BUSI 412 Review

If an investment of €277 million yields cost savings of €1 million a year, how many years would it take to break even on that investment, based only on the cost savings? Ignore cost of capital.

277

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. Merrimack does not offer paddles or other goods for sale through its site.* Which of the following are true? (Select all that apply) Sanborn and Merrimack are creating value through consolidation synergies Sanborn is creating value through connection synergies by using its site to sell additional products produced by others Merrimack is leveraging demand-side synergies to create and capture value Combined ownership is required to create any additional synergies

A and B Consolidation 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. Merrimack is not leveraging demand-side synergies (many customers buying canoes would likely prefer to buy paddles in the same transaction, rather than looking elsewhere for those). Combined ownership is not required to create any additional synergies, though it could be helpful for some (they were moving in this direction last time I spoke with them about it).

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? Chasebook can increase the number of users posting and watching videos Operating in multiple countries will protect Chasebook against declines in the number of car chases in the US Operating in multiple countries will increase the bargaining power of the car chase social network industry, relative to advertisers It will be cheaper to launch versions of the site in other English-speaking countries, compared to non-English speaking countries

A. 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 (it might slightly increase firm-level leverage with advertisers, but that is also unlikely to drive the decision). Language might affect where they choose to expand to, but not whether they choose to expand. Adding volume is the most likely, of these, to justify expansion internationally.

Slamazon is an online retailer. Based on recent acquisitions of security and camera companies, it is offering delivery services where delivery people enter customer homes to deliver package. Slamazon is considering the introduction of a new service, WagTheDog, where dog walkers use technology to enter customer homes, where they feed and walk the dogs who live there. Based on this description, which of the following is true? The cost of errors of commission are high (pet health and safety) - this requires more synergies to justify acceptance in the portfolio The cost of errors of omission are high (others may enter this industry first) - this requires fewer synergies to justify acceptance in the portfolio By offering both of these services, Slamazon will achieve customization synergies By offering both of these services, Slamazon will achieve consolidation synergies

A. The cost of errors of commission are high here, because people generally like their pets. Many things can go wrong when a stranger interacts with a pet, which could cause many problems for the company (reputational or legal). The cost of errors of omission are low, because there's nothing in this description to indicate that failing to enter into this business would create substantial business risk. There is nothing in this description describing how either service would be modified to work better with the other (customization), or how any costs would be cut or limited by operating these businesses together (consolidation).

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? This is an example of a previous exam question. 89% answered the question correctly. The discrimination index was moderately high, meaning that students who did well on this tended to do well generally. Administrative challenges - the regulation of air travel differs by country Cultural differences - preferences for leisure travel differ by country Geographic distance - time zones may make it difficult to manage operations spread over multiple countries Economic differences - the number of people who can afford air travel differs by country

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. There are multiple types of travelers (including business), and there is not a lot of cultural content to transportation (though it might affect what kind of food to serve). Economic differences would matter more if the airline was considering adding routes within other countries (entering domestic markets that are foreign to the firm), but is less relevant for adding major cities, mainly because many of the fliers will still be coming from the US (resolving most of the demand uncertainty), but also because the economic distance to major cities will be lower (there are plenty of rich people in Toronto and Mexico City).

What factors would increase the attractiveness of organic growth for firms seeking [access to] new resources? Resource is easy to copy There is no external availability of the resource Resource is easy to catch up [to the required level] Resource can easily be created quickly enough to catch up to competition

All of the above

Initech, an enterprise software company specializing in human resource software, currently selling their offerings in 42 countries. Which strategy is LEAST likely to create value through international scope? This is an example of a previous exam question. 12% answered this question correctly. The discrimination index was just shy of "good" (+0.24, and +0.25 is considered good - I consider that moderate, and greater than +0.45 to be high), which means those who did well in general tended to get this right, but it also confused a lot of people who had studied. I've increased the prominence of a key word, which I'm hoping helps. This combines thinking about organizational design with other global corporate strategy frameworks. Allowing developers in each country to create their own user interface based on local preferences Organizing sales at the regional level, based on shared languages Locating internal back-office functions in low cost countries Partnering with local software resellers to sell Initech's 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 design a user interface based on local preferences is an example of over- adaptation (duplicating too much of the value chain - in this case the design of the GUI - 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 internal back-office functions in low cost countries in 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. 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.

A spin-off a business unit is likely to be advantageous if... It is an "altruist" in the portfolio It is a taker in the portfolio There is a better parent The firm needs cash to fund better growth opportunities

Altruist. A taker is above the threshold of acceptance, getting more value from being in the portfolio than the cost to the portfolio, so that the synergy test is passed. One-sided synergies increase transaction costs relative to ownership costs, so the synergy is likely to be best managed within a firm. If there is a better parent, a sell-off is likely to be more appropriate. Similarly, if the firm needs cash, selling is likely to make more sense (as spin-offs are not typically cash generating transactions). An altruist is most likely to be spun out (unless there is a buyer who values it more), because it is below the threshold of acceptance. It provides benefit to the rest of the portfolio, but the cost to the unit exceeds that benefit, creating negative value/synergy.

Bluestar Airlines is a North Carolina based airline, offering domestic flights across the United States. Bluestar also owns a catering service, Redstar Catering, that provides in-flight meals for passenger flights. Which of the following are true? (Select all that apply). Bluestar can create intra-temporal economies of scope by sharing leased facilities with Redstar Similar resource, low modification (consolidation). Bluestar can create inter-temporal economies of scope by sharing human resource and purchasing functions with Redstar The relatedness between Bluestar and Redstar increases resource fungibility intra-temporally The relatedness between Bluestar and Redstar increases resource fungibility inter-temporally Minimizing interdependence between Bluestar and Redstar will increase the firm's flexibility to divest Redstar in the future Maximizing modularity between Bluestar and Redstar will increase the firm's to create synergies through joint operation

Bluestar can create intra-temporal economies of scope by sharing leased facilities with Redstar Similar resource, low modification (consolidation). The relatedness between Bluestar and Redstar increases resource fungibility intra-temporally Correct Answer The relatedness between Bluestar and Redstar increases resource fungibility inter-temporally Correct Answer Minimizing interdependence between Bluestar and Redstar will increase the firm's flexibility to divest Redstar in the future

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)? Consolidation synergies Customization synergies Combination synergies Connection synergies Vertical integration

Customization synergies The software is being customized so that they work better together (co-specialization / engineered complementarity). Connection synergies 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).

Cracker Bucket is a restaurant that specializes in comfort food for travelers. It is considering expanding into a neighboring country with a single restaurant, to test the belief that residents there will appreciate the opportunity to enjoy food from their neighboring country. In what ways is Cracker Bucket trying to create value with this expansion? (Select all that apply) Adding volume Decreasing Cost Differentiating Improving industry attractiveness Normalizing risk Generating knowledge

Differentiating and generating knowledge This move is trying to create value through differentiation (based on country/cuisine of origin) and generating knowledge (testing a theory). It is not about adding volume (though that might come later, depending on the knowledge obtained - that is the one that confused the most people). It is also not doing anything to improve industry attractiveness, normalize risk, or decrease cost.

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.

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).

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 deciding whether to divest a legacy business unit, firms should defer to financial markets or new managers (from outside the company) to provide an unbiased recommendation.

False. 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.

Joint ventures are often created when firms are seeking to limit the transfer of tacit knowledge, so that it remains fully under their control.

False. JVs are created to facilitate the transfer of tacit knowledge, while maintaining an ownership/control stake in it (not fully under their control).

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 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. See pg. 55 of The Services Shift (one of the assigned readings). Jay Barney 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).

To maximize value creation, most companies should pursue three strategies: adaptation, aggregation, and arbitrage.

False. The reading describes this as rare in practice, and that most attempts are likely to fail. Where it might work is domains where there is little tension between adaptation and aggregation.

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

False. This is from the slides for Session 1. 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 make it easier to create some synergies, but it isn't required.

With two-sided synergies, governance costs are likely to be minimized if the same parent owns both business units.

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) Test Buy should consider partnering with or buying Leak Squad (a third-party offering technical support and installation services). Time compression diseconomies would help Test Buy 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

Test Buy should consider partnering with or buying Leak Squad (a third-party offering technical support and installation services). If the resource is externally available, that path should at least be considered. Correct! The difficulty in patenting technical support and installation services would help Test Buy develop this service internally The lack of IP protection makes it easier to imitate rivals who might already have similar services. Correct! If Test Buy's employees have a reputation for helping customers with technical buying decisions, it will help Test Buy develop this service internally This is a relevant resource, and may also represent organizational fit.

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) -There is an opportunity cost in maintaining focus on plumbing services -There is an opportunity cost to using the Mario Brothers brand for solar installation 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 -There is an opportunity cost to leverage the relationships that Mario Brothers has with existing customers

There is an opportunity cost in maintaining focus on plumbing services 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 expertise that Mario Brothers has in dealing with residential customers is fungible with respect to solar installation 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. The relationships that Mario Brothers has with existing customers is scale free 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.

From a strategic management perspective, divestitures are not simply a corporate governance solution, but are part of how managers maximize value through corporate strategy.

True

True or False? According to the assigned reading, the goal of corporate strategy is NOT to individually maximize the value (competitive advantage) of each business in the corporation. The goal is to achieve corporate advantage - when the total value of all the businesses [in the firm] is greater than the sum of the value of each business if owned separately. Value might be created through the joint operation of businesses through joint operation (synergies).

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) is costly, but 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 the country that is physically closer.

True

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.

Internal and external resource acquisition activities are complementary when productivity of each is greater when the other is also used.

True. Internal and external resource acquisition activities are complementary when the value of doing both is more than the sum of the value of each.

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

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

A company might create a demand-side synergy by combining 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 their existing resource base through internal development, and explore for 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.

True or False? One motivation for the Alphabet restructuring at Google was to separate the core (composed of businesses with high interdependence) from other (often newer or smaller) businesses, to increase the autonomy of those other [less-interdependent] businesses.

True. This is true. This action increases modularity. Modularity is characterized by separating businesses into "modules" that exhibit higher interdependence of the choices/operations within the module, and lower interdependence of the choices/operations between the modules. Helfat and Eisenhardt argue that this increases the potential for inter-temporal economies of scope, but at the cost of reducing opportunities for intra-temporal economies of scope (joint-operation/synergies).

Uncertainty can be managed by... Using internal organization Increasing idiosyncratic investment Creating intra-temporal economies of scope Horizontal diversification

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.