Strategic Mgt Ch 6 - Ch 11

Front 1

Corporate Level Strategies

Back 1

1. Vertical Integration
2.Corporate Diversification
3. Strategic Alliances
4. Mergers & Acquisitions

Front 2

Vertical Integration

Back 2

- # of steps in the value chain that firm accomplishes within its boundaries.

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Backward Vertical Integration

Back 3

When a firm incorporates (brings it within the boundaries of the firm) an activity closer to the beginning of the value chain (i.e. raw materials).

Front 4

Forward Vertical Integration

Back 4

When a firm incorporates (brings it within the boundaries of the firm) an activity closer to the end of the value chain (i.e. customers)

Front 5

3 Theories of Vertical Integration

Back 5

Opportunism (Transaction Cost Economics)
Capabilities (Resource Based View)
Flexibility (Real Options Theory)

Front 6

When is opportunism most likely to occur?

Back 6

When the exchange involves transaction specific investments or asset specificity – higher contracting hazard

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Transaction Specific Investments

Back 7

any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.

Front 8

Opportunism

Back 8

occurs when a firm is unfairly exploited in an exchange

Front 9

Governance Forms

Back 9

The underlying governance structure or rules of the transaction

Front 10

2 common forms- governance

Back 10

(1) Markets – Individual Actors, High Incentives, (Adam Smith)

(2) Hierarchies (Firms) – Low Incentives, Centralized Monitoring & Control

Front 11

Various forms of Specificity

Back 11

Site
Physical
Human capital
Temporal
Dedicated Assets

Front 12

Site Specificity

Back 12

Oil Refinery and Oil Field/Pipeline.Once the pipeline is built the oil refinery can simply say it is going to pay half of the agreed upon price (opportunism). The salvage value of the pipeline (the alternative use) is not worth much compared to the agreed upon price due to site specificity.

Front 13

Physical Specificity

Back 13

Large number of products custom built to a buying firms unique requirements. Upon completion the buying firm can break the contract and say it will only pay 75% of agreed upon price (opportunism). Producer will still sell the asset specific product because it is of little value to other buyers.

Front 14

Temporal Specificity

Back 14

Farmer and PickersRipe orange crop must be picked immediately. Pickers realize the value of the oranges will drop substantially if not picked so they demand more $ to pick the crops. Farmer must pay because bad oranges are worth little.

Front 15

Capabilities & Vertical Integration

Back 15

Resource Based View

Identify VRIO R&Cs

Front 16

Flexibility & Vertical Integration

Back 16

Real Options Theory

Identify sources of uncertainty

Front 17

Flexibility

Back 17

Vertical Integration = Less Flexible
No Vertical Integration = More Flexible

Front 18

Organization Structure of vertical integrated company

Back 18

U-Form

Front 19

3 common forms of corporate diversification

Back 19

1.Product Diversification – operating in multiple industries

2. Geographic Market Diversification – operating in multiple geographic markets

3.Product-Market Diversification – operating in multiple industries and in multiple geographic markets

Front 20

3 types of diversification

Back 20

-Limited Diversification

-Related Diversification (e.g. Microsoft, Disney)

-Unrelated Diversification (e.g. GE)

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Single Business -limited

Back 21

> 95% of sales in a single business

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Dominant Business-limited

Back 22

70% to 95% in single business

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Related-Constrained- related

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<70% in a single business. All businesses related on most dimensions

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Related Linked- related

Back 24

<70% single business… some businesses related on some dimensions

Front 25

Economies of Scope

Back 25

Value of the products or services being sold increases as a function of the number of businesses in which it operates.

Front 26

Types of Economies of Scope

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Operational

Financial

Anticompetitive

Managerial

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Shared activities

Back 27

e.g. Texas Instruments R&D; P&G manufacturing

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Core competencies

Back 28

less tangible e.g. 3M adhesive coatings; J&J marketing medical products

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Financial

Back 29

Internal capital allocation

Risk reduction

Tax advantages

Front 30

Anticompetitive

Back 30

Multipoint competition

Deep pockets, cross-subsidization

Front 31

Managerial

Back 31

Maximizing management compensation

Front 32

Two criteria for pursuing diversification

Back 32

Economies of scope must exist

Must create value that outside equity holders cannot create on their own

Front 33

Imitability of Economies of Scope

Back 33

Internal development: start a new business under the corporate whole

Strategic alliance: find a partner with the desired complementary assets

Front 34

Less Costly to Imitate

Back 34

Managerial Compensation

Tax Advantages

Risk Reduction

Shared Activities

Codified / Tangible

Front 35

Costly to Imitate

Back 35

Core Competencies

Internal Capital Allocation

Multipoint Competition

Exploiting Market Power

Front 36

Internal Capital Market

Back 36

Premise – Insiders can allocate capital across divisions more efficiently than the external capital market

Front 37

Internal Capital Market limitations

Back 37

Level of diversification

Works only if managers have better information

May suffer from escalation of commitment

Front 38

Strategic Alliance

Back 38

Any cooperative effort between two or more independent organizations to develop, manufacture, or sell products or services

Front 39

3 Types of Strategic Alliances

Back 39

Non-Equity Alliances

Equity Alliances

Joint Ventures

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Non-Equity Alliances

Back 40

Contract to work together to supply, produce or distribute a firm’s goods or services (without equity sharing)
e.g. licensing, supply, distribution agreements (Disney & McDonalds)

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Equity Alliances

Back 41

Partnership where one (or both) partner supplements contracts with equity holdings in alliance partner
e.g. Pharmaceutical firms and small biotech

Front 42

Joint Ventures

Back 42

Independent firm is created by joining assets from two other firms where each contributes 50% of the total
e.g. CFM (GE and SNECMA) to produce jet engines

Front 43

Agency Relationship

Back 43

The delegation of decision making from one party (principle) to another (agent).

Front 44

Agency Problem

Back 44

Separation of ownership (stockholders = principals) and management (agent)

-Delegation of decision making

-Information asymmetry

Front 45

Common Challenges of agency

Back 45

Perquisites - on-the-job consumption, empire building (Jeffrey Skilling -Enron, Jack Welch - GE, Dennis Kozlowski - Tyco)

Risk preference

Front 46

3 General Categories of Opportunities- Strategic Alliance

Back 46

Improve Current Performance

Create Favorable Competitive Environments

Facilitate Entry (or Exit) New Markets

Front 47

Improve Performance

Back 47

(1) Exploit Economies of Scale – sets of firms cooperate to gain the cost advantages of scalee.g. Buying agreements

(2) Learn from Competitors – Learning Races e.g, GM and Toyota (NUMMI)

(3) Manage Risks and Share Costse.g. HBO and production companies, Titanic - 200 million – 20th Century Fox & Paramount

Front 48

Favorable Competitive Environment

Back 48

(1) Alliances are often observed in technology intensive industries characterized by…

Increasing Returns to Network Industries: The value of each product increases as the number of these products increases

Examples: fax machines, airports, FacebookPositive network externalities

Standard-setting (e.g. Mini CD, iOS vs. Windows, Electric cars vs. gas stations)

(2) Alliances are sometimes used to facilitate tacit collusion – Increased informal and tacit channels to transmit information about prices and costs.

Airline industry

Front 49

Entry & Exit

Back 49

(1)Entry into new markets (R&Cs not controlled by the firm) Product, segment, region

(2) Exit from markets
Assets true value only known to exiting firm

Resolves information asymmetry problem in spin-off e.g. Ciba-Geigy and Corning –Medical Diagnostic Supplies
– 75 million for first half of its assets, 150 million for second half after alliance

(3) Manage uncertainty Real-options or flexibility as in Vertical Integration

Front 50

Threats to Strategic Alliances

Back 50

Adverse Selection

Moral Hazard

Hold-up Hazard

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Adverse Selection

Back 51

-Promise of resources that partner does not control (strategic misrepresentation)

- Partner is unable to detect representation error due to measurement difficulties / information asymmetries

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Moral Hazard

Back 52

-Failure to provide promised resources

-Partner is unable to detect due to measurement difficulties / information asymmetries

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Hold-up Hazard

Back 53

Partner appropriates more value from exchange due to transaction specific investments.

Front 54

What is a key advantage of strategic alliances according to real options theory?

Back 54

Vertically integrate under conditions of low uncertainty

Avoid vertical integration under conditions of high uncertainty

Front 55

Methods for Limiting Hazards/Cheating

Back 55

-Contracts (e.g. performance targets, dispute resolution, selling shares)

-Equity Investments – Cross holdings aid in aligning incentives

-Firm Reputation

- Joint Ventures

-Trust

Front 56

The Big Challenge of Strategic Alliances

Back 56

Maximizing gains from exchange while minimizing the threat of cheating

Front 57

Merger

Back 57

Combination of equal firms (e.g. Daimler & Chrysler)

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Acquisition

Back 58

Larger firm acquires a smaller firm (e.g. Adobe & Omniture, Amazon & Zappos)

Front 59

Parent stocks are usually retired and new stock issued

Often friendly

One of the parents usually emerges as the dominant management

Partner firm identities are combined in theory

Back 59

Mergers

Front 60

Can be a controlling share, a majority or all of the target firm’s stock

Can be friendly or hostile

Target firm identity is relinquished

Back 60

Acquisitions

Front 61

3 FTC classifications of M&As

Back 61

Vertical = Suppliers or Customers (e.g. apple & Siri, eBay & Skype)

Horizontal = Competitors(e.g. Adidas & Reebok, Mobil & Exxon))

Product Extension = Complementary Products(e.g. Broadcom & Mobilink)

Front 62

Why are M&As so prevalent?

Back 62

Survival – (competitive parity)

Free Cash Flow

Agency Problems

Managerial Hubris

Potential for Profits (on average does not indicate always)

Expert Advice

Front 63

Bidding Firm - Rules

Back 63

Identify (VR) Economies of Scope

Keep Information away from Bidders (i.e. Asymmetrical Information with Bidders)

Keep Information away from Targets (i.e. Asymmetrical Information with Targets)

Avoid Bidding Wars

Close the Deal Quickly

Operate in “thinly traded” Acquisition Markets

Front 64

Target Firm - Rules

Back 64

Seek information from bidders

Invite other bidders to join the competition

Delay but do not stop acquisition

Front 65

M&As – Organization

Back 65

Structure, Control, and Compensation
-M-Form structure is most frequently used
-Management controls and compensation policies are similar to those of diversification strategies

Front 66

M&As – Common Problems

Back 66

-Inadequate Evaluation of Target
-Inability to Create Synergy
-Inability to Integrate Cultural, Operational, Strategic Differences
- Large Amount of Debt
- Overdiversification

Front 67

International Strategies - Value

Back 67

To gain access to new customers for 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

Front 68

Challenges- International Strategies

Back 68

-Physical & Technical – Standards, Dimensions, Requirements

-Cultural – Tastes (Flavors, Appearance), Interpretation & Language (Marketing), Familiarity

-Inadequate or Distinct (e.g. Different Rules / Norms) Distribution Channels

-Tariffs, Quotas, Policies – Trade Barriers

- Insufficient Wealth

- Hard Currency

Front 69

Low Cost Access to Factor Inputs

Back 69

Raw Materials – Early Colonial Exploration (e.g. Minerals, Crops)

Labor (e.g. Mexico, India, China)

Technology

Front 70

Absorptive Capacity

Back 70

Organizations ability to learn

Front 71

Factors increasing a firms ability to learn from international exposure

Back 71

The intent to learn
The transparency of business partners (Alliances)
Receptivity to learning

Front 72

Local Responsiveness

Back 72

Non-standard product

High variance in tastes & preferences

Decentralized control

Focused on satisfying tastes & preferences

e.g. Nestlé, Phillips

Front 73

International Integration

Back 73

Standardized product

Little variance in tastes & preferences

Centralized control

Focused on efficiency

Front 74

Transnational Strategy

Back 74

Local responsiveness and international Integration. Integrated Network of distributed independent resources and capabilities.

Front 75

Managing Financial Risks (e.g. currency fluctuations, inflation)

Back 75

Currency hedging

Geographic distribution

Front 76

Managing Political Risks (e.g. political stability, rule of law)

Back 76

Find a local partner

Political neutrality

Negotiate with governments

Front 77

Organizing options for International Strategies

Back 77

Front 78

Organization structure for international strategies

Back 78

Front 79

Identify the differences between decentralized federation, coordinated federation, transnational structure,& centralized hub

Back 79