Strategic Management Quiz #5

End result of internal innovation

*creation of value* for customers and shareholders by developing and commercializing new products

real options

- An alternative or choice that becomes available with a business investment opportunity - can include opportunities to expand and cease projects if certain conditions arise, amongst other options

Individualism, Collectivism, and Entrepreneurship

- Entrepreneurship declines as collectivism is emphasized - Exceptionally high levels of individualism can be dysfunctional for entrepreneurship - Firms must provide appropriate autonomy and incentives for individual initiative to surface, but they also must promote cooperation and group ownership of an innovation if it is to be implemented successfully

Benefits of Foreign Direct Investment

- Operational control - Operational flexibility

incremental innovations

- build on existing knowledge bases and provide small improvements in well-defined current product lines - evolutionary and linear in nature, with the underlying production technologies emphasizing efficiency - profit margins tend to be lower and competition is often based primarily on price

Dodd-Frank Act

- intended to align financial institutions' actions with society's interests - includes provisions related to the categories of consumer protection, systemic risk oversight, executive compensation, and capital requirements for banks

Top Executives' Preference

- level of diversification that maximizes firm size and their compensation and that reduces their employment risk

Factors that Contribute to International Entrepreneurship

- national culture - level of investment outside of the home country - international experience of top executives

Problems with separation of ownership and managerial control

- principal and agent have different interests / goals - managerial opportunism

radical innovations

- provide significant technological breakthroughs and create new knowledge - rare because of the difficulty and risk involved in developing them - require creativity

Shareholders' Preference

- riskier strategies - more focused diversification

Factors that Encourage Innovation

- top management team supportive of innovation - organizational idea champions - reward systems that encourage risk taking - culture that emphasizes learning, teamwork, creativity, and accomplishment of group goals - decentralized decision making and innovation approval process - ample resources allocated to innovative process - strong communications system that records and disseminates information about innovations throughout organization - Participation with external research organizations and cooperation with other firms

Factors that Discourage Innovation

- top management team supportive of status quo - absence of idea champions - reward systems that harshly punish failures - culture that fosters individual accomplishment over team or organizational goals - centralized decision making and innovation approval processes - outdated communications systems, strong administrative hierarchy and "closed-door" offices throughout organization - strong emphasis on developing innovations "in-house"

Risks Associated with Internationalization

- unstable foreign currencies - inefficient markets - insufficient infrastructures to support businesses - limitations on market size and growth

Results of Product Diversification that Serve Managers not Shareholders

1) Increases size of firm, increasing executive compensation 2) reduce top executives' employment risk

Traits of Firms that Encourage Entrepreneurship

1) Risk Taking 2) Committed to Innovation 3) Proactive

Barriers to Effective Integration

1) Team members' independent frames of reference are a barrier that may prevent successfully using cross-functional teams as a means of integrating organizational functions 2) Organizational politics

Reasons Firms Acquire Companies to Gain Access to Their Innovations and Innovative Capabilities

1) The capital market values growth 2) Acquisitions provide a means to rapidly extend one or more product lines and increase the firm's revenues

Factors that Affect Shareholder Preferences

1) firm's primary industry 2) intensity of rivalry among competitors in that industry 3) Top management team's experience with implementing diversification strategies

Types of Internal Innovations

1) incremental 2) radical Both part of R&D activities

Autonomous strategic behavior is based on...

A firm's wellsprings of knowledge and capabilities that are the sources of its innovations; a firm's technological capabilities and competencies are the basis for new products and processes

5 Criteria for an Option to Exist

An option provides a firm 1) with the right 2) but not the obligation 3) to take some future specified action 4) enabling the firm to reduce its downside risk 5) while accessing upside opportunities

Result of Strategic Alliances

Because of the importance of alliances, particularly in the development of new technology an din commercializing innovations, firms are beginning to build networks of alliances that represent a form of social capital

Why is real option analysis important?

Because they have recast motives for a variety of strategic decisions, have opened new opportunities to bridge strategic and financial analyses, and have shown how managers need to alter their investment thresholds

Key Risk in Acquisition

Firm may substitute an ability to buy innovations for an ability to produce innovations internally

Governance Costs in Diversified Firms

If a firm is diversified, governance costs increase because it is more difficult to monitor actions inside the firm

Shared Values and Effective Leadership are...

Important to achieve cross-functional integration and to effectively implement innovation

How are inventions and innovations related?

Innovation begins after an invention is chosen for development; thus, an invention brings something new into being and an innovation brings something new into use

Why do firms innovate?

Innovation is a key outcome firms seek through entrepreneurial activity and is often the source of competitive success especially in turbulent, highly competitive environments

Why do new ventures in international markets succeed?

New ventures that enter international markets gain more new technological knowledge and thereby enhance their performance --> the amount of international entrepreneurship has been increasing in recent years

Focus of Real Options Analysis

Operational flexibility, rather than operational control

Parallel Asymmetry in Outcomes of Options

Options help firms reduce downside risk while accessing upside opportunities

Key Risk in Alliances

Partner will appropriate the firm's technology or knowledge and use it to enhance its own competitive abilities

Flexible Strategy

Strategy that allows a firm to react to changing uncertainties by quickly changing course, or, better still, allows a firm to position itself to take advantage of the resolution of uncertainty

Why won't innovation lead to sustainable competitive advantage?

The process of creating an innovative product or service is entrepreneurial, but individual products or services are unlikely to lead to sustainable competitive advantage because they can be imitated; however, the ability to continuously create new innovations can be a source of sustainable competitive advantage

Primary Objective of the Separation of Ownership and Managerial Control

To increase the corporation's profit and thereby the financial gains of the owners (the shareholders)

autonomous strategic behavior

a bottom-up process in which product champions pursue new ideas, often through a political process, to develop and coordinate the commercialization of a new good or service

option to defer

a lease or option to buy land allows the firm to wait to see whether output prices justify investment (e.g., natural-resource extraction industries, real estate development)

international entrepreneurship

a process in which firms creatively discover and exploit opportunities that are outside their domestic markets in order to develop a competitive advantage

induced strategic behavior

a top-down process whereby the firm's current strategy and structure foster product innovations that are closely associated with that strategy and structure

Invention

act of creating or developing a new product or process

product champion

an individual with an entrepreneurial vision of a new good or service who seeks to create support in the organization for its commercialization

Entrepreneurial opportunities exist because of...

competitive imperfections in markets and among factors of production used to produce them, and when information about these imperfections is distributed unevenly among individuals

Importance of social capital

critical for access to complementary resources from partners in order to compete effectively in domestic and international markets

Social capital

develops as firms collaborate and helps them to obtain the knowledge and other resources they need to develop innovations

agency relationship

exists when one or more people (the principal(s)) hire another person or people (the agent(s)) as decision-making specialists to perform a service

Cross-functional product development teams

facilitate efforts to integrate activities associated with different organizational functions such as design, manufacturing, and marketing

Cross-functional product development teams are...

important to promote integrated new product design ideas and commitment to their implementation

entrepreneurs

individuals, acting independently or as a part of an organization, who create a new venture or develop an innovation and take risks by introducing them into the marketplace

compound options

investments conferring multiple types options

entrepreneurial mind-set

necessary so that managers and employees consistently try to identify entrepreneurial opportunities the firm can pursue by developing new goods and services and new markets

strategic entrepreneurship

occurs as firms seek opportunities in the external environment that they can exploit through competitive advantages that are framed around innovations

switching options

product flexibility allows shifts in output mix; process flexibility permits shifts in inputs (e.g., consumer goods susceptible to volatile demand, tapered vertical integration)

Shared values and effective leadership

promote integration and vision for innovation and commitment to it

entrepreneurial opportunities

represent conditions in which new products or services can satisfy a need in the market

growth options

represent investments that enable the firm to expand the investment in the future, if that action turns out to be valuable (e.g., infrastructure investments, investments in products with multiple generations)

Free cash flows

resources remaining after the firm has invested in all projects that have positive net present values within its current businesses

Real options help reconcile...

strategic analysis and financial analysis

Imitation

the adoption of an innovation by similar firms; usually leads to process standardization

corporate entrepreneurship

the application of entrepreneurship within an established firm

abandonment options

the presence of resale markets allows the firm to realize value from exiting markets with deteriorating conditions (e.g., new product introductions, capital-intensive industries)

entrepreneurship

the process by which individuals or groups identify and pursue entrepreneurial opportunities without the immediate constraint of the resources they currently control

Innovation

the process of creating a commercial product from an invention

managerial opportunism

the seeking of self-interest with guile (i.e., cunning or deceit)

internal corporate venturing

the set of activities firms use to develop internal inventions and innovations (e.g., 3M with Scotch Tape)

agency costs

the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals, because governance mechanisms cannot guarantee total compliance by the agent

equity joint venture

type of growth option that involves firms establishing a business with joint ownership

entrepreneurial mindset

values uncertainty in the marketplace and seeks to continuously identify opportunities with the potential to lead to important innovations