MGT 405 Exam 2

Diversified company

A company that makes and sells products in two or more different or distinct industries

Dominant design

Common set of features or design characteristics.

Related diversification

Corporate-level strategy is based on the goal of establishing a business unit in a new industry related to a company's existing business units.

Agency theory

Deals with business relationship problems when decision-making authority is delegated from one person to another.

Diversification

Entering new industries, distinct from a company's core or original industry, to make new kinds of products for customers in new markets.

Relational capital

Interpersonal relationships between the firms' managers.

Methods of Control

Personal Control Bureaucratic Control Output Controls Market Control

ROOTS OF UNETHICAL BEHAVIOR

Personal ethics - Generally accepted principles of right and wrong governing the conduct of individuals. Failing to ask oneself if a decision is ethical Some organizational cultures deemphasize business ethics Pressure to meet unrealistic performance goals Unethical leadership

Economies of scope

Synergies that arise when one or more of a diversified company's business units are able to lower costs or increase differentiation.

Platform ecosystem

System of mutually dependent entities mediated by a stable core.

Transferring competencies

Taking a distinctive competency developed by a business unit in one industry and implanting it in a business unit operating in another industry.

3 FACTORS THAT ACCELERATE CUSTOMER DEMAND

Technical standards Format wars Dominant design

Organizational structure

The combination of the location of decision-making responsibilities, the formal division of the organization into subunits, and the establishment of integrating mechanisms to coordinate the activities of the subunits.

Joint ventures

Two or more companies agree to pool their resources to create new business. Allows a company to share the risks and costs associated with establishing a business unit

Vertical disintegration

When a company decides to exit industries either forward or backward in the industry value chain to its core industry to increase profitability.

If a firm's leaders are using a functional structure but feel it is becoming too complex as the company experiences growth, the leaders can turn to:

a multidivisional structure.

corruption

can arise when managers pay bribes to gain access to lucrative business contracts

International strategy - Occurs when:

companies establish manufacturing and marketing functions in each major country they do business in. local customization of product offering and marketing strategy is limited in scope.

Technological paradigm shift occur in an industry when:

established technology is approaching or is at its natural limit. new disruptive technology has entered the marketplace and is invading the main market.

flat hierarchy

few layers and wide spans of control

For a company concentrating on final assembly, adding retail and distribution into its value chain will require:

forward integration.

Alternative standards

get locked out as consumers are unwilling to bear the switching costs.

Tall Hierarchy

has many layers and narrow spans of control

Aggressive marketing strategies such as substantial upfront marketing and point-of-sales promotion techniques:

helps a company jump-start demand.

Goal: Bundling products offers customers:

lower prices. convenience of a single supplier

International strategy - Most appropriate when:

product serves universal needs. companies are not confronted with cost pressures.

vertical differentiation

the location of decision-making responsibilities within a structure referring to centralization or decentralization, and also the number of layers in a hierarchy, referring the whether to organizational structure is tall or flat.

Ownership of retail outlets may be necessary if:

the required standards of after-sales service for complex products are to be maintained.

Why are standards so important in high-tech industries?

• Technical standards guarantees compatibility in business • It can reduce confusions in customers which can arise due to quality perception. • It stimulates the production quantity which can reduce costs. • It enables the organization to reduce the supply of complementary products so as to attract customers.

In order to achieve a competitive advantage in certain countries and certain industries using factor endowments, a company needs to have what?

A combination of basic and advanced factors of production

EXPANDING THE MARKET: LEVERAGING PRODUCTS

A company can sell goods, developed at home, internationally to increase its growth rate. Multinational company - One that does business in two or more national markets. Success depends on the distinctive competencies that underlie its production and marketing process.

Parallel sourcing policy

A company enters into long -term contracts with suppliers for components to prevent incidents of opportunism

A matrix structure would be the most appropriate for which of the following type of firm

A company that is dependent on rapid mobilization of resources for competitive success

When would a company choose a matrix structure? What are the problems associated with managing this type of structure? How might these problems be mitigated?

A company will choose a matrix structure to cater to large organizations or multiple projects. It's helpful where employees are deployed in multi-functions in regards to the project requirements. The problems associated with matrix structure are: 1. Employees have to report to multiple bosses which can create confusion and chaos. Both functional managers and product managers may have internal conflicts. 2. In the case of a scarce resource, the internal competition within the firm may be counterproductive. 3. Higher workload makes it difficult for the employees. They have to perform their work as well as project work. 4. The structure is expensive to maintain. 5. The non-clarity of job roles may be a confusion in a matrix organization. To overcome problems associated with coordinating cross functional teams one should use the Product Team Structure. In this structure, employees are grouped according to the product line and employees have to focus on a particular range of products. Therefore, clarity is given and everyone has a role and place within the organization/ team. Also, this structure allows for a clear hierarchy as well, this in turn helps to not only clarify roles but also gives people a structure of support to refer to when something goes wrong. Having a clear structure of who to go to or how to report an issue is a major benefit for any organization, this allows for the employees to be more efficient and more trusting of the organization as a whole. This will then result in a positive work environment that understands the company's goals and mission.

When would a company decide to change from a functional to a multidivisional structure?

A company would decide to change from a functional to a multidivisional structure when it grows too large or becomes too complex to effectively manage under a functional structure. Some common reasons include diversification, geographical expansion, increased complexity, greater autonomy, and improved accountability. For example, when Costco first opened in Washington, the organizational structure was functional, however, as the company continued to progress it slowly turned into a multidivisional structure. Fast forward to the current day and the organizational structure is now a matrix! In conclusion, a company may choose to adopt a multidivisional structure when it needs to balance the benefits of increased autonomy and flexibility with the need for centralized control and coordination.

Unrelated diversification

A corporate-level strategy that uses general organizational competencies to increase the performance of all the company's business units. Companies pursuing this are called conglomerates.

Internal capital market

A corporate-level strategy whereby the firm's headquarters assesses the performance of business units and allocates money across them. Cash generated by profitable but poor investments is cross-subsidized to promising units that need cash

determines where in its hierarchy the decision-making power is concentrated.

A firm's vertical differentiation

Knowledge network

A network for transmitting information within an organization that is based not on formal organization structure but on informal contacts between managers within an enterprise and on distributed-information systems

When will an industry tend to become dominated by platform ecosystems? What will determine which platform ecosystems are more successful in an industry than others?

A platform ecosystem is a system composed of the core products and complement products that are compatible with each other. An industry is said to be dominated by platform ecosystems when there are products which have modules or components that can complement the core product, there is a producer of the product that does not exercise a tight control over the product, there are companies willing to create valuable components or accessories for the core product and lastly, there is a target market that values the use of complement products. Various companies are transitioning to creating platform ecosystems as a strategy to create competitive advantage for their core products. But not all platform ecosystems perform equally as other platform ecosystems perform better than the rest. The qualities of a successful platform ecosystem include a variety of complement products, ease of use, and compatibility.

Killer applications

Applications or uses of a new technology or product so compelling that customers adopt them in droves, killing competing formats.

Autonomous subunit

A subunit that has all the resources and decision-making power required to run the operation on a day-to-day basis

What factors make it most likely that (a)acquisitions or (b) internal new venturing will be the preferred method to enter a new industry?

A) Acquisitions - Acquisitions tends to make most sense when barriers to enty are high and cost internal venturing are high. Another case acquisition is adapting the company when company is pursuing unrelated diversification because acquisition provide instant access to an experienced management team that reducing the learning cost. B) Internal new venturing makes the sense in opposite circumstances and when barriers to enty low and when the industry to be entered is closely related to the company existing operations.

Organizational design skills

Ability of the managers to create a structure, culture, and control systems that motivate and coordinate employees to perform at a high level

Horizontal integration

Acquiring or merging with industry competitors to achieve the competitive advantages that arise from a large size and scope of operations.

FIRST MOVER

Firm that pioneers a particular product category or feature by being first to offer it to the market. - Creation of a revolutionary product results in a monopoly position.

Controls in a diversified firm with high integration

Firms use bureaucratic, output, incentive, and market controls. Additional control problems Firms need a control mechanism that induced divisions to cooperate for mutual gain. Firms must deal with performance ambiguities of tightly-coupled divisions that share resources and depend on cooperation for better performance. Cultural controls create values and norms across divisions.

Localization strategy

Focuses on increasing profitability by customizing a company's goods to provide a favorable match to preferences in different national markets.

What is different about high-tech industries?

Follow some technical standards while performing its business activities. Technical standards are a set of specifications that an industry or an organization follows in production or business activities. It can achieve competitive advantage to the organization with in its industry. High-tech industries cope up with the most advanced technologies available in the market. This enables it to increase its productivity and the quality of its products. Through this, it can also provide better service to its customer. Unlike substandard industries or organizations, it focuses on creating brand equity in the market by becoming highly savvy to the new technologies.

What is the relationship among organizational structure, control systems, incentives, and culture? Give some examples of when and under what conditions a mismatch among these components might arise.

a mismatch among organizational structure, control systems, incentives, and culture can lead to issues that can harm an organization's performance. Therefore, it is essential to ensure that these components are aligned and work together effectively to achieve organizational objectives.

Pressures are intense:

in industries producing commodity-type products. for products that serve universal needs. when major competitors are based in low-cost locations, there is excess capacity, and consumers face low switching costs.

When decision-making responsibilities are decentralized, benefits include all of the following:

increased motivation and accountability. lower bureaucratic costs from flattened hierarchy. reduced information overload. flexibility in decision making. EXCEPT: easier coordination of functions.

Organizational design skills Major factors:

influences a company's entrepreneurial capabilities. determines a company's ability to create functional competencies. determines a diversified company's ability to profit from its multibusiness model.

The growth of distributed computer and telecommunications information systems such as E-mail, video-conferencing, intranets, and web-based search engines have made which of the following informal integrating mechanism possible?

Knowledge networks

INFORMAL INTEGRATINGMECHANISMS

Knowledge networks that are supported by an organizational culture that values teamwork and cross-unit cooperation.

a major determinant of a new venture's success

Large-scale entry into the target industry designed to build market share

Which of the following strategies is represented by McDonald's experimenting with their traditional menu, as well as changing the layout and theme of restaurants in foreign locations?

Leveraging the competencies of global subsidiaries

Licensing

Licensees purchase the rights to produce a company's product in their country for a negotiated fee.

Strategic alliances

Long-term agreements between two or more companies to jointly develop new products or processes. Substitute for vertical integration Avoids bureaucratic costs

Which of the following risks of outsourcing can be reduced by ensuring that there is appropriate communication between the outsourcing specialist and the company?

Loss of information and forfeited learning opportunities

3 BENEFITS OF OUTSOURCING

Lower cost structure Enhanced differentiation Focus on the core business

BENEFITS OF HORIZONTAL INTEGRATION

Lowers the cost structure Increases product differentiation Leverages a competitive advantage Reduces rivalry within the industry Increases bargaining power over suppliers and buyers

Complementary assets

Required to exploit a new innovation and gain a competitive advantage. Help build brand loyalty and achieve rapid market penetration.

SUPERIOR STRATEGIC MANAGEMENTCAPABILITIES

Required to manage different business units to perform better than they would if they were independent companies Ability to diagnose the underlying source of the problems of a poorly performing business unit

Noblesse oblige

Responsibility of people of high birth to give something back to the society that made their success possible.

Stock options

Right to purchase company stock at a predetermined price at some point in the future.

Takeover constraint

Risk of being acquired by another company

Holdup

Risk that a company will become too dependent upon the specialist provider of an outsourced activity

Opportunism

Seeking one's own self-interest, through guile.

Technical standards

Set of technical specifications that producers adhere to when making the product or component.

Output controls

Setting goals for units or individuals and monitoring performance against those goals

CHALLENGES FOR PRINCIPALS

Shape the agents' behavior to act in accordance with the goals set. Reduce the information asymmetry. Develop mechanisms for removing agents who do not act in accordance with the goals.

Technological paradigm shift

Shifts in new technologies that: revolutionize the structure of the industry. dramatically alter the nature of competition. require companies to adopt new strategies for survival.

COSTS IN HIGH-TECHNOLOGY INDUSTRIES

Similar cost economics. Very high fixed costs and very low marginal costs. Law of diminishing returns - Marginal costs rise as a company tries to expand output. Profitability increases when a company shifts from a cost structure with increasing marginal costs to higher fixed costs with lower marginal costs.

Transnational strategy

Simultaneously: achieves low costs. differentiates the product offering across geographic markets. fosters a flow of skills between global subsidiaries.

Commonality

Skill or competency that, when shared by two or more business units, allows them to operate more effectively and create more value for customers

Franchising

Specialized form of licensing in which the franchiser expects the franchisee to abide by rules governing how it does business.

Organizational culture

Specific collections of values and norms shared by people and groups in an organization. Values - Ideas or shared assumptions about what a group believes to be good, right, and desirable. Norms - Social rules and guidelines that prescribe the appropriate behavior in particular situations. Culture can exert a profound influence on: the way people behave within an organization. decisions that are made. things that the organization pays attention to. the firm's strategy and performance.

Internal stakeholders

Stockholders and employees,including executive officers, other managers, and boardmembers.

Decentralization

Structure in which the decision- making authority is distributed to lower-level managers or other employees

Centralization

Structure in which the decision-making authority is concentrated at a high level in the management hierarchy

Basis of multibusiness model

Takes advantage of strong commonalities that can be modified to increase the competitive advantage. Allows a company to use any general organizational competency it possesses

Leveraging competencies

Taking a distinctive competency developed by a business unit in one industry and using it to create a new business unit in a different industry

What are the competitive implications of this?

Technical standards increase the competitive advantage of an organization as a whole. An organization can gain the trust of the customers by being standardized or high-tech. This helps them in gaining more customer base which is competitive advantage. If a company introduces a standardized product, the cost that would be incurred with it will be very high. Once the product is successful, the production of copies of the product will incur low costs. This enables mass production which helps them to reduce the cost as per consumer demand. One can gain competitive advantage through mass production.

Acquisition

The company uses its capital resources to purchase another company.

Adam's boss tells him that their company is pursuing the strategy of horizontal integration. Which of the following is true of this scenario?

The company will buy or merge with one of its rivals.

Incentives

The devices used to encourage desired employee behavior

Is it ethical for a firm faced with a labor shortage to employ illegal immigrants to meet its needs?

The ethical implications of deploying illegal immigrants if there is a shortage of labor would be as follows: • Employing illegal immigrants at work would not be lawful. The firm indulged in such activity would have to face consequences for breaching the law. • The sustainability of the firm would be affected by such a business decision. If such a practice is discovered, severe legal action will be taken against the organization, impacting its survival and growth. • Such anticompetitive behavior, i.e., using appropriate means to tackle competition, would be considered unethical. • Immigration by unfair means is an activity practiced by illegal immigrants because they do not possess a strong sense of personal ethics. Hiring individuals with such low personal ethics would not be the right decision. • The decision would be unethical as it would not fall under accepted standards, could not be made public, and would not be approved by managers in other businesses Thus, it would not be ethically right to deploy immigrants to work in case of the unavailability of labor.

Diversification strategy "better off" test:

The firm must be more valuable than it was before the diversification, and that value must not be fully capitalized by the cost of the diversification move.

Under what conditions is it ethically defensible to outsource production to companies in the developing world that have much lower labor costs when such actions involve laying off long- term employees in the firm's home country?

The following arguments can be given in support of outsourcing: - When a product or service can be manufactured more cheaply in some other country, it is a matter of common sense to import those products and services than to produce them in the domestic country. It increases the profitability of outsourcing companies. It increases the wealth of shareholders. - Unemployment is a very big issue in developing countries. Outsourcing creates job opportunities in such countries. It transforms people there into professionals. Providing jobs improves their quality of life and it is an example of corporate social responsibility. - Sometimes outsourcing provides access to skill sets and resources that companies may not find in their domestic countries.

Horizontal differentiation

The formal division of the organization into subunits.

Organization processes

The manner in which decisions are made and work is performed within the organization

Controls

The metrics used to measure the performance of subunits and make judgments about how well managers are running them.

Discuss how the need for control over foreign operations varies with the strategy and distinctive competencies of a company. What are the implications of this relationship for the choice of entry mode?

The need for control over foreign operations strategies and a company's distinctive competencies has direct relationship with its mode of entry to that particular market. The entry modes like joint ventures and franchising can increase the risk of losing control over the new innovation or technology. Therefore, entry mode of a company should be properly structured before its implementation. Apart from joint venture and franchising, the company may also adopt wholly owned subsidiary mode for entry into foreign markets. Licensing should be done for newly invented products or technologies, in order to reduce their imitation that is one of the major risks involved in global business.

Organization culture

The norms and value systems that are shared among the employees of an organization

Market control

The regulation of the behavior of individuals and units within an enterprise by setting up an internal market for valuable resources such as capital

Ways to improve the performance of the acquired company

Top managers of the acquired company are replaced with a more aggressive team. New top-management team sells off expensive assets. New management team works to devise new strategies to improve the performance. Introduce companywide pay-for-performance bonus system. Establish "stretch" goals for employees at all levels

Ways in which profitability can be increased THROUGH DIVERSIFICATION

Transfer competencies between business units in different industries. Leverage competencies to create business units in new industries. Share resources between business units to realize synergies or economies of scope. Utilize general organizational competencies that increase the performance.

Internal new venture

Transferring resources and creating a new business unit in a new industry to innovate new kinds of products Used by companies that are: technology-based and pursue related diversification. venturing to enter a newly emerging industry Pitfalls Market entry on too small a scale Poor commercialization of the new-venture product Poor corporate management of new-venture division

complicate the process of realizing location economies

Transportation costs and trade barriers

SparklingLeaves is one of the major suppliers of automobile tools to StanMotors, a leading automobile company. Many of the tools are customized to meet the specific needs of StanMotors and hence have little other value. In return, StanMotors has agreed to make SparklingLeaves its sole supplier of automobile equipment for a period of 15 years. This scenario illustrates:

a credible commitment.

Competitors' capability depends on their:

research and development skills (ability to reverse-engineer and develop a comparable product). access to complementary assets (marketing, sales, manufacturing capabilities).

UNETHICAL BEHAVIOR ARISING FROM AGENCY PROBLEMS

self-dealing information manipulation anticorruption behavior opportunistic exploitation substandard working conditions environmental degradation corruption

A company can realize cost savings from economies of scale by:

spreading the fixed costs and setting up production facilities over its global sales volume. serving a global market, a company utilizes its production facilities more intensively. bargaining down the cost of key inputs with suppliers. increasing its sales volume more rapidly.

Long-term agreements between two or more companies to jointly develop new products or processes that benefit all companies that are part of the agreement are known as:

strategic alliances.

Component suppliers benefit because

their business and profitability grow as the companies they supply grow

Tall Org Limitations

• Accidentally distorted information • Deliberately distorted information for personal agendas • Increased expenses • Difficult to change

Incentives Control

Incentives - The devices used to encourage and reward appropriate employee behavior. When incentives are tied to team performance, as is often the case, they have the added benefit of encouraging cooperation between team members and fostering a degree of peer control. Peer control - The pressure that employees exert on others within their team or work group to perform up to or in excess of the expectations of the organization

Positive feedback loops

Increase in demand for a technology that triggers an increase in demand for products that support it.

Ways to grow profits

Increase the margins earned on products and services. Participate in a market that is growing. Take market share from competitors. Develop new markets through innovation, geographic expansion, or diversification.

Globalization of production and markets

Increased as companies took advantage of lower barriers to international trade and investment National markets started merging into one global marketplace

Competitive bidding strategy

Independent component suppliers compete to be chosen to supply a particular component.

The internal research department of Libra Inc. has found that the packaging of health supplements produced by the company is faulty and resulting in poor quality. Despite this knowledge, the company has not improved the packaging and instead has advertised to its customers that this packaging is foolproof. Which of the following concepts is illustrated in this scenario?

Information manipulation

Restructuring Reasons

Investors feel these companies no longer have multibusiness models. Complexity of the financial statements of highly diversified enterprises disguises the performance of individual business units. Responds to declining financial performance brought about by over-diversification. Diminishes the advantages of vertical integration or diversification from innovations in strategic management

When is a company likely to choose (a) related diversification and (b) unrelated diversification?

(a) Related Diversification: Company will choose to indulge in related diversification when there will be meaningful commonalities between the businesses. Commonalities can be because of similar product line. For example: when a textile firm expand or add its own firm with another textile firm. These diversifications support the companies to generate synergy and economies of scale. (b)Unrelated Diversification: These diversifications are favored when the company wants to expand or add an unrelated or new product line. There will be less or no commonalities between the companies. For example: When a Furniture company diversify its business through adding television manufacturing company. The company can generate synergy by entering into new market through unrelated or different product lines.

PRESSURES FOR LOCAL RESPONSIVENESS

- To respond to them, a firm must differentiate its products and marketing strategy from country to country. - Raises a company's cost structure.

3 Types of General organizational competencies

-Entrepreneurial capabilities -Organizational design capabilities -Strategic capabilities

BENEFITS OF STANDARDS

-Guarantees compatibility between products and their complements. -Reduces confusion in the minds of consumers. -Reduces production costs. -Reduces risks associated with supplying complementary products. -Leads to low-cost and differentiation advantages for individual companies. -Helps raise the level of industry profitability.

PROBLEMS WITH VERTICAL INTEGRATION

-Increasing cost structure -Disadvantages that arise when technology is changing fast - Disadvantages that arise when demand is unpredictable

Agency Problems

-Information Asymmetry -Methods for monitoring agents -On the job consumption -Empire building

ESTABLISHMENT OF STANDARDS

-Standards emerge in an industry when the benefits of establishing are recognized. -Technical standards are set by cooperation among businesses, through the medium of an industry association. -When the government sets standards they fall into the public domain.

More valuable than modular when:

-complements are nonroutine purchases. -platform and complement integration increases performance. -important components require subsidization

TRANSFERRING COMPETENCIES Increases profitability when they

-lower the cost structure of one or more of a diversified company's business units. -enable one or more of its business units to better differentiate their products.

STAGES IN THE VALUE-ADDED CHAIN

1. Raw materials 2. Component parts manufacturing 3. Final assembly 4. Retail 5. Customers

You are working for a small company that has developed an electric scooter that is lower cost, lighter, and has longer battery range than most existing electric scooters on the market. What strategies might your company pursue to try to increase your company's success?

1. This company must look for the advertisement of its electric scooter so that more customer can come to know about the brand and its products. 2. Must have contracts with the local distributors so that their products show up in the local showrooms. 3. Supply chain management must be consolidated so that the electric scooter can easily be transferred from one location to another.

3 dimensions of organizational structure

1. vertical differentiation 2. horizontal differentiation 3. integrating mechanisms

Which of the following types of business law describes the accepted principles of right and wrong when dealing with competitive behavior?

Antitrust laws

Public domain

Any company can freely incorporate the knowledge and technology upon which the standard is based into its products.

Information asymmetry

Agent has more information about the resources being managed than the principal.

Which of the following statements is true in the context of principal-agent relationships?

Agents almost always have more information about the resources they are managing than the principals do.

Merger

Agreement between two companies to pool their resources and operations and joint together to better compete in a business or industry.

anticorruption behavior

Aimed at harming actual or potential competitors to enhance the long-run prospects of the firm.

Which of the following is a major function of the board of directors of a company?

Aligning corporate strategy with stockholder interests

External stakeholders

All other individuals and groups that have some claim on the company.

Were all industries once high-tech?

Almost all the industries in the market have adhered to some technology in carrying out their business activities. But to become high-tech, an organization or industry should adopt latest technologies. The organization that comes first in the usage of advanced technology can be considered as high-tech.

What is the difference between a company internal value chain and the industry value chain? What is the relationship between vertical integration and the industry value chain?

An internal value chain is what is involved within the company during production of a product. An industry value chain is when multiple companies are working together throughout the life of the product from beginning to consumer. A company's internal value chain can be a part of the overall industry's value chain. Vertical integration happens when a company expands its production forward or backward to have more control over the whole industry chain within their company. The more integration the company does, the more of the industry value chain they do with the product's production.

Functional structure

An organizational structure built upon the division of labor within the firm, with different functions focusing on different tasks Examples: a production function, an R&D function, a marketing function, a sales function, and so on A top manager or small top management team oversees these functions. Most single businesses of any scale are organized along functional lines

Matrix structure

An organizational structure in which managers try to achieve tight coordination between functions, particularly R&D, production, and marketing High-technology firms based in rapidly changing environments sometimes adopt a matrix structure. Dual hierarchy can lead to power struggles. Can be difficult to ascertain accountability. Can work with clear lines of responsibility.

Multidivisional structure

An organizational structure in which a firm is divided into divisions, each of which is responsible for a distinct business area. Autonomous entities with their own functions and strategies Run their own daily operations as long as they hit performance targets Headquarters manages corporate-level strategy, helps with strategy, allocates capital, supervises division managers, and transfers knowledge between divisions.

Why was it profitable for GM and Ford to integrate backward into component-parts manufacturing in the past, and why are both companies now buying more of their parts from outside suppliers?

Backward integration, in case of both GM and Ford, has provided reduced cost structure with better organized and well-coordinated supply of component-parts. This is so because, it facilitates in deriving the benefit of Just in time or JIT system of inventory Therefore, backward integration enabled these companies to maintain, monitor and utilize production capacity as required, depending upon the demand in the market. And backward integration has helped both GM and Ford, in reducing cost structure and made it profitable. However, when companies started buying from outside specialized supplier s in production of steel, it emerged as low cost steel provider. Therefore, Ford stated buying from them (outside supplier). And GM realized that their company-owned suppliers have become costlier and not that cost effective as compared to outside suppliers and hence, the company started buying from outside suppliers.

Format wars

Battles to control the source of differentiation, and the value that such differentiation can create for the customer.

STRATEGIC IMPLICATIONS FOR ESTABLISHED COMPANIES

Being aware of how disruptive technologies can revolutionize markets is a valuable strategic asset. Investing in new technologies that may become disruptive technologies. Creating an autonomous operating division solely for the disruptive technology.

Credible commitment

Believable promise or pledge to support the development of a long-term relationship between companies.

Methods for monitoring agents

Board of directors Codetermination law (Mitbestimmungsgesetz in German law) Securities and Exchange Commission (SEC) Generally agreed-upon accounting principles (GAAP)

Disadvantage of Global strategic alliances

Brings together skills and assets that cannot be developed alone. Helps establish technological standards for the industry that will benefit the firm.

Increased competition

Building of an industrywide resource that lowers the barriers to entry in that industry

Ford and Mazda have decided to enter into a strategic alliance and have agreed upon an appropriate alliance structure. The companies have decided to host a conference for management and employees to better understand the purpose and objectives of the alliance and allow employees of both companies to build interpersonal relationships which will build trust and facilitate harmonious relations between the two firms. Which of the following describes this alliance management technique?

Building relational capital

Low Integration

Bureaucratic controls in the form of budgets are used to allocate financial resources to each function and to control spending by the functions. Output controls will then be used to assess how well a function is performing.

Controls in a diversified firm with low integration

Bureaucratic controls regulate the financial budgets and capital spending. Output controls involve output targets for each division based on profitability, profit growth, and cash flow. Incentive controls tie managers' incentives to the financial performance of their divisions. Market controls allocate capital resources between different divisions. Personal controls may be used within divisions.

High Integration

Bureaucratic controls will be used for financial budgets, and output controls will be applied to the different functions. Output controls will also be applied to cross-functional product development teams

Global standardization strategy

Business model based on pursuing a low-cost strategy on a global scale. - Companies market a standardized product worldwide to reap maximum benefit from economies of scale.

Empire building

Buying new businesses to increase the size of the company through diversification.

DISADVANTAGES OF DIVERSIFICATION

Changes in the industry or company Management Technology Diversification for the wrong reasons Risk pooling Entry into a wrong business or at the wrong time or forthe wrong reasons Bureaucratic costs

Implications of Globalization of production and markets

Companies finding home markets inundated by foreign competitors Critical to maximize efficiency, quality, customer responsiveness, and innovative ability Opportunities abound in international markets

PRESSURES FOR COST REDUCTION AND ENTRY MODE

Companies pursuing global or transnational strategies prefer establishing a wholly-owned subsidiary because: it gives them tight control over marketing to coordinate a globally dispersed value chain. it gives them tight control over a local operation. enables use of profits generated in one market to improve competitive position in another.

Capable competitors

Companies that can move quickly to imitate the pioneering company.

Virtual corporation

Companies that pursue extensive strategic outsourcing to the extent that they only perform the central value creation functions that leads to competitive advantage.

Related diversification

Company's competencies can be applied across a great number of industries. Company has superior strategic capabilities that allow it to keep bureaucratic costs under close control.

Unrelated diversification

Company's top managers are skilled at raising the profitability of poorly run businesses. Company's managers use their strategic management competencies to: improve the competitive advantage of their business units. keep bureaucratic costs under control.

First-mover disadvantages

Competitive disadvantages associated with being first. Bear significant pioneering costs. More prone to making mistakes. Risk of building the wrong resources and capabilities. Risk of investing in inferior or obsolete technology.

Swedish strength in fabricated steel products (such as ball bearings and cutting tools) has drawn on strengths in Sweden's specialty steel industry. This is an example of which of the following attributes that impact national competitive advantage?

Competitiveness of related and supporting industries

3 FACTORS TO CONSIDER WHEN SELECTING A STRATEGY

Complementary assets Height of barriers to imitation Capable competitors

Nonmodular (tightly integrated) advantages

Components work better together. Better monitoring of quality and reliability.

Firm strategy, structure, and rivalry

Conditions in the nation governing: • How companies are created, organized, and managed. • Nature of domestic rivalry.

Personal control

Control by personal contact with and direct supervision of subordinates.

Bureaucratic control

Control through a formal system of written rules and procedures.

Which form of control would you MOST likely find in a voluntary or charity organization?

Control through norms and values

Global strategic alliances

Cooperative agreements between companies from different countries that are actual or potential competitors. Brings together skills and assets that cannot be developed alone. Helps establish technological standards for the industry that will benefit the firm.

Localization Limitation

Cost reduction by mass-producing a standardized product is not possible.

Bureaucratic costs

Costs associated with solving the transaction difficulties between business units and corporate headquarters

Strategic outsourcing

Decision to allow one or more of a company's value-chain activities to be performed by independent, specialist companies

Modularity

Degree to which a system components can be separated and recombined.

Tall Org Solution

Delayering - The process of reducing the number of levels in a management hierarchy.

On-the-job consumption

Describes the behavior of senior management's use of company funds to acquire perks.

STRATEGIES FOR EXPLOITING FIRST-MOVER ADVANTAGES

Develop and market the innovation. Develop and market the innovation jointly with other companies. Through a strategic alliance or joint venture. License the innovation to others and allow them to develop the market.

PROBLEMS WITH HORIZONTAL INTEGRATION

Difficult to implement Conflict with the Federal Trade Commission (FTC) Increase in prices Abuse of market power Crushing potential competitors

Transnational Limitation

Difficult to pursue because it places conflicting demands on a company.

Which of the following reasons can make a diversification strategy an unwise course of action for a company to pursue?

Diversification for pooling risks

STRATEGIC IMPLICATIONS FOR NEW ENTRANTS

Do not face pressures to continue the existing out-of-date business model. Do not have to worry about established: customer base. relationships with suppliers and distributors. Can focus their energies on the opportunities offered by the new disruptive technology. Must decide whether to partner with an established company or go solo.

Joint venture

Each party takes a part ownership stake and a team of managers from both companies share control.

Location Economies

Economic benefits that arise from performing a value creation activity in an optimal location.

Which of the following is NOT a way that standards can emerge in an industry?

Emerging rules and regulations about resource use and worker safety POSSIBLE WAYS: Lobbying the government to mandate an industry standard when the benefits of establishing a standard are recognized Government- or association-set standards fall into the public domain Market demand Industry association between cooperating businesses without government assistance

Which of the following is a justification that a business adopts to justify diversification?

Entry into new industries will rescue the core business and lead to long-term growth and profitability.

THE CHOICE OF ENTRY MODE

Exporting Licensing Franchising Joint venture Wholly owned subsidiary

Advantages of Global strategic alliances

Facilitates entry into a foreign market. Allows firms to share the costs of developing new products or processes.

4 ATTRIBUTES THAT DETERMINE THE NATIONAL COMPETITIVE ADVANTAGE IN A GLOBAL MARKET

Factor endowments Local demand conditions Related and supporting industries Firm strategy, structure, and rivalry

Four Basic Strategies

Global standardization strategy Localization strategy Transnational strategy International strategy

General organizational competencies

Help business units within a company perform at a higher level than it could if it operated as a separate or independent company. Results from the skills of a company's top managers.

Height of barriers to imitation

Higher the barriers, longer it takes for rivals to imitate. Give the innovator more time to build an enduring competitive advantage.

RISKS OF OUTSOURCING

Holdup Increased competition Loss of information and forfeited learning opportunities

What factors increase pressures for local responsiveness

Host government demands

Company A has made substantial investments in specialized assets and, in theory, because of this investment, has become dependent on Company B. Company B can threaten to change orders to other suppliers as a way of driving down Company A's prices. Company B is highly unlikely to change suppliers because it is, in turn, a major supplier to Company A and also has made major investments in specialized assets to serve their needs. These companies are mutually dependent because of the specialized investment the other has made. Thus, Company B is unlikely to renege on any pricing agreements with because it knows that Company A would respond the same way. This is an example of which of the following?

Hostage taking

3 STRATEGIES TO BUILD LONG-TERM COOPERATIVE RELATIONSHIPS

Hostage taking Credible commitment Parallel sourcing policy

STEPS IN STAKEHOLDER IMPACT ANALYSIS

Identify stakeholders. Identify stakeholders' interests and concerns. Identify the probable claims of stakeholders on the organization. Identify important stakeholders from the organization's perspective. Identify the resulting strategic challenges.

Distinctive Competencies and Entry Mode

If a company's distinctive competency is its technological expertise: -licensing and joint-ventures should be avoided. -wholly owned subsidiary should be given preference. Combination of franchising and subsidiaries for service companies whose distinctive competency is management proficiency.

STRATEGIES FOR WINNING A FORMAT WAR

Make network effects work in one's favor and against competitors. Build the installed base for the standard as rapidly as possible. Ensure a supply of complements. Leverage killer applications. Pursue aggressive pricing and marketing. Razor and blade strategy - Pricing the product low to stimulate demand, and pricing complements high. Cooperate with competitors. License the format.

How might a company configure its strategy- making processes to reduce the probability that managers will pursue their own self-interest at the expense of stockholders?

Managers may pursue self-interest at the expense of stockholders when managers do not pursue goals like stockholders. According to the classic principle of carrot and stick, two methods could be used to tackle this. The company was able to establish a very strong representation of stockholders as well as review processes in the process of strategy making. Therefore, the voice of the stockholder will always ask the right questions to ensure progress is made in the right direction. This method could be effective to some degree, but managers are not fully involved in this. The effectiveness of this method also depends on the right choice and control over the entire process of stockholder representation. A better solution for executives is to match rewards based on the same criteria that stockholders care about. Managers are now following the same goals as stockholders. A slight change in this approach is to also make stockholders managers (via routes such as stock options for employees). There is now no chance of conflicting interests in this way.

Turnaround strategy

Managers of a diversified company identify inefficient, poorly managed companies in other industries they acquire and restructure them to improve their performance and the profitability of the total corporation.

opportunistic exploitation

Managers rewrite the terms of a contract to make it favorable to the firm

substandard working conditions

Managers underinvest in working conditions or pay employees below-market rates to reduce their production costs

information manipulation

Managers use their control over corporate data to distort or hide information to enhance their financial situation or the firm's competitive position.

self-dealing

Managers using company funds for personal use

Exporting

Manufacturing the product in a centralized location and then exporting it to other national markets.

hostage taking

Means of exchanging valuable resources to guarantee that each partner to an agreement will keep its side of the bargain

In 1999, two pharmaceutical companies that held an equal market share decided to pool their operations to create a new firm that was known by a different name. This is an example of a(n):

Merger

Factor endowments

Nation's position in factors of production necessary to compete in an industry.

Local demand conditions

Nature of home demand for the industry's product or service.

Network effects

Network of complementary products as a primary determinant of the demand for an industry's product.

Which of the following statements is true about new entrants in the context of a technological paradigm shift?

New entrants do not need to worry about their established customer base.

How is the acquisition of new business related to existing business activities in situations where company leaders base their diversification strategy on transferring competencies?

Related

Agency Relationship

Relationship between stockholders and senior managers. Stockholder - Principal (person delegating authority) Senior managers - Agent (person to whom authority is delegated)

Restructuring

Reorganizing and divesting business units and exiting industries

In a public corporation, should the CEO of the company also be allowed to be the chairman of the board (as allowed for by the current law)? What problems might this present?

No, in the public corporation the CEO of the company should not be allowed to be the chairman of the broad of directors. This is mainly because of the conflict of interest arises in the company. The role of the board of directors is to keep a check on the actions that are taken by the management of the company. But when the CEO becomes the chairman of the broad, then he has to take decisions like his own compensation that are directly linked to his interest. For a fair and free board of directors it is required that its members do not have any type of interest in the working of the company. When the CEO becomes the board of director in a company there are high chances that he will look after the interests of the executive team rather than the stakeholders in general. This will affect the transparency and independence of the broad of directors.

environmental degradation

Occurs when a company's actions directly or indirectly result in pollution or other forms of environmental harm

Modular advantages

Offers choices in function, design, scale, and features. Allows product variety with economies of substitution

What value creation activities should a company outsource to independent suppliers? What are the risks involved in outsourcing these activities?

Outsourcing refers to transfer of a business activity to a third party vendor. Following activities of value chain should be outsourced to independent suppliers: - Those activities which can be performed in a cheaper and better way by suppliers. - Those activities which do not fall under core competencies of the company and outsourcing them saves time and resources. - Those activities which are risky to be performed in-house. - Those activities which are rapidly changing in nature or highly dependent on use of some changing technology. - Those activities, whose outsourcing can improve business processes such as higher flexibility, reduced lead time and reduced inventory etc. So outsourcing helps companies save time and resources to perform well in the area of their core competencies and mitigate any shortage of skills and resources in the areas where they want to outsource. Outsourcing activities of value chain are associated with the following risks: - Data security may be leaked - Processes may face discipline issues - Loss of knowledge of business - Failure of vendor to deliver - Productivity fluctuations - Disputes arising in the relations

Wholly owned subsidiary

Parent company owns 100% of the subsidiary's stock.

Success of an alliance depends on:

Partner selection. Alliance structure - Ensure alliance agreement guards against the risk of opportunism by a partner. Managing the alliance - Building relational capital.

Joint ventures Resulting Problems

Partner with superior skills will have to give away profits. Different business models or time horizons leading to a conflict about how to run the joint venture. Can lead to leaks of proprietary information

Imagine that IBM has decided to diversify into the telecommunications business to provide online cloud-computing data services and broadband access for businesses and individuals. What method would you recommend that IBM pursue to enter this industry? Why?

Penetration Strategy: Penetration pricing refers to a marketing strategy used by the businesses to attract customers to new product and services. It is a strategy in which pricing is kept so low that it breaks the competition and when customer base reaches certain level , price of product or service is increased. This marketing strategy relies on the idea that lower prices can help make a customer aware of and more willing to buy new product As IBM is trying to enter new market where there is huge competition , it should use this strategy to lure the customer using it's economies of scale

First-mover advantage

Pioneering new technologies and products that lead to a competitive advantage (slowing the rate of imitation). Opportunity to exploit network effects and positive feedback loops. Ability to establish brand loyalty . Ability to increase sales volume ahead of rivals. Ability to create switching costs for customers. Can accumulate knowledge.

Reasons for efficiency of capital markets in U.S.

Reporting requirements mandated by the Securitiesand Exchange Commission (SEC) Large numbers of research analysts Extremely large and active investment community Strong communication systems Strong contract law

Related and supporting industries

Presence or absence in the nation of supplier and related industries that are internationally competitive.

Razor and blade strategy

Pricing the product low to stimulate demand, and pricing complements high.

ACQUISITION

Principal way companies enter new industries to pursue vertical integration and diversification Used by companies to move fast to establish a presence in an industry Less risky than internal new ventures Easy way to enter an industry that is protected by high barriers to entry

Integrating mechanisms

Processes and procedures used for coordination subunits.

Backward vertical integration

Produces inputs for the company's products.

Localization strategy Benefit

Product value raises in the local market.

Product bundling

Providing products that are related to each other. Allows companies to expand their range providing customers a complete package of related products.

Corporate raiders

Purchase large blocks of shares in companies that appear to be pursuing strategies inconsistent with maximizing stockholder wealth

Why is maximizing ROIC consistent with maximizing returns to stockholders?

ROIC (Return on Invested Capital) is a tool to assess profitability of the company. ROIC is the income earned by the company apart from expenses incurred. It will provide required input to the managers which help them in setting up strategies, formulate plans, and create necessary funds to pay dividends to its share holders. ROIC is added to shareholders equity which results in increased value of shares and value of company's stock also increases. Thus, if return on invested capital will increase, the return to shareholders will also increase.

Licensing proprietary technology to foreign competitors is the best way to give up a company's competitive advantage. Discuss.

The statement is basically correct - licensing proprietary technology to foreign competitors does significantly increase the risk of losing the technology. Therefore licensing should generally be avoided in these situations. Yet licensing still may be a good choice in some instances. When a licensing arrangement can be structured in such a way as to reduce the risks of a firm's technological know-how being expropriated by licensees, then licensing may be appropriate. A further example is when a firm perceives its technological advantage as being only transitory, and it considers rapid imitation of its core technology by competitors to be likely. In such a case, the firm might want to license its technology as rapidly as possible to foreign firms in order to gain global acceptance for its technology before imitation occurs. Such a strategy has some advantages. By licensing its technology to competitors, the firm may deter them from developing their own, possibly superior, technology. And by licensing its technology the firm may be able to establish its technology as the dominant design in the industry. In turn, this may ensure a steady stream of royalty payments. Such situations apart, however, the attractions of licensing are probably outweighed by the risks of losing control over technology, and licensing should be avoided

What statements are generally true of a diversification strategy based on the realization of economies of scope?

The strategy allows a company to realize cost economies among business units. The strategy may allow a company to use shared resources more intensively, thereby realizing economies of scale. The strategy requires managers to be aware of the costs of coordination. The strategy requires close coordination among different business units. EXCEPT: The strategy requires the head office to evaluate each business unit as a stand-alone operation.

Organizational architecture

The totality of a firm's organizational arrangements, including its formal organizational structure, control systems,incentive systems, organizational culture,organization processes, and human capital

FORMAL INTEGRATING MECHANISMS

There is often a need to coordinate the activities of different functions and divisions within an organization to achieve strategic objectives. Formal integrating mechanisms used to coordinate subunits vary in complexity from simple direct contact and liaison roles to teams to a matrix structure. The greater the need for coordination between subunits (functions or divisions), the more complex the formal integrating mechanisms need to be

Which of the following statements is true about technological paradigm shifts?

They have the potential to threaten the survival of established industries.

Which of the following statements is true about marginal costs in high-technology industries? A. They are invariably higher than fixed costs. B. They are the costs that customers need to bear to adopt a new technology. C. They include the costs of packaging and product distribution. D. They are extremely high in software-making companies. E. They do not exist if the product is sold by a sales force directly to end-users.

They include the costs of packaging and product distribution.

PRESSURES FOR COST REDUCTIONS

To respond to them, a firm must try to lower the costs of value creation.

What steps would you recommend that a company take to build mutually beneficial, long-term, cooperative relationships with its suppliers?

Understanding the working style of the suppliers - This includes learning about their business, how they work and respecting their working styles. Turning the supplier rivalry into opportunity - The components can be taken from two or three vendors. This can help in creating compatible production philosophies and systems. Sharing the knowledge about the same with the vendor will be helpful in building good relationship and setting up of joint venture. Supervise your suppliers - This includes providing performance report card and immediate and constant feedback to the suppliers. Problem solving can be done by the involvement of the senior management. Developing supplier' technical capabilities - this can be done by building the problem-solving skills of the supplier and innovation capabilities. Sharing information intensively but selectively - Formal meetings should be conducted on a regular basis. The information can be shared in a rigid and structured way. Suppliers should be insisted on collecting accurate data for futrure business opportunities and growth. Conducting joint improvement activities - This can be done by sharing views, ideas and best practices with the supplier and setting up suppliers study groups.

Quasi integration

Use of long-term relationships, or investment into some of the activities normally performed by suppliers or buyers.

What is the role of output controls in a firm with a minimal need for integration?

Used to assess how well a function is performing.

Forward vertical integration

Uses, distributes, or sells the company's products.

United States electronics companies setting up research and production facilities in Japan to take advantage of Japanese success in consumer electronics is an example of which of the following?

Using the framework

How would you design structure, controls, incentives, processes, and culture to encourage entrepreneurship in a large, established corporation? How might the desire to encourage entrepreneurship influence your hiring and management development strategy?

We would design structure, controls, incentives, processes, and culture to encourage entrepreneurship in a large, established corporation by organizations establishing codes of conduct, policies, and procedures that can guide people to build their entrepreneurial skills, organizations can map their business processes and focus on improving the cultural level of the organization. The organizations should build a culture that can promote business and service levels, here, people should be engaged to perform with their innovative and creative minds, and people can build various business strategies that could be helpful and critical for organizational success. The organizations should implement incentive practices like achieving the business objective, which can attract Incentive and bonuses for the employee with such entrepreneurial skills, the employee becomes more understanding of the needs of the business, the needs of the customer, the needs of the community, they understand that for every success they need a strategy to be enabled and smooth functioning of such strategy will help employees to grow their career with the organization. Any hiring supervisor having the choice to encourage entrepreneurship will make hiring decisions based totally on the hazard-taking capabilities of individuals. They will seek those who can take responsibility and attain the consequences. The management development programs may be focused on reaching entrepreneurship talents. They will layout training or assign personnel with pilot responsibilities to benefit confidence and decide their threat-taking abilities, dedication, management abilities for completing some missions correctly.

Vertical integration

When a company expands its operations either backward or forward into an industry.

What kind of structure, controls, incentives, and culture would you be likely to find in (a) a small manufacturing company based in a stable environment, (b) a high-tech company based in a rapidly changing market, and (c) a Big Four accounting firm?

a) In a small manufacturing company based in a stable environment, you will find that they use the functional structure, incentives control, incentives tied to team performance, and a rigid culture because of the standardized ways of operation and the high degree of formalization. b) In a high-tech company based in a rapidly changing market, you will find that they use a matrix structure, output controls, incentives tied to individual performance, and a flexible and informal culture because of the high degree of innovation required to perform the job. c) In a Big Four accounting firm, you will find that they use a multidivisional structure, market controls, incentives tied to divisional performance, and organizational culture in a multidivisional structure tied to bottom line bottom-line results.

Under what conditions might horizontal integration be inconsistent with the goal of maximizing profitability?

a) Mergers and Acquisitions may cause cultural conflicts. This is so because the companies that are merged will have different company culture. This kind of condition is more, when merger or acquisition is of hostile in nature. b) Overestimating the benefit and underestimating the adverse result might cause horizontal integration not beneficial or profitable. c) The government runs FTC or Federal Trade commission that generally enforces antitrust law, preventing mergers or acquisition. Moreover, the laws are generally enforced because such merger or acquisition may make a company dominant industry competitor. In return, company might exploit its market power to make profit to the company since the buyer is left with very few or no competitors in the market. Thus, under the above mentioned conditions, horizontal integration might be inconsistent with its goal of creating a market atmosphere beneficial in maximizing profitability of the company.

Location Economies Help a Company:

achieve a low-cost position. to differentiate its product offering. to gain competitive advantage over rivals who base all their value creation activities at a single location.

Localization strategy most appropriate when:

consumer tastes and preferences differ across nations. cost pressures are not very strong.

More valuable than nonmodular when:

customers and third-party options are diverse. compatibility with third-party options is seamless. platform sponsor controls quality and architecture.

PRESSURES FOR LOCAL RESPONSIVENESS Occurs as a result of:

differences in customer tastes and preferences. differences in infrastructure and traditional practices. differences in distribution channels. host government demands. the rise of regionalism.

A criticism of stock-based compensation plans is that they:

dilute stockholders' equity.

Vertical integration increases product differentiation, lowers costs, and reduces industry competition when it:

facilitates investments in efficiency-enhancing specialized assets. protects product quality. results in improved scheduling.

Short-term contracts

last for a year or less. do not result in specialized investments. signal a company's lack of long-term commitment to its suppliers.

In any organization, for-profit or not-for-profit, span of control refers to the:

number of direct reports that a manager has.

Global standardization strategy is most appropriate when:

pressures for cost reductions are strong. demand for local responsiveness is minimal.

Corporate-level strategies should be chosen to

promote the success of its business-level strategies - This allows a firm to achieve a sustainable competitive advantage, leading to higher profitability.

LEVERAGING THE COMPETENCIES OF GLOBAL SUBSIDIARIES Managers must:

realize that valuable skills can arise anywhere within a firm's global network. establish an incentive system that encourages local employees to acquire new competencies. have a process for identifying valuable new skills created in a subsidiary. help transfer valuable skills within the firm.

Control allows managers to

regulate the activities of individuals and units so that they are consistent with the goals and standards of the organization. Goal - A desired future state that an organization attempts to realize. Standard - A performance requirement that the organization is meant to attain on an ongoing basis. Subgoal - An objective, the achievement of which helps the organization attain or exceed its major goals.

Under which conditions are joint ventures a useful way to enter new industries?

• When substantially huge amount of investment is needed to enter the new industry. • When acquisition is found to be not viable. • When the companies participating in joint venture can share their skill to strengthen the distinctive competency to succeed in the new market. • When both the companies benefit from increased profitability without incurring the bureaucratic cost. • When both companies avail the benefit from diverse business activity without merging in to one company.