quiz 3 review

Why do firms enter strategic alliances?

A strategic alliance is a voluntary arrangement between firms that involves the sharing of knowledge, resources and capabilities to develop processes, products and services. By entering into a strategic alliance firm goals can be achieved faster and at a lower cost to the company. It can also help a firm can and sustain competitive advantage and it is less complex legally. They can strengthen competitive advantage, enter new markets, hedge against uncertainty, access critical complementary assets and learn new capabilities.

What is agency theory? Why is it a problem in organizations? What problems do governance mechanisms attempt to overcome in agency theory settings?

A theory that views the firm as a nexus of legal contracts. Conflicts that arise should be resolved legally. The firm needs to design work tasks, incentives and employment contracts to minimize opportunism by agents. This is used by trying to overcome adverse selection and moral hazard. Adverse selection is an increased likelihood of selecting inferior alternatives and moral hazard is when one party is incentivized to take undue risks or shirk responsibilities because the costs incur to the other party

What are the strengths/weaknesses of the three mechanisms to govern alliances?

Contractual agreement pro : flexible, fast, easy to initiate and terminate Cons: weak tie, lack of trust and commitment Equity alliances Pros: stronger tie, trust and commitment can emerge, window into new technology Cons: less flexible, slower, can entail significant investments Joint ventures Pros: strongest tie, trust and commitment likely to emerge, may be required by institutional setting Cons: can entail long negotiations and significant investments, long-term solution, JV managers have double reporting lines

What is the shared value creation framework and what are its three key principles?

Creating shared value means that executives shouldn't just focus on increasing firm profits but rather they should focus on creating shared value through economic value and social value. It helps with gaining and sustaining competitive advantage and corporate social responsibility. Expand the customer base Expand traditional internal firm value chains Focus on creating new regional clusters

What is the general performance outcome from mergers and why?

In most cases mergers and acquisitions do not create competitive advantage and do not realize anticipated synergies. This is because of the principal agent problem, the desire to overcome competitive disadvantage and superior acquisition and integration capability.

What is the integration-responsiveness framework, and what 4 global strategic positions does it lead to? What is a benefit and a risk of each?

International strategy- low cost reductions and low local responsiveness. It leverages home-based care competencies and sells the same products domestically and abroad. Multidomestic strategy- low cost reductions and high local responsiveness making local consumers ideally perceived products as locals. Can be costly and inefficient as it is a duplication of business functions across countries. Global standardization strategy- high cost reductions and low local responsiveness. Price is the main competitive weapon and this can be achieved through global division of labor based on wherever capabilities have lowest cost. Transitional strategy- high cost reductions and high local responsiveness using the slogan "think globally act locally" in which is the best practices, ideas and innovations used everywhere. This is difficult to implement because of duplication of efforts and organizational complexity.

Explain the CAGE Framework. List and define each of its components.

Is an acronym meaning cultural, administrative and political, geographic and economic and it guides decisions on which countries to enter. cultural - social norms and morals, beliefs and values, the disparity between a firm's home and host country. Administrative and political- captured in factors such as shared monetary or political associations and political hostailites. geographic - this can be more than just physical distance it can also be measured by physical size, within country distances to its borders, topography, time zones and infrastructure. economic - wealth and per capita income of consumers, wealthy countries trade with wealthy countries and wealthy countries trade with poor countries making it access to low cost input factors.

Why is the corporate form attractive?

It is a mechanism to direct and control an enterprise and ensure that it pursues strategic goals successfully and legally. It offers checks and balances and attempts to address the principal agent problem.

Contrast mechanistic and organic organizations.

Mechanistic organization Much specialization and formalization Tall hierarchies Centralized decision mankind Organic organization Little specialization and formalization Flat organizational structure Decentralized decision making

Why do firms merge with competitors? Why do they acquire other firms?

Merging with competitors helps with horizontal integration and can reduce competitive intensity, lower costs and increase differentiation. Firms acquire other firms to access new markets and distribution channels that help them overcome entry barriers and access new capabilities or competencies. It also preempts rivals.

List and describe the four basic organizational structures. What are their advantages and disadvantages?

Simple structure- used by small firms with low organizational complexity. The founder usually makes all the strategic decisions and runs day-to-day operations. Professional managers and sophisticated systems are not usually in place. Functional structure- employees are grouped into functional areas based on domain expertise and they often correspond to distinct stages in the value chain. The leaders of functional areas report to the ceo. Only works when a firm has a narrow focus and small geographic footprint. It cannot effectively address greater diversification and its suboptimal communication across departments. Multidivisional structure- used as a firm diversifies products and geography. It has profit-and-loss responsibility, operates independently and is led by a unique CEO. disadvantage is that it adds another layer of corporate hierarchy and SBUs competing. Matrix structure- leverages SBU benefits from domain expertise, economies of scale and efficient processing of information. It also leverages organizational structure benefits of responsiveness and decentralized focus. This structure is difficult to implement and accountability can be undermined.

List and describe the four building blocks of organizational structure.

Specialization- describes the degree to which a task is divided into separate jobs Formalization- the extent to which employee behavior is guided by rules and procedures. Centralization- the degree to which decision making is concentrated at the top of the organization. Hierarchy- the formal, position based reporting lines, who reports to whom

List and describe 4 common governance mechanisms.

The board of directors Represent the interest of shareholders Tasked with providing oversight Consist of inside and outside directors Are elected by the shareholders Executive compensation Stock options are often part of compensation The average ratio of CEO to employee pay is 300:1 About ⅔ of CEO pay is linked to firm performance Incentives can negatively affect performance The market for corporate control An external corporate-governance mechanism Activist investors who: Seek to gain control of an underperforming corporation Buy shares of its stock in the open market Through leveraged buyouts Defend by poison pills Financial statement auditors, government regulators and industry analysts. External governance mechanisms To avoid misrepresentation of financial results Public financial statements must follow GAAP Financial statements must be audited Industry analysts often base their buy, hold, or sell recommendations on Financial statements filed with the SEC Business news

What is the role of the board of directors?

The board of directors represent the interests of shareholders and are tasked with providing oversight. It consists of inside and outside directors and are elected by shareholders to determine who is on the board. They handle strategic oversight and guidance, CEO selection, evaluation and compensation, guide executive compensation and review, monitor, evaluate and approve strategic initiatives.

What is the Build-borrow-buy framework. What are the 4 key questions and what are the relevant outcomes from each of these questions?

The build-borrow-buy framework is implemented for firms to achieve growth. Build being internal development, borrow being entering a contract or strategic alliance and buy being to acquire new resources, capabilities and competencies. How relevant are internal resources? If high develop internally How tradable are the targeted resources? If high enter into strategic alliances to use or borrow resources How close to your resource partner? If close then enter into a strategic alliance How well can you integrate the target firm? Enter into an acquisition

What is the purpose of control and reward systems? What are input and output controls?

They are internal-governance mechanisms that are put in place to align the incentives of principals (shareholders) and agents (employees). They allow managers to specify goals, measure progress and provide performance feedback. Input controls seek to define and direct employee behavior through explicit, codified rules and standards operating procedures. Output controls guide employee behavior by defining expected results (outputs) but leaving the means to those results open to individual employees, groups or SBUs.

multinational enterprise

a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries.

factor conditions

a country's endowments such as natural, human and other resources. If a country is resource rich, then focus on commerce, if a country is a resource lacking focus on human capital.

CAGE distance framework

a decision framework based on the relative distance between home and a foriegn target country along four dimensions: cultural distance, administrative and political distance, geographic distance and economic distance.

foreign direct investment

a firm's investment in value chain activities abroad.

managerial hubris

a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.

organizational structure

a key term in determining how the work efforts of an individuals and teams are orchestrated and how resources are distributed.

shared value creation framework

a model proposing that managers have a dual focus on shareholder value creation and value creation for society.

moral hazard

a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs incur to the other party.

adverse selection

a situation that occurs when information asymmetry increases the likelihood of selecting inferior alternatives.

corporate governance

a system of mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally.

agency theory

a theory that views the firm as a nexus of legal contracts.

hostile takeover

acquisition in which the target company does not wish to be acquired.

liability of foreignness

additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances.

business ethic

an agreed-upon code of conduct in business based on societal norms.

stock options

an incentive mechanism to align the interests of shareholders and managers, by giving the recipient the right (but not the obligation) to buy a company's stock at a predetermined price sometime in the future.

Formalization

an organizational element that captures the extent to which employee behavior is steered by explicit and codified rules and procedures.

Specialization

an organizational element that describes the degree to which a task is divided into separate jobs (i.e. the division of labor).

Hierarchy

an organizational element that determines the formal, position-based reporting lines and thus stipulates who reports to whom.

Centralization

an organizational element that refers to the degree to which decision making is concentrated at the top of the organization.

inside directors

board members who are generally part of the companies senior management team; appointed by shareholders to provide the board with necessary information pertaining to the company;s internal workings and performance.

outside directors

board members who are not employees of the firm, but who are frequently senior executives from other firms or full-time professionals.

demand conditions

characteristics of demand in a firm's domestic market.

Mechanistic organizations

characterized by a high degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making.

organic organizations

characterized by a low degree of specialization, a flat organizational structure, and decentralized decision making.

competitive intensity in focal industries

competitive environments lead to better performance.

build-borrow-buy framework

conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities and competencies (buy).

poison pill

defensive provisions to deter hostile takeovers by making the target firm less attractive.

non

equity alliances- partnership based on contracts between firms.

corporate venture capital

equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances.

multidivisional/M

form structure- organizational structure that consists of several distinct strategic business units (SBUs), each with its own profit-and-loss (P&L) responsibility.

Integration

if a firm has low relevancy, low tradability and a high need for closeness, integration is the option and getting into legal contracts.

Closeness

if firms are close to other firms for borrowing and can be achieved by equity alliances, joint ventures and enables borrowing.

Relevancy

if firms internal resources are highly relevant they should develop internally.

explicit knowledge

knowledge that can be codified; concerns knowing about a process or product.

tacit knowledge

knowledge that cannot be codified; concerns knowing how to do certain task and can be acquired only through active participation in that task.

related and supporting industries/complementors

leadership in related and supporting industries fosters complementors in downstream industries.

input controls

mechanisms in a strategic control-and-reward system that seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures that are considered before the value-creating activities.

output controls

mechanisms in a strategic control-and-reward system that seek to guide employee behavior by defining expected results open to individual employees, groups, or SBUs.

Co

opetition- cooperation by competitors to achieve a strategic objective.

simple structure

organizational structure in which the founders tend to make all the important strategic decisions as well as run the day-to-day operations.

matrix structure

organizational structure that combines the functional structure with the M-form.

functional structure

organizational structure that groups employees into distinct functional areas based on domain expertise.

equity alliances

partnership in which at least one partner takes partial ownership in the other.

integration

responsiveness framework- strategy framework that juxtaposes the pressures an MNE faces for cost reductions and local responsiveness to derive four different strategies to gain and sustain competitive advantage when competing globally.

CEO/Chairperson duality

situation where the CEO of a publicly traded company is also the chairperson of the board of directors.

globalization

standardization strategy- strategy attempting to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost.

multidomestic strategy

strategy pursued by MNEs that attempts to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies.

transnational strategy

strategy that attempts to combine the benefits of localization strategy (high local responsiveness) with those of global-standardization strategy (lowest-cost position attainable).

international strategy

strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets.

board of directors

the centerpiece of corporate governance, composed of inside and outside directors who are elected by the shareholders.

Tradability

the firm creates a contract to transfer ownership or allow the use of resources by contracts that support borrowing resources.

Merger

the joining of two independent companies to form a combined entity.

local responsiveness

the need to tailor product and service offerings to fit local consumer preferences and host-country requirements.

span of control

the number of employees who directly report to a manager.

Globalization

the process of closer integration and exchange between different countries and peoples worldwide, made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs.

horizontal integration

the process of merging with competitors, leading to industry consolidation.

Acquisition

the purchase or takeover of one company by another; can be friendly or unfriendly.

strategic alliances

voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.