4490 quiz 2

Types of Diversification

-single business -dominant business -related diversification -unrelated diversification

taper integration, strategic outsourcing

Ideally, one would like to find alternatives to vertical integration that provide similar benefits without the accompanying risks.

globalization 2.0

MNEs began to create smaller, self-contained copies of themselves, with all business functions intact, in a few key countries; notably, Western European countries, Japan, and Australia.

relational capability

Rather than focusing on developing an alliance management capability in isolation, firms should develop a relational capability that allows for the successful management of both strategic alliances and mergers and acquisitions.

firms enter strategic alliances

Strengthen competitive position. ▪ Enter new markets. ▪ Hedge against uncertainty. ▪ Access critical complementary assets. ▪ Learn new capabilities.

CAGE

To aid MNEs in deciding where in the world to compete, Pankaj Ghemawat introduced the CAGE distance framework. CAGE is an acronym for different kinds of distance: ▪ Cultural. ▪ Administrative and political. ▪ Geographic. ▪ Economic.49

make v buy

When the costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market (Cin-house < Cmarket), then the firm should vertically integrate by owning production of the needed inputs or the channels for the distribution of outputs. In other words, when firms are more efficient in organizing economic activity than are markets, which rely on contracts among many independent actors, firms should vertically integrate

market for corporate control

Whereas the board of directors and executive compensation are internal corporate-governance mechanisms, the market for corporate control is an important external corporate-governance mechanism

it is important to be close to partner to understand underlying info

a firm should consider using M&A when

international expansion

adv: access new markets, lower cost inputs, new competencies dis: liability of foreignness, loss of reputation, loss of IP

make relation-specific investments, establish knowledge-sharing routines, and build interfirm trust.

after alliance

global standardization strategy

attempt 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. The global-standardization strategy arises out of the combination of high pressure for cost reductions and low pressure for local responsiveness. MNEs using this strategy are often organized as networks (Globalization 3.0). This lets them strive for the lowest-cost position possible. Their business-level strategy tends to be cost leadership. Because there is little or no differentiation or local responsiveness because products are standardized, price becomes the main competitive weapon. To be price competitive, the MNE must maintain a minimum efficient scale take adv of location economies, take adv of economies of scale

make acquisitions

gaining new capabilities or competencies is one of the 3 main reasons companies _____________- gain access to new markets and distribution channels, preempt rivals

downside to strategic alliance

he downside of equity alliances is the amount of investment that can be involved, as well as a possible lack of flexibility and speed in putting together and reaping benefits from the partnership

mechanistic organization

high division of labor

global standardization

likely to have a multidivisional structure with the multiple divisions representing different products and centralized decision making

Principal-agent problems. ▪ The desire to overcome competitive disadvantage. ▪ Superior acquisition and integration capability.

mergers for reasons other than shareholder value?

exporting

oldest form of internationalization

hired PIs and poached drivers

uber

corporate strategy questions

where to compete; vertical integration, diversification, and geographic scope

organic organization

flexible division of labor

reduced cost

in g s strategy, main competitive element is

multidomestic strategy,

An MNE following a _______- in contrast with an international strategy, faces reduced exchange-rate exposure because the majority of the value creation takes place in the host-country business units, which tend to span all functions. On the downside, a multidomestic strategy is costly and inefficient because it requires the duplication of key business functions across multiple countries.

advantageous

As shown in the integration-responsiveness framework, it is ---- when the MNE faces low pressures for both local responsiveness and cost reductions.

organic growth through internal development, external growth through alliances, or external growth through acquisitions.

Corporate executives have three options at their disposal to drive firm growth

M&A no advantage

Despite their popularity, the answer, surprisingly, is that in most cases they do not. In fact, the M&A performance track record is rather mixed. Many mergers destroy shareholder value because the anticipated synergies never materialize.62 If value is created, it generally accrues to the shareholders of the firm that was taken over (the acquiree), because acquirers often pay a premium when buying the target company

demanding customers, no speed limit autobahn and fierce domestic competition

Fierce domestic competition in Germany, for example, combined with demanding customers and the no-speed-limit autobahn make a tough environment for any car company. Success requires top-notch engineering of chassis and engines, as _____________ ($6-per-gallon gas) in check. This extremely tough home environment amply prepared German car companies such as Volkswagen (which also owns Audi and Porsche), BMW, and Daimler for global competition.

diversification discount

Firms that pursue unrelated diversification are often unable to create additional value. They experience a

integration-responsiveness framework

Given the two opposing pressures of cost reductions versus local responsiveness, scholars have advanced the _______________, shown in Exhibit 10.7 .67 This framework juxtaposes the opposing pressures for cost reductions and local responsiveness to derive four different strategic positions to gain and sustain competitive advantage when competing globally.

cultural distance

Hofstede's work provides a useful tool to proxy _________. Based on data analysis Page 355from more than 100,000 individuals from many different countries, four main dimensions of culture emerged: Power distance, individualism, masculinity-femininity, and uncertainty avoidance.54 Hofstede's data analysis yielded scores for the different countries, for each dimension, on a range of zero to 100, with 100 as the high end. More recently, Hofstede added two additional cultural dimensions: long-term orientation and indulgence.

not expanding internationally

If the cost of going global as captured by the following disadvantages exceeds the expected benefits in terms of value added (C > V), that is, if the economic value creation is negative, then firms are better off by .

transnational strategy

MNEs typically implement a transnational strategy through a global matrix structure. This organizational structure combines economies of scale along specific product divisions with economies of learning attainable in specific geographic regions. the required matrix structure is rather difficult to implement because of the organizational complexities involved. High local responsiveness typically requires that key business functions are frequently duplicated in each host country, leading to higher costs. main adv: takes adv of economies of scale and location

factor conditions, demand conditions, competitive intensity in local industry, related and supporting industries/complementors

Michael Porter advanced a framework to explain national competitive advantage—why some nations outperform others in specific industries. This framework is called Porter's diamond of national competitive advantage. As shown in Exhibit 10.10, it consists of four interrelated factors:

BOD functions

Selecting, evaluating, and compensating the CEO. The CEO reports to the board. Should the CEO lose the board's confidence, the board may fire him or her. ▪ Overseeing the company's CEO succession plan. ▪ Providing guidance to the CEO in the selection, evaluation, and compensation of other senior executives. ▪ Reviewing, monitoring, evaluating, and approving any significant strategic initiatives and corporate actions such as large acquisitions. ▪ Conducting a thorough risk assessment and proposing options to mitigate risk. The boards of directors of the financial firms at the center of the global financial crisis were faulted for not noticing or not appreciating the risks the firms were exposed to. ▪ Ensuring that the firm's audited financial statements represent a true and accurate picture of the firm. ▪ Ensuring the firm's compliance with laws and regulations. The boards of directors of firms caught up in the large accounting scandals were faulted for being negligent in their company oversight and not adequately performing several of the functions listed here.

closed to open innovation

The increasing supply and mobility of skilled workers. ▪ The exponential growth of venture capital. ▪ The increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions. ▪ The increasing capability of external suppliers globally.

expand customer base to bring in noncustomers, expand traditional internal firm value chains to include more nontraditional partners such as nongovernmental orgs, focusing on creating new regional clusters

To ensure that managers can reconnect economic and societal needs, Michael Porter recommends that managers focus on three things within the shared value creation framework:17

globalization 1.0

Typically, only sales and distribution operations took place overseas—essentially exporting goods to other markets. In some instances, firms procured raw materials from overseas. Strategy formulation and implementation, as well as knowledge flows, followed a one-way path—from domestic headquarters to international outposts. This time period saw the blossoming of the idea of MNEs. It ended with the U.S. entry into World War II.

US MNEs

U.S. MNEs make up less than 1 percent of the number of total U.S. companies, but they: ▪ Account for 11 percent of private-sector employment growth since 1990. ▪ Employ 19 percent of the work force. ▪ Pay 25 percent of the wages. ▪ Provide for 31 percent of the U.S. gross domestic product (GDP). ▪ Make up 74 percent of private-sector R&D spending.

lt contracts

We noted that firms in short-term contracts have no incentive to make transaction-specific investments. Long-term contracts, which work much like short-term contracts but with a duration generally greater than one year, help overcome this drawback. Long-term contracts help facilitate transaction-specific investments

based on economies of experience, scale, scope, and standardization

Wealthy countries engage in relatively more cross-border trade than poorer ones. Rich countries tend to trade with other rich countries; in addition, poor countries also trade more frequently with rich countries than with other poor countries. Companies from wealthy countries benefit in cross-border trade with other wealthy countries when their competitive advantage is_____________.

MNE

a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries. MNEs need an effective global strategy that enables them to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world

National Competitive Advantage

a consideration of world leadership in specific industries. That issue, in Page 364turn, has a direct effect on firm-level competitive advantage. Companies from home countries that are world leaders in specific industries tend to be the strongest competitors globally.

leveraged buyout

a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding sharesPage 432 of a publicly traded company in order to take it private. In short, an LBO changes the ownership structure of a company from public to private. The expectation is often that the private owners will restructure the company and eventually take it public again through an initial public offering (IPO). Private companies enjoy certain benefits that public companies do not. Private companies are not required to disclose financial statements. They experience less scrutiny from analysts and can often focus more on long-term viability

closed innovation

approach was the dominant research and development (R&D) approach for most firms: They tended to discover, develop, and commercialize new products internally.

formalization

aptures the extent to which employee behavior is steered by explicit and codified rules and procedures. Formalized structures are characterized by detailed written rules and policies of what to do in specific situations. These are often codified in employee handbooks. McDonald's, for example, uses detailed standard operating procedures throughout the world to ensure consistent quality and service.not necessarily negative, often necessary to achieve consistent and predictable results

demand conditions

are the specific characteristics of demand in a firm's domestic market. A home market made up of sophisticated customers who hold companies to a high standard of value creation and cost containment contributes to national competitive advantage. Moreover, demanding customers may also clue firms into the latest developments in specific fields and may push firms to move research from basic findings to commercial applications for the marketplace.

related v unrelated

asking questions about the relationship of core competencies across business units allows us to identify the other two types: related diversification and unrelated diversification

site specificity

assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting.

physical asset specificity

assets whose physical and engineering properties are designed to satisfy a particular customer. Examples include the bottling machinery for E&J Gallo. Given the many brands of wine offered by E&J Gallo, unique equipment, such as molds and a specific production process, is required to produce the different and trademarked bottle shapes.

multidomestic strategy

attempt to maximize local responsiveness, hoping that local consumers will perceive their products or services as local ones. This strategy arises out of the combination of high pressure for local responsiveness and low pressure for cost reductions. markets are idiosyncratic (japanese mkt example)

location economies

benefits from locating value chain activities in optimal geographies for a specific activity, wherever that may be.36

for an increasing number of firms

benefits of competing on a global scale exist

Horizontal Integration

can help a firm improve its strategic position in an industry

relational view of competitive advantage

critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries.

centralization

decision making often correlates with slow response time and reduced customer satisfaction. In decentralized organizations such as Zappos, decisions are made and problems solved by empowered lower-level employees who are closer to the source of issues.

organizational culture

describes the collectively shared values and norms of an organization's members.44 Values define what is considered important. Norms define appropriate employee attitudes and behaviors

simple structure

enerally is used by small firms with low organizational complexity. In such firms, the founders tend to make all the important strategic decisions and run Page 388 the day-to-day operations. are flat hierarchies operated in a decentralized fashion. They exhibit a low degree of formalization and specialization

factor conditions

escribe a country's endowments in terms of natural, human, and other resources. Other important factors include capital markets, a supportive institutional framework, research universities, and public infrastructure (airports, roads, schools, health care system), among others.

reciprocity, honesty, fairness

ethical norms in business

joint venture

explicit and tacit knowledge, least common of three types of strategic alliances long term commitment by two or more partners facilitates transaction specific investments

value chain activities abroad

fdi are investments in

be audited by certified public accountants, adhere to generally accepted acctg principles

financial statements by public companies must

complementors

firms that provide a good or service that leads customers to value the focal firm's offering more when the two are combined—further strengthens national competitive advantage.

organic organizations

have a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making. Organic structures tend to be correlated with the following: a fluid and flexible information flow among employees in both horizontal and vertical directions; faster decision making; and higher employee motivation, retention, satisfaction, and creativity. Organic organizations also typically exhibit a higher rate of entrepreneurial behaviors and innovation. Organic structures allow firms to foster R&D and/or marketing, for example, as a core competency

matrix structure

he idea behind the matrix structure is to combine the benefits of the M-form (domain expertise, economies of scale, and the efficient processing of information) with those of the functional structure (responsiveness and decentralized focus).

strengthening bargaining power vis-à-vis suppliers and buyers, reducing the threat of entry, and reducing rivalry among existing firms

horizontal integration can favorably affect porters five forces by

firms use this as a corporate strategy

horizontal integration to lower costs through economies of scale and to enhance their economic value creation, and in turn their performance. and to provide complementary products in their offering Reduction in competitive intensity. ▪ Lower costs. ▪ Increased differentiation.

compatibility

how well firms in an alliance fit together culturally is referred to as partner

regional geographic clusters

in global economy, comp adv increasingly exist in

human asset specificity

investments made in human capital to acquire unique knowledge and skills

alliance management capability

is a firm's ability to effectively manage three alliance-related tasks concurrently, often across a portfolio of many different alliances (see Exhibit 9.3):36 Access the text alternative for Exhibit 9.3 ▪ Partner selection and alliance formation. ▪ Alliance design and governance. ▪ Post-formation alliance management. a firm may need to employ it with several different alliances, it involves partner selection and alliance formation

international strategy

is essentially a strategy in which a company sells the same products or services in both domestic and foreign markets. It enables MNEs to leverage their home-based core competencies in foreign markets. An international strategy is one of the oldest types of global strategies (Globalization 1.0) and is frequently the first step companies take when beginning to conduct business abroad

organizational design

is the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization. The key components of organizational design are structure, culture, and control. The goal is to design an organization that allows managers to effectively translate their chosen strategy into a realized one.

differentiation strategy

is to create a competitive advantage by offering products or services at a higher perceived value, while controlling costs

tacit knowledge

it can only be acquired through actively participating in the process

dedicated alliance function

led by a vice president or director of alliance management and endowed with its own resources and support staff. The dedicated alliance function should be given the tasks of coordinating all alliance-related activity in the entire organization, taking a corporate-level perspective. It should serve as a repository of prior experience and be responsible for creating processes and structures to teach and leverage that experience and related knowledge throughout the rest of the organization across all levels. Research shows that firms with a dedicated alliance function are able to create value from their alliances above and beyond what could be expected based on experience alone

achieve comp adv against other companies

mne need effective global strategy in order to

desired level of control over foreign operations and degree of investment

mode of entry when a firm enters a foreign market?

acquisition benefits for agents

not for anticipated shareholder value appreciation, but to build a larger empire, which is positively correlated with prestige, power, and pay. Besides providing higher compensation and more corporate perks, a larger organization may also provide more job security, especially if the company pursues unrelated diversification.

natural resources

often not needed to generate world-leading companies, because competitive advantage is often based on other factor endowments such as human capital and know-how.

adverse selection and moral hazard

organization and control The firm needs to design work tasks, incentives, and employment contracts and other control mechanisms in ways that minimize opportunism by agents. Such governance mechanisms are used to align incentives between principals and agents. These mechanisms need to be designed in such a fashion as to overcome two specific agency problems

transnational

out of all possible global strategies, only transnational strategy tends to lead to the implementation of a global matrix structure

build borrow buy framework

provides a 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). Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage

shared value creation framework

provides guidance to managers about how to reconcile the economic imperative of gaining and sustaining competitive advantage with corporate social responsibility (introduced in Chapter 2).5 It helps managers create a larger pie that benefits both shareholders and other stakeholder

strategic control and reward

re internal-governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees). These systems allow managers to specify goals, measure progress, and provide performance feedback.

blue ocean strategy

requires reconciliation of the trade-offs between differentiation and low cost. To effectively implement a blue ocean strategy, the firm must be both efficient and flexible. It must balance centralization to control costs with decentralization to foster creativity and innovation

cost leadership strategy

s to create a competitive advantage by reducing the firm's cost below that of competitors while offering acceptable value

input controls

seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures budgets is key and so is standard operating procedures

adv of joint venture

strong ties, trust, and commitment that can result between the partners. However, they can entail long negotiations and significant investments

national culture

the collective mental and emotional "programming of the mind" that differentiates human groups.53 Culture is made up of a collection of social norms and mores, beliefs, and values. Culture captures the often unwritten and implicitly understood rules of the game.

local responsiveness

the need to tailor product and service offerings to fit local consumer preferences and host-country requirements; it generally entails higher costs. Walmart sells live animals (snakes, eels, toads, etc.) for food preparation in China. IKEA sells kimchi refrigerators and metal chopsticks in South Korea. McDonald's uses chicken and fish instead of beef in India and offers a teriyaki burger in Japan

structure culture and control

the three key levers that managers have at their disposal when designing their organizations for competitive advantage: structure, culture, and control.

main goal of corporate venture capital

to create real options in terms of gaining access to new tech

purpose of core competence market matrix

to provide guidance regarding how to diversify in order to grow the company

real options perspective

to strategic decision making breaks down a larger investment decision (such as whether to enter biotechnology or not) into a set of smaller decisions that are staged sequentially over time. This approach allows the firm to obtain additional information at predetermined stages. At each stage, after new information is revealed, the firm evaluates whether or not to make further investments

outperform global competition that lacks such intense domestic competition

when companies face highly competitive environment at home, they are more likely to __________

functional

which groups employees into distinct functional areas based on domain expertise. These functional areas often correspond to distinct stages in the value chain such as R&D, engineering and manufacturing, and marketing and sales, as well as supporting areas such as human resources, finance, and accounting

advances in telecommunications, reductions in transportation costs, falling trade barriers

which has made globalization possible

non equity alliance

which is based on contracts between firms. The most frequent forms of non-equity alliances are supply agreements, distribution agreements, and licensing agreements.

agency theory

which views the firm as a nexus of legal contracts.25 In this perspective, corporations are viewed as a set of legal contracts between different parties. Conflicts that may arise are to be addressed in the legal realm. Agency theory finds its everyday application in employment contracts, for example.

VI Benefits

▪ Lowering costs. ▪ Improving quality. ▪ Facilitating scheduling and planning. ▪ Facilitating investments in specialized assets. ▪ Securing critical supplies and distribution channels.