BUSI 412 Final Review

Bluestar Airlines is a North Carolina based airline, offering domestic flights across the United States. It is considering route expansion, to offer flights to major cities in Canada and Mexico. Which concern should factor most heavily in their decision?

Administrative challenges - the regulation of air travel differs by country. (The airline industry is highly regulated (even more for international air travel, though you don't need to know that to answer this question). Awareness of regulatory requirements will be the major concern (from the CAGE perspective) in this decision. Time zones are not likely to be a major concern (they largely overlap for countries in North America, plus it's an issue that is already being managed domestically). Cultural differences (particularly for the reason provided) are also not a major concern. Preferences may vary, but food/drink options are easy to change, and there is not a lot of cultural content to transportation itself. Economic differences might matter more in general if the airline was considering adding routes within other countries (entering domestic markets that are foreign to the firm), but the fact that airport employees are paid differently is not a major concern - airports everywhere are staffed by local employees.)

What is the subject of the poll?

Adorableness

Bluestar Airlines is a North Carolina-based airline, offering domestic flights across the United States. Bluestar also owns a freight service, Redstar Freight, that transports packages in unused luggage space. Which of the following are true? (Select all that apply).

Bluestar can create intra-temporal economies of scope by sharing human resource and purchasing functions with Redstar. The relatedness between Bluestar and Redstar increases resource fungibility intra-temporally. (Similar resources, with modification (consolidation synergies). Relatedness increases fungibility intra- and inter-temporally.)

Chasebook is a US-based social network where people post videos of car chases they've participated in. Which motivation is most likely to drive their decision about whether to expand their service beyond the US (ADDING value framework)?

Chasebook can increase the number of users posting and watching videos with little incremental cost. (Diversifying to reduce idiosyncratic risk is unlikely to create value, because shareholders can diversify on their own at lower cost. Operating in multiple countries is unlikely to improve the attractiveness of the social network industry (and, if anything, it would increase multi-market contact). Language might affect where they choose to expand to (CAGE), but not whether they choose to expand (ADDING). Adding volume with few incremental costs (economies of scale) is the most likely, of these, to justify expansion internationally. Update: I noted in class that my in-depth explanation of multimarket contact would not be on the test, but I just realized that even the basic explanation of it is not in the currently assigned reading (I went with a shorter summary reading of ADDING this year).)

Chasebook is a US-based social network where people post videos of car chases they've participated in. It is considering the creation of a second site, To Be Kittermined, featuring videos of kittens chasing each other. How is Chasebook most likely to create value with these two business units?

Combination synergies - leveraging ownership of multiple sites to gain bargaining power over advertisers. Customer-specific synergies - by tracking customers across multiple sites, greater data/insights can be generated at a lower cost (which might increasing ad revenue potential). Using a scale-free resource (the technical capabilities to run a social network) to expand into a related business

Initech, an enterprise software company specializing in human resource software, is considering the acquisition of Nukem, a maker of payroll software. In planning the integration, Initech expects to redesign the payroll software so that customer data can be easily transferred between the payroll and human resource software. Initech also plans to offer incentives to their existing sales team, to encourage them to sell Nukem's payroll software to their existing customers. In what ways is Initech using joint operation to create value (select all that apply)? This is an example of a previous exam question. 30% of students correctly identified all true statements and no false statements. Each true statement was selected by about 70% of students (on average). Each false statement was selected by about 29% of students (on average).

Customization synergies and Connection synergies. (The software is being customized so that they work better together (co-specialization / engineered complementarity). Initech is cross-selling their software (using their existing sales team to sell an additional product to their customers). This lowers customer acquisition cost (and may also reduce customer search costs).)

COOK IN is a US-based restaurant that specializes in burgers, barbeque, and shakes for drivers who enjoy waiting in long lines for cheap but delicious food. It is considering expanding into Canada, to deescalate competition with the many rivals and imitators in their home market, and where customers might pay a premium for Southeastern US-style foods. In what ways is Cracker Bucket using global scope to create value with this expansion? (Select all that apply)

Differentiating. Improving industry attractiveness. (This move is trying to create value through differentiation (based on country/region of origin) and improving industry attractiveness (expanding where there is less competition). It is not about using volume strategically (e.g., no mention of creating economies of scale with shared production, or using greater scope to increase bargaining power). Nothing is mentioned about how they optimize risk or use scope to decrease costs.)

Which of the following would support relational advantage?

Experience with a partner allowing you to understand what they need to succeed. Underinvesting in their areas of strength, and overinvesting in their areas of weakness.

Four Seasons Total Landscaping is a small business that offers landscaping services. In response to events surrounding the 2020 election, it expanded into event hosting (in their parking lot) and selling t-shirts featuring the Four Seasons Total Landscaping logo. Producing these t-shirts requires 1) bringing together dissimilar resources (the Four Seasons Total Landscaping brand and screen-printing technology), 2) with low resource modification, and 3) external companies exist with t-shirt production capabilities. Based only on the information in this question, Four Seasons Total Landscaping should acquire an existing t-shirt producer to create this synergy.

False

A customer-specific synergy exists whenever a customer buys two products from the same company.

False (A customer buying two products from the same company doesn't automatically create customer-specific synergy. A customer-specific synergy exists when costs are lower or willingness-to-pay is higher for customers who buy two things from the same company.)

True or False? The creation of synergies through joint operation requires joint ownership (corporate advantage).

False (Corporate advantage (more valuable if owned together) comes from joint ownership (though joint ownership doesn't mean that there is corporate advantage). Synergies come from joint operation, which could occur between businesses within a corporation, or between independent businesses (alliances, joint ventures, etc.). Joint ownership might lower the governance costs to create some synergies, but it isn't required for synergies generally.)

Corporate advantage exists when a combination of businesses or business units are LESS valuable when owned together than if separately owned.

False (Corporate advantage exists when a combination of businesses or business units are MORE valuable when owned together than if separately owned)

A firm generally creates corporate advantage by diversifying into new businesses to reduce the risk of business failure if the core business suffers unexpected losses (unsystematic risk). This is an example of a previous exam question (58% of students answered this correctly). This question had a high discrimination index (students who did well on this tended to do well on other questions).

False (Corporate advantage might be created through the reduction in unsystematic risk in countries with under-developed capital markets, but this is not generally how corporate advantage is created (in countries with or without developed capital markets). There may be some reduction in systematic risk (e.g., if some businesses are cyclical and others are counter-cyclical), but most corporate advantage comes from using joint-operation (synergies) to increase revenues or decrease costs. While synergies are the source of most corporate advantage, it is not necessarily true that most synergies require joint ownership (though some do - these synergies make up the majority of corporate advantage).)

When faced with customer-specific willingness-to-pay synergies, the firm should consider a mixed bundling strategy (over a pure product strategy) so that the firm realizes greater value from more customers buying both products.

False (Customers will self-select into combinations to realize customer-specific willingness-to-pay synergies. The firm does not need to further incentivize this with a discount (nor does it realize lower costs, so it has no reason to try to change customer behavior based on this type of demand synergy).)

Internal and external resource acquisition activities are complementary when each is equally effective regardless of whether the other is also done.

False (Internal and external resource acquisition activities are complementary when the value of doing both is more than the sum of the value of each. This happens because the productivity of each is increased in the presence of the other.)

An alliance is likely preferable to a merger or acquisition when synergies are asymmetric (one-sided).

False (One-sided synergies lead to higher transaction costs than ownership costs, and are usually best managed within a firm rather than between firms.)

Relational advantage exists whenever firms in related industries work together (joint operation)

False (Relational advantage comes from relation-specific assets, knowledge-sharing routines, complementary resources or capabilities, and/or effective governance (each with sub-processes facilitating them). Not every relationship between firms will be characterized by these advantages.)

True or False? When providing an offering (product or service), holding willingness-to-pay constant, transaction costs should always be minimized.

False (The important consideration is the total cost - for a given output, there is production cost plus transaction costs. The total cost is what matters - not just minimizing one of the costs, regardless of the effect on the other. Though the "transaction costs economics" highlights the type of costs they're focused on (governance costs, and specifically what increases transaction costs relative to ownership costs), the goal is to minimize the sum of all costs, including governance and production costs, to create a given amount of utility (based on willingness-to-pay). For more information, see pg. 55 of The Services Shift (one of the optional readings). Jay Barney (in the other reading) says that transaction cost economics only thinks about minimizing transaction costs (not actually true), but he also believes in minimizing a larger cost function (the cost of developing/acquiring/accessing the capabilities plus the cost of transacting).)

With two-sided synergies, governance costs are likely to be minimized if the same parent owns both business units. (This is an example of a previous exam question. 34% of students answered it correctly.)

False (Transaction costs increase more quickly than ownership costs as one-sided synergies or the need for resource modification increases. With two-sided synergies (and no other information about resource modification), transaction costs are likely to be lower than ownership costs, so the same parent owning both business units is NOT likely to minimize governance costs.)

True or false? To create value as part of a portfolio of businesses in a firm (corporate advantage), a business must both provide benefit to the rest of the portfolio and receive benefits from belonging to the portfolio.

False (While it is great to have fits in a portfolio (providing benefit to the rest of the portfolio and receiving benefits from belonging to the portfolio), both givers and takers can also be part of a strong portfolio, increasing corporate advantage. This is because the benefit to the portfolio might exceed the cost to the business (givers) or the benefit from belonging to the portfolio might exceed the cost to the rest of the portfolio (takers).)

Test Buy is a consumer electronics store, faced with the challenge of customers trying out products in-store and then buying them online. To fight this challenge, Test Buy would like to offer customers technical support and installation services. Which of the following are true? (Select all that apply)

If the synergies are best created internally, Test Buy should consider buying Leak Squad (a third-party offering technical support and installation services). Time compression diseconomies could make it more difficult for Test Buy to develop this service internally. The difficulty in patenting technical support and installation services would help Test Buy develop this service internally. If Test Buy's employees have a reputation for helping customers with technical buying decisions, it will help Test Buy develop this service internally.

Which of the following are true (Select all that apply).

More synergies are realized with greater levels of post-merger integration. Disruption increases with greater levels of post-merger integration. Disruption from post-merger integration may be greater if integrating quickly. (Net gains do not always increase with greater levels of post-merger integration. There is some optimal level. There may also be time-compression diseconomies, where slowing integration creates the synergy value later but with less disruption. Synergies do increase with integration, as does disruption, which is why finding the right balance to maximize the difference between the two is important.)

Rossum Corporation is an enterprise software company specializing in human resource software that scans the brains of employees to better match them to jobs. It currently sells its offerings in 42 countries. Which strategies are likely to create value through international scope?

Organizing international sales divisions at the regional level, based on shared languages. Locating some software update teams in low cost countries. Partnering with local software resellers to sell their software. Building modularity into the software, so that some parts can be adapted to local needs without affecting others. (Allowing developers in each country to rewrite the software based on local preferences is an example of over- adaptation (duplicating too much of the value chain in a way that is unlikely to increase WTP enough to justify the added cost. Organizing sales at the regional level achieves a balance of aggregation (more economies of scale than replicating in every country) with adaptation (having expertise in the languages of the region where sales are happening). Locating some functions in low-cost countries is a classic example of labor/cost arbitrage. Partnering with local software resellers is another way to achieve local face and have sales done by those intimately familiar with their market but without the cost of developing and managing all of that internally. This is an example of externalization to reduce the burden of adaptation. Building modularity into software has value beyond international scope, but the relevant point here is that it minimizes the cost of adaptation by allowing adaptation of only the pieces that need to be adapted (perhaps based on local regulations), without affecting the rest of the code.)

Sanborn Canoe Company is a maker and seller of high-end made-to-order canoe paddles. Merrimack Canoe Company is a maker and seller of high-end made-to-order canoes. Though not part of the same company, these firms cooperate in a number of ways. They share employees for managerial and financial functions, splitting the cost. They share a facility, with Merrimack using space that was previously unused in the Sanborn shop. In addition, Sanborn offers a range of goods produced by third parties through its site, that it believes will appeal to their customers, including Merrimack canoes decorated with the unique colors/design of the Sanborn brand (and when shipped, the paddles can be shipped inside the canoe). Which of the following are true? (Select all that apply)

Sanborn is creating value through connection synergies by using its site to sell additional products produced by others. Sanborn is leveraging demand-side synergies to create and capture value. Combined ownership could reduce the governance cost of creating some of these synergies. (Consolidation (not combination) synergies are realized by better-utilizing space and some employees. Connecting the unmodified resources of others (products) with Sanborn's existing sales portal is an example of connection synergies. Sanborn is leveraging demand-side synergies (many customers would likely prefer to buy paddles and canoes in the same transaction, rather than looking elsewhere for those, and by shipping the products together there are customer-specific cost savings). Because there are asymmetric synergies and resource modification (consolidation synergies, and making canoes customized to the branding of the other), governance costs could probably be lowered through joint ownership (the plan is to eventually do this).)

Slamazon is an online retailer. It has been investing heavily in drone-based delivery services, where drones fly packages to people's homes. Based on this description, which of the following is most likely true? Reminder: an error of commission is about very bad things happening because you did something (something bad could happen because you did X), and an error of omission is about very bad things happening because you didn't do something (because you didn't do X, something bad happened).

Slamazon believes the cost of errors of omission are high (others may gain a drone advantage) - this requires fewer synergies to justify acceptance in the portfolio. (The cost of errors of commission are probably high here, because drone crashes could be dangerous, and are likely if you're delivering millions of packages a week, but Slamazon doesn't seem to be too worried about that, because it's moving forward. With a high risk of error here, you need more synergies to justify the risk. Slamazon believes that the cost of errors of omission are high, because even if the synergies aren't obviously huge, they see a threat if the technology becomes critical and they are left behind. There is nothing in this description describing how this delivery mode would increase the bargaining power generally (combination), or how any overlapping costs would be cut or limited by delivering in this way (consolidation).)

Four Seasons Total Landscaping is a small business that offers landscaping services. In response to events surrounding the 2020 election, it expanded into event hosting (in their parking lot) and selling t-shirts featuring the Four Seasons Total Landscaping logo. Which of the following are true, based only on the information in this question? Select all that apply. There is at least one correct answer, and it is possible that all answers are correct.

The Four Seasons Total Landscaping brand is scale-free. Four Seasons Total Landscaping could limit the synergies between its core business and these new offerings to maintain flexibility in case demand for these new offerings does not last. There is an opportunity cost in using the Four Seasons Total Landscaping parking lot.

Where can the required, recommended and optional readings (not cases) for this course be found?

The library's electronic course reserves

Selling-off a business unit is likely to be advantageous if... (Select all that apply)

There is a better parent. The firm needs to free up non-scale-free resources and generate cash to focus on better growth opportunities. (A giver/taker is above the threshold of acceptance, giving/getting more value from being in the portfolio than the cost to the unit/portfolio so that the synergy test is passed. Also, one-sided synergies increase transaction costs relative to ownership costs, so the synergy is also likely to be best managed within a firm. If there is a better parent, a sell-off is appropriate (even if there are valuable synergies that are best created within the firm). Similarly, if the firm needs cash, selling is likely to make more sense (as spin-offs are not typically cash-generating transactions). The focus is also relevant here - there are opportunity costs for many resources, and a divestiture can free up those resources (like managerial attention) to focus on better opportunities.)

Mario Brothers is a family owned firm, with two employees, offering licensed plumbing services to residential consumers. They are considering an expansion of their service offerings, into installing solar panels for residential consumers. Which of the following are true? (Select all that apply) This is an example of a previous exam question. 58% of students selected all the correct statements and none of the incorrect statements. Each true statement was selected by about 89% of students (on average). Each incorrect statement was selected by about 17% of students (on average).

There is an opportunity cost in maintaining focus on plumbing services. The expertise that Mario Brothers has in dealing with residential customers is fungible with respect to solar installation. The relationships that Mario Brothers has with existing customers is scale free. (The opportunity cost in maintaining focus on plumbing services is that the firm cannot use their fungible non-scale-free resources for solar installation business. The ability to deal with customers of a particular type is fungible. The same expertise can be applied to that type of customer regardless of the product being sold. Customer relationships are scale free. Having a plumbing relationship with a customer does not mean that the relationship is "used up" and can't also be applied for the purpose of selling other services.)

What factors would increase the attractiveness of inorganic growth (a merger or acquisition) for firms seeking [access to] new resources for internal synergies?

There is external availability of the resource.

Governance costs for synergies with high resource modification, like customization synergies, are usually lower between business units in a single firm, than between two independent businesses.

True

Rossum Corporation is an enterprise software company specializing in human resource software that scans the brains of employees to better match them to jobs. It is considering expanding into services where employees' brains can be re-written so that they can better perform certain tasks. Because the risks of errors of commission are high, the expected value of synergies required to justify this portfolio addition would need to be higher to justify this risk.

True

True or False? When a synergy requires that one business make a large transaction-specific investment, but not the other, there is a threat of opportunism. Hierarchical governance (having both businesses in the same portfolio) can be used to limit the threat of opportunism.

True

When a firm is considering two countries for international expansion, holding all else equal, it is more likely to succeed in entering a country that has more similarities in terms of ethnicity and religion.

True

Corporate advantage generally requires the creation of synergies.

True (Corporate advantage, to the extent it exists, is almost certain to come from synergies created through the joint operation of business units. Though corporate advantage through joint ownership requires synergies, synergies do not require joint ownership. Many synergies can either be created by business units working together within a single firm, or by separate firms working together, perhaps through an alliance or joint venture. Corporate advantage, in the context of synergies, exists when the same level of synergy can be obtained with lower governance costs through joint ownership.

When deciding whether to divest a legacy business unit, firms should NOT defer to financial markets or new managers (from outside the company) to provide an unbiased recommendation.

True (Divesting legacy business units can be risky because there is often interdependence with the rest of the firm that are difficult for outsiders to identify and appreciate. This knowledge tends to be tacit, making it difficult to communicate to markets or new executives with limited experience in the company. Outside perspectives should not be ignored, but neither should they be [automatically] deferred to in situations where they are most likely to make mistakes.)

True or False? Inter-temporal economies of scope involve the reallocation of resources between business units over time (e.g., a resource is used for business A, and then the firm exits business A and uses those same resources in a new business B), so that the cost is lower than if old business A (earlier, exits) and new business B (later, new) were independent of each other.

True (Inter-temporal economies of scope do involve the reallocation of resources between business units over time (e.g., a resource is used for business A, and then the corporation exits business A and uses those same resources in a new business B), so that the cost is lower than if old business A (earlier, exits) and new business B (later, new) were independent of each other. This is distinct from intra-temporal economies of scope, where extra value is created through contemporaneous joint-operation of two businesses.)

While adaptation, aggregation, and arbitrage strategies each have value, a firm that attempts to rely heavily on all three at the same time is likely to struggle with achieving success on all of them.

True (The reading describes compies doing this successfully as rare in practice, and that most attempts are likely to fail. It might work in domains where there is little tension between adaptation and aggregation.)

A company might create a demand-side synergy by modifying two business units to allow customers to accomplish two tasks simultaneously (minimizing their effort, and increasing their willingness-to-pay).

True (This is the first of two possible consumer benefits to inter-industry diversification mentioned in the paper by Ye, Priem, and Alshwer. They describe this as simultaneous utility.)

To minimize the conflict between exploratory and exploitative activities, a firm can exploit its existing resource base through acquisitions, and explore new resources and opportunities through joint ventures.

True (This is true, but it does not need to be this specific combination. Exploitation can be done with any of the modes (internal development, alliance / joint venture, or merger / acquisition), and exploration with any other mode not being used for exploitation.)

Uncertainty can be managed by (This is an example of a previous exam question. 38% of students got this question completely correct.)

Using internal organization (Uncertainty can be managed by increasing internal organization, so that changes can be made without holdup. It can also be managed by increasing standardization, so that if needs change you can go back to the market. Inter-temporal economies of scope also provide flexibility, which can be useful for adaptation (when uncertainty is resolved). Idiosyncratic investment without control would increase risk. Horizontal diversification and intra-temporal economies of scope are not directly related to managing uncertainty.)