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79 Cards in this Set
- Front
- Back
Corporate Level Strategies
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1. Vertical Integration
2.Corporate Diversification 3. Strategic Alliances 4. Mergers & Acquisitions |
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Vertical Integration
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- # of steps in the value chain that firm accomplishes within its boundaries.
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Backward Vertical Integration
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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).
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Forward Vertical Integration
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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)
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3 Theories of Vertical Integration
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Opportunism (Transaction Cost Economics)
Capabilities (Resource Based View) Flexibility (Real Options Theory) |
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When is opportunism most likely to occur?
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When the exchange involves transaction specific investments or asset specificity – higher contracting hazard
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Transaction Specific Investments
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any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.
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Opportunism
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occurs when a firm is unfairly exploited in an exchange
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Governance Forms
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The underlying governance structure or rules of the transaction
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2 common forms- governance
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(1) Markets – Individual Actors, High Incentives, (Adam Smith)
(2) Hierarchies (Firms) – Low Incentives, Centralized Monitoring & Control |
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Various forms of Specificity
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Site
Physical Human capital Temporal Dedicated Assets |
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Site Specificity
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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.
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Physical Specificity
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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.
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Temporal Specificity
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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.
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Capabilities & Vertical Integration
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Resource Based View Identify VRIO R&Cs |
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Flexibility & Vertical Integration
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Real Options Theory
Identify sources of uncertainty |
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Flexibility
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Vertical Integration = Less Flexible
No Vertical Integration = More Flexible |
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Organization Structure of vertical integrated company |
U-Form
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3 common forms of corporate diversification
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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 |
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3 types of diversification |
-Limited Diversification
-Related Diversification (e.g. Microsoft, Disney) -Unrelated Diversification (e.g. GE) |
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Single Business -limited
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> 95% of sales in a single business
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Dominant Business-limited
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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
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<70% single business… some businesses related on some dimensions
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Economies of Scope
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Value of the products or services being sold increases as a function of the number of businesses in which it operates.
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Types of Economies of Scope
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Operational
Financial Anticompetitive Managerial |
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Shared activities
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e.g. Texas Instruments R&D; P&G manufacturing
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Core competencies
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less tangible e.g. 3M adhesive coatings; J&J marketing medical products
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Financial
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Internal capital allocation
Risk reduction Tax advantages |
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Anticompetitive
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Multipoint competition
Deep pockets, cross-subsidization |
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Managerial
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Maximizing management compensation
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Two criteria for pursuing diversification
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Economies of scope must exist
Must create value that outside equity holders cannot create on their own |
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Imitability of Economies of Scope
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Internal development: start a new business under the corporate whole
Strategic alliance: find a partner with the desired complementary assets |
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Less Costly to Imitate
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Managerial Compensation
Tax Advantages Risk Reduction Shared Activities Codified / Tangible |
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Costly to Imitate
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Core Competencies
Internal Capital Allocation Multipoint Competition Exploiting Market Power |
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Internal Capital Market
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Premise – Insiders can allocate capital across divisions more efficiently than the external capital market
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Internal Capital Market limitations
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Level of diversification
Works only if managers have better information May suffer from escalation of commitment |
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Strategic Alliance
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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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3 Types of Strategic Alliances
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Non-Equity Alliances
Equity Alliances Joint Ventures |
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Non-Equity Alliances
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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
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Partnership where one (or both) partner supplements contracts with equity holdings in alliance partner
e.g. Pharmaceutical firms and small biotech |
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Joint Ventures
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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 |
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Agency Relationship
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The delegation of decision making from one party (principle) to another (agent).
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Agency Problem
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Separation of ownership (stockholders = principals) and management (agent)
-Delegation of decision making -Information asymmetry |
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Common Challenges of agency
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Perquisites - on-the-job consumption, empire building (Jeffrey Skilling -Enron, Jack Welch - GE, Dennis Kozlowski - Tyco)
Risk preference |
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3 General Categories of Opportunities- Strategic Alliance
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Improve Current Performance
Create Favorable Competitive Environments Facilitate Entry (or Exit) New Markets |
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Improve Performance
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(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 |
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Favorable Competitive Environment
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(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 |
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Entry & Exit
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(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 |
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Threats to Strategic Alliances
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Adverse Selection
Moral Hazard Hold-up Hazard |
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Adverse Selection
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-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
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-Failure to provide promised resources
-Partner is unable to detect due to measurement difficulties / information asymmetries |
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Hold-up Hazard
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Partner appropriates more value from exchange due to transaction specific investments.
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What is a key advantage of strategic alliances according to real options theory?
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Vertically integrate under conditions of low uncertainty
Avoid vertical integration under conditions of high uncertainty |
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Methods for Limiting Hazards/Cheating
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-Contracts (e.g. performance targets, dispute resolution, selling shares)
-Equity Investments – Cross holdings aid in aligning incentives -Firm Reputation - Joint Ventures -Trust |
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The Big Challenge of Strategic Alliances
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Maximizing gains from exchange while minimizing the threat of cheating
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Merger
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Combination of equal firms (e.g. Daimler & Chrysler)
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Acquisition
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Larger firm acquires a smaller firm (e.g. Adobe & Omniture, Amazon & Zappos)
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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 |
Mergers
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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 |
Acquisitions
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3 FTC classifications of M&As
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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) |
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Why are M&As so prevalent?
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Survival – (competitive parity)
Free Cash Flow Agency Problems Managerial Hubris Potential for Profits (on average does not indicate always) Expert Advice |
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Bidding Firm - Rules
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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 |
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Target Firm - Rules
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Seek information from bidders
Invite other bidders to join the competition Delay but do not stop acquisition |
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M&As – Organization
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Structure, Control, and Compensation
-M-Form structure is most frequently used -Management controls and compensation policies are similar to those of diversification strategies |
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M&As – Common Problems
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-Inadequate Evaluation of Target
-Inability to Create Synergy -Inability to Integrate Cultural, Operational, Strategic Differences - Large Amount of Debt - Overdiversification |
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International Strategies - Value
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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 |
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Challenges- International Strategies
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-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 |
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Low Cost Access to Factor Inputs
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Raw Materials – Early Colonial Exploration (e.g. Minerals, Crops)
Labor (e.g. Mexico, India, China) Technology |
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Absorptive Capacity
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Organizations ability to learn
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Factors increasing a firms ability to learn from international exposure
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The intent to learn
The transparency of business partners (Alliances) Receptivity to learning |
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Local Responsiveness
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Non-standard product
High variance in tastes & preferences Decentralized control Focused on satisfying tastes & preferences e.g. Nestlé, Phillips |
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International Integration
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Standardized product
Little variance in tastes & preferences Centralized control Focused on efficiency |
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Transnational Strategy
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Local responsiveness and international Integration. Integrated Network of distributed independent resources and capabilities.
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Managing Financial Risks (e.g. currency fluctuations, inflation)
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Currency hedging
Geographic distribution |
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Managing Political Risks (e.g. political stability, rule of law)
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Find a local partner
Political neutrality Negotiate with governments |
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Organizing options for International Strategies
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Organization structure for international strategies |
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Identify the differences between decentralized federation, coordinated federation, transnational structure,& centralized hub
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