomerate (unrelated)- everything else |
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Unrelated M&A Activity:
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no expectation of value creation due to the lack of synergies b/w businesses
value creating might come from internal capital market value creating might come from exploitation of a conglomerate discount |
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Related M&A Activity:
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value creation would be expected due to synergies between divisions
economies of scale and scope: - transferring competencies - sharing infrastructure, etc |
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The ____ firm in an M&A captures the value created from the M&A
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target
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Why do companies acquiring in the M&A go through with it?
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Survival- avoid competitive disadvantage, avoid scale disadvantages
Free Cash Flow- creates cash, and returns normal return investment |
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Why do managers acquiring in the M&A go through with it?
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Agency Problems- maangers benefit from increases in size and diversification
Managerial Hubris- managers believe they can beat the odds Above normal profits- managers may see economies that the market can't see |
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Can an M&A strategy generate sustained
competitive advantage? |
Yes, if managers’ abilities meet VRIO criteria
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M&A activity requres responses on these issues:
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what form to use (typically m-form)
management controls and compensation policies are similar to those used in diversification strategies |
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Managers must decide on the level of integration:
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whether or not target firm remains autonomous or compeletely integrated, etc
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Corporate Cultural Differences when Implementing M&A's
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matter of:
combining elements of both cultures, replacing once culture with the other this may be very costly, and smooth integration might be a source of competitive advantage |
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Government policies when Implementing M&A's
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governments may constrain ownership by foreign firms
governments may restrict repatriation of profits government labor policy may limit a firm’s ability to apply management practices to target firm |
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Firms can
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Vertically integrate
Diversify Form strategic alliances Implement mergers and acquisitions *all across national borders |
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What are the advantages and disadvantages of international diversification? (just list)
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Globalization: trend toward a more integrated and interdependent world economy
Greater Returns on existing skills/competencies, less financial risk Disadvantages of international expansion: markets differ in ways that cannot be anticipated, lost flexibility and responsiveness to shifting customer tastes, increased coordination and control costs |
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Potential Sources of Economies of Scope in International Markets
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To gain access to new customers for current products or services
To gain access to low-cost factors of production To develop new core competencies To leverage current core competencies in new ways To manage corporate risk |
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Structural Options for Firms Pursuing International Strategies (just list)
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Decentralized federation
Coordinated federation Centralized hub Transnational structure |
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Decentralized federation
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Strategic and operational decision are delegated to divisions/country companies
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Coordinated federation
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Operational decisions are delegated to divisions/country companies; strategic decisions are retained at corporate headquarters
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Centralized hub
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Strategic and operational decisions are retained at corporate headquarters
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Transnational structure
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Strategic and operational decisions are delegated to those operational entities taht maximize responsiveness to local conditions and international integration.
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Explain each structure's importance on global integration compared to the importance on local resposiveness
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Decentralized federation-
HIGH local resposiveness, LOW global integration Coordinated federation- MEDIUM local responsivness, LOW global integration Centralized hub- LOW local responsiveness, HIGH global integration Transnational structure- HIGH IN BOTH |
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Factor Endowments (just list factors)
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Factor conditions: basic (e.g. natural resources) and advanced (e.g. communication, transportation infrastructure, skilled labor force)
Firm strategy, structure, rivalry (competitive environment in a particular location) Demand conditions (size, structure, needs of company’s home market) Related and supporting industries (e.g. suppliers, distributors, complements) |
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What are factor conditions?
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Labor, land, natural resources, physical capital, infrastructure, etc.
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Which factor conditions are basic?
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Low-skilled labor, natural resources
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Which factor conditions are advanced?
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Sophisticated infrastructure, educated and trained labor, focused research institutions, communication
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What is the difference between generalized & specialized?
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Used across industries or specific industries
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Demand conditions
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Demand conditions: focus on home base
What demand factors might help firms in a country grow/be innovative? Demand composition: sophisticated, demanding, anticipatory consumers demand more Demand size & growth: large, rapidly growing and early Internationalization: more synchronized with international demands, the more competitiveness |
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Related and supporting industries
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How can supplying industries help downstream industries?
Efficient, early, rapid access to cost-effective inputs Ongoing coordination and cooperation Innovation and upgrading Usually better to have a competitive domestic supplier than rely on well-qualified foreign supplier |
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Firm strategy, structure and rivalry
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How does the firm strategy, structure and rivalry impact firm competitiveness?
Different countries have different managerial systems, philosophies, etc Institutions can positively contribute to competitiveness Competition leads to allocative efficiency Domestic rivalry improves dynamic, technological efficiency |
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Porter Diamond Strengths
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Focuses on macro country environment
Can be used for location decisions for a variety of firm activities Fairly comprehensive (embedded industry analysis) |
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Porter Diamond Weaknesses
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But what if you are a small country- how can you explain success?
What if some clusters are just undesirable over time? (e.g. cotton in American South) |
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Alan Rugman’s Criticism
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Successful MNEs don’t need to operate solely from strong national diamonds
Can access other countries’ diamonds, especially in regional triads For example- in Canada |
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What is a cluster?
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Firms and activities that are interlinked and exist in the same local and regional setting (based on economic, social, institutional factors)
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Home base concepts and flexibility can lead to ____________ __________
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spatial clustering
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How do clusters form?
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Concentration in geographic areas
Communication possibly through highly social face-to-face interaction over a long period of time Increases in learning and innovation Trust increases too- facilitating contracting and exchange Common business culture reduces uncertainty |
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What’s in a cluster?
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Firms
Knowledge (embedded within) Institutional environment Ties: to customers, research institutions, educational institutions, and local government Milieu: rules and norms for business activity, social cohesion, business culture, government support |
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What are significant cross-cultural differences?
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Strategists must satisfy both external (customers, governments) and internal (employee) stakeholders
Countries differ significantly in culture and management approaches |
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Hofstede’s Cultural Dimensions
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Five dimensions: power distance, individualism/collectivism, masculinity/femininity, uncertainty avoidance, short/long-term orientation
Describe averages/tendencies, not individual characteristics Based on research on IBM managers in 1970s and updated over time |
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Power Distance
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Extent to which less powerful members of institutions and organizations expect and accept that power is distributed unequally
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Small power distance:
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more consultative, democratic; people relate to each other as equals (e.g. US, Canada, Denmark)
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Large power distance:
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more autocratic and paternalistic; subordinates acknowledge others’ power based on position in hierarchy (e.g. China, Turkey)
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Uncertainty Avoidance
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Extent to which members of a society attempt to cope with anxiety by minimizing uncertainty
High uncertainty avoidance: prefer rules (e.g. about religion, food) and structured circumstances; employees tend to remain longer with present employer (e.g. Japan, Meditteranean) |
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Individualism/Collectivism
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Extent to which people are expected to stand up for themselves and choose their own affiliations or to act predominantly as a member of a life-long group or organization
Highly individualistic: United States Highly collectivist: Latin America |
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Masculinity/ Femininity
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Value placed on traditionally male or female roles (as understood in most Western cultures)
Masculine: value competitiveness, assertiveness, ambition, accumulation of wealth and material possessions; e.g. Japan Feminine: value relationships, quality of life; e.g. Sweden |
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Long/short term orientation
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Describes society’s “time horizon” or importance attached to the future versus the past or the present
Long-term: value pragmatism, thrift, perseverance Short term: value normative statements, respect for tradition, reciprocation of gifts or favors |
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Liability of Foreignness
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Foreign companies have historically experienced a lower survival rate than local companies as they are at a competitive disadvantage
Costs of unfamiliarity Costs of discrimination But firms can adapt strategies to overcome the liability of foreignness |
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Friedman Perspective
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The "social responsibility" of business is to increase its profits
Unethical for corporation to engage in social responsibility because top managers are violating their fiduciary obligation Corporation should not be doing governmental functions Corporation is AMORAL Moral/ethical concerns of society are already factored into the market Napalm plant example |
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fiduciary obligation
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legal obligation for an agent to act in the best interest of the principles
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Mulligan Perspective
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says that businesses have the resources and abilities to be better proactive for change and society
profits should therefore be a secondary concern or businesses businesses have inherent morality |
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Corporate Social Responsibility- Three general manifestations of CSR (just list)
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Social consciousness
Sustainable business practices Social Entrepreneurship/social strategy |
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Social consciousness
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Being environmentally conscious/using recyclables or "green energy"
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Sustainable business practices
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Being a net-zero consumer of resources. I.e. cow crap recycling and decomposing and using methane gas to power farm and sell
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Social Entrepreneurship/social strategy
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Using new for-profit businesses to solve a social problem
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Key CSR takeaways
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Social consciousness and sustainable business practices tend to trade profits for ‘doing good’
Social entrepreneurship/strategy attempts to do both: make money and ‘do good’ Could sacrifice profits, but not necessarily Requires a market to serve Provide a market-driven product |
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Ethics Definition
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Ethics is all about the decision, set of principles that determines how you make the decision.
"Should i do this or should i not?" |
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Morality
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Personal code or societal code that tells you what is right or wrong
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Reasons for Unethical Behavior
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Greed
Distinctions between activities at work and activities at home Ignorance Survival (bottom-line thinking) It's not the companies job to be socially minded its churches, community-organizations, etc |
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Rationalizing Ethical Lapses: Justifications-
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Its not "really" illegal
Is in the individual's or the corporations best interest Will never be found out Saying the company "should be happy that I did this, bc it helped them" |
