Capstone Final Exam

What is agency theory? Adverse selection? Moral hazard?

- Agency theory is a theory that views the firm as a nexus of legal contracts - Adverse selection is a situation that occurs when information asymmetry increases the likelihood of selecting inferior alternatives - Moral hazard is a situation in which information asymmetry increases the incentive of one party to take undue risk or shirk other responsibilities because the cost incur to the other party

What is business ethics? Are law and ethics synonymous? What are codes of conduct?

- Business ethics are an agreed upon code of conduct in business based on societal norms. Laws and ethics are not synonymous. - Code of conducts are codes that go above and beyond the law

What are inside directors? Outside directors? Which is more independent and how does that independence benefit shareholders?

- Inside directors are generally part of the companies senior management team such as CEO, CFO and COO - Outside directors are board members that are not employees of the firm - Outside directors are more independent and they help watch out for the interest of shareholders

What is the "market for corporate control"? What is a corporate raider?

- Market for corporate control consist of activist investors who seek to gain control of underperforming corporation by buying shares of stock in the open market - Corporate raider an investor who buys a large interest in a corporation whose assets have been judged to be undervalued

What are the three advantages of going global?

-gain access to a larger market -gain access to low-cost input factors -develop new competencies

Which three "Other Governance Mechanisms" exist as noted on page 443?

1. Executive compensation 2. The market for corporate control 3. Financial statements auditors, government regulators and industry analysis.

What three ideas does Michael Porter recommend that managers focus on to ensure managers can reconnect economic and societal needs?

1. Expand the customer base to bring in non consumers 2. Expand traditional internal firm value chains to include more nontraditional partners 3. Focus on creating new

Relating to the build-borrow-buy framework, which 4 sequential questions enable an organization to determine the best course of action to close the strategic resource gap? (Hint, questions relate to relevancy, tradability, closeness, and integration).

1. How relevant are the firms existing internal resources to solving the resource gap? 2. How tradable are the targeted resources that may be available externally? 3. How close do you need to be to your external resource partner? 4. How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?

What are three disadvantages of going global?

1. Liability of foreignness 2. Loss of reputation 3. Loss of intellectual property

What are the four beneficial characteristics enjoyed by public stock companies?

1. Limited Liability for investors 2. Transferability of investor ownership 3. Legal personality 4. Separation of legal ownership and management control

With which three mechanisms can alliances be governed?

1. Non-equity alliances 2. Equity alliances 3. Joint ventures

For which three reasons do we see so many mergers?

1. Principal agent problems 2. The desire to overcome competitive disadvantage 3. Superior acquisition and integration capability

Continued economic development across the global has which two consequences for MNE?

1. Rising wages and other cost 2. When standard of living rises, MNEs are hoping that increased purchasing power will enable workers to export materials

What are five common reasons firms enter strategic alliances?

1. Strengthen competitive position 2. Enter New Markets 3. Hedge against uncertainty 4. Access critical complementary assets 5. Learn new capabilities

What two issues are at the forefront of CEO pay?

1. The absolute size of the CEO pay package compared with the pay of the average employee. 2. The relationship between CEO pay and firm performance.

What is a multinational enterprise (MNE)? Foreign direct investment (FDI)? Global strategy?

A MNE is a company that deploys resources and capabilities in the procurement, production, and distribution or goods and services in at least two countries. FDI is a firms investments in value chain activities abroad. Global Strategy is a corporate strategy to gain and sustain a competitive advantage when competition against other foreign and domestic companies around the world.

What is a licensing agreement?

A contractual agreement that gives someone permission to engage in a specifically defined activity or to use a certain property owned by someone else

What is the CAGE distance framework and how does it aid MNEs in deciding where in the world to compete? Be familiar with Exhibit 10.6.

A decision framework based on the relative distance between home and a foreign target country along four dimensions.

What is managerial hubris and its two forms? Why did Quaker Oats Company's acquisition of Snapple fail?

A form of self-delusion in which managers convince themselves of their superior skills. 1. Managers of the acquiring company convince themselves that they are able to manage 2. Although most top-level managers are aware that the majority of acquisitions destroy. It was difficult and costly to integrate snapple

What is corporate governance? Why did the accounting scandals of the early 2000s and the global financial crisis get so out of hand?

A system of mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. It got out of hand because the enterprises involved did not follow corporate governance.

How did the strategic alliance between HP and DreamWorks Animation SKG affect HP?

Ability to compete with Ciscos high end videoconferencing solution.

What is liability of foreignness? What challenges did Walmart face that resulted in its exit from Germany?

Additional cost of doing business in an unfamiliar cultural and economic environment and of coordinating across geographic distances. Underestimated its liability of foreignness in Germany.

What is information asymmetry?

Agents are better informed than the principals

How does USMCA (NAFTA) impact the Administrative and Political distance between Canada, Mexico & the US?

Allowed for dominant trading partners

What is a leveraged buyout (LBO)?

An acquisition method funded through high levels of debt that can also be used as a valuation method

What is globalization 3.1?

China and U.S.A competing for supremacy

Relating to learning new capabilities, what is co-opetition? Learning races? Why did Toyota enter into the NUMMI joint venture with GM?

Co-opetition is cooperation by competitors to achieve a strategic objective. Learning races is a situation in which both firms are motivated top form an alliance for learning but the rate at which firms learn may vary. Toyota entered to learn how to introduce its lean manufacturing program with an American force.

In terms of value economic creation, why do firms expand beyond their domestic borders?

Competitive advantage

What is the relational view of competitive advantage?

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

What is the death-of-distance hypothesis? What is national competitive advantage?

Death of distance is the assumption that geographical location alone should not lead to firm level competitive advantage bc firms are now more than able to source inputs globally. National competitive advantage is world leadership in specific industries

Why is insider trading unethical?

Due to egregious exploitation of information asymmetry

What is an equity alliance? What is tacit knowledge?

Equity alliance is a partnership in which at least one partner takes partial ownership in the other. Tacit knowledge is knowledge that cant be codified.

What is corporate venture capital (CVC)?

Equity investments by established firms in entrepreneurial ventures

What does Porter's Diamond Framework seek to explain? What are each of the four interrelated factors and how does each contribute a national competitive advantage?

Explain national competitive advantage. 1. Factor conditions 2. Demand conditions 3. Competitive intensity in focal industry 4. Related and supporting industries/complementors

What does the term tradable imply? What are examples of ways to "borrow" resources from other companies?

Firm is able to source the resource externally through a contract that allows transfer of ownership. Licensing and Franchising are ways to borrow.

What are the characteristics of each of the three stages of globalization?

Global 1 (1900-1941) : Important functions stationed in home country and only used oversees for sales and distribution. Global 2 (1945-200) : Significant amounts of FDI Global 3 (21st Century) : Huge amount of international trade going on.

What is the globalization hypothesis? What is local responsiveness? What is the Integration-Responsiveness framework?

Globalization Hypothesis states the needs and preferences of consumers throughout the world. Local responsiveness is the need to tailor a product or service offerings to fit local preferences Integration-Responsiveness framework juxtaposes the opposing pressures for cost reductions and local responsiveness to derive four different positions.

What is globalization? How has globalization impacted world's market economies?

Globalization is the process of closer integration and exchange between different countries and peoples worldwide. It has allowed economies have become integrated and independent

What are the Modes of Foreign-Market Entry and the associated levels of investment and control associated with each mode (exhibit 10.7)?

High Level of control: foreign acquisitions and greenfield (Help reduce exposure to loss of reputation and IP) Exporting is the oldest form and used to test market Strategic alliances : Middle control

Which company is more profitable, Walmart or IKEA?

IKEA

What are the four strategic positions of the Integration-Responsiveness Framework? (International, multidomestic, global-standardization, transnational). What are the characteristics, strengths/benefits and weaknesses/risks of each?

International: Strengths (Limited local responsiveness) and Weakness (Exchange rate fluctuations) Multi domestic: Strength (Faces reduced exchange rate exposure) Weakness (Costly and inefficient) Global Standardization: Strength (Cost reductions) and Weakness (Cost Competition) Transnational: Strengths ( Localization and standardization) and Weakness (High risk of IP expropriation)

What is board independence?

Is when they don't have relationship with the company except as directors.

What is the Principal-Agent problem?

It is a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them.

Why would it sometimes be preferable to obtain resources through strategic alliances, rather than outright acquisition?

Less costly

What are location economies? What is a polycentric innovation strategy?

Location economies benefit from locating value chain activities in the worlds optimal geographies for a specific activity. Polycentric innovation strategy is in which MNE's draw on multiple, equally important innovation hubs throughout the world characteristics.

In which two ways do the use of acquisitions and greenfield plants reduce the firm's exposure to downsides to global business?

Loss of reputation and intellectual property

In gaining access to low-cost input factors, what low-cost input factor was the key driver for Globalization 1.0 and 2.0? What was the key driver for 3.0?

Low cost material were key drivers for 1.0 and 2.0. Lower labor cost for 3.0

What is a merger? Acquisition? Hostile takeover?

Merger is the joining of two independent companies to form a combined entity. Acquisition is the purchase or takeover of one company by another. Hostile Takeover is the acquisition in which the target company does not wish to be acquired

What is national culture? Which framework provides a useful to proxy cultural distance? What is cultural distance? Which countries have low cultural distance to the US?

National culture is the collective mental and emotional programing of the mind that differentiates human groups. Cultural distance is the disparity between an internationally expanding firms home country and its targeted host country. Australia, Canada, Ireland, New Zealand and UK

What benefits do private companies enjoy that public companies do not?

Not required to disclose financial statements, experience less scrutiny, and can focus on long-term viability.

When does an alliance qualify as strategic?

Only if it has the potential to affect a firm's competitive advantage

What three options do corporate executives have at their disposal to drive firm growth?

Organic growth through internal development, external growth through alliances, or external growth through acquisitions

What percentage of Fortune 1000 CEOs indicated more than one-quarter of their firm's revenues were derived from strategic alliances?

Over 80%

How do auditors, government regulators, and industry analysists serve as external governance mechanisms?

Oversee stock trading and enforce federal securities law

What is partner compatibility? Partner commitment?

Partner compatibility captures the aspects of cultural fit between firms. Partner commitment concerns the willingness to make available necessary resources and to accept short-term sacrifices.

What is the first step in the process of alliance management?

Partner selection and alliance formation

What is a non-equity alliance? What are the most frequent forms of non-equity alliances?

Partnership based on contracts between firms. Supply agreements, distribution agreements and licensing agreements.

Relating to private start-up companies, what is a unicorn?

Private start-up companies valued at $1 Billion or more

What is the shared value creation framework? How does GE's Ecomagination strategy exemplify the shared value creation framework?

Proposes that managers maintain a dual focus on shareholder value creation and value creation for society. They have strengthen their competitiveness

What is the build-borrow-buy framework? What is the strategic resource gap and why is it the starting point in the build-borrow-buy framework?

Provides a framework that aids strategic leaders in deciding whether to pursue internal development, enter contractual arrangement or strategic alliance or acquire new resources. The gap is strategic because it allows a firm to gain competitive advantage.

Is the world fully globalized? Semi-globalized?

Semi-globalized

What is on the job consumption?

Senior management's use of company funds to acquire perks that enhance status

Who are the legal owners of a public stock company?

Shareholders

What is shareholder capitalism?

Shareholders—the providers of the necessary risk capital and the legal owners of public companies—have the most legitimate claim on profits.

What is CEO/chairperson duality?

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

What are stock options? Why would a board of directors grant stock options as part of a manager's compensation package?

Stock options are incentive packages to align the interest of the shareholders.

Relating to hedging against uncertainty, what is a real-options perspective?

Strategic decisions making break down a larger investment decision into a set of smaller decisions that are staged over time.

What are the pros and cons of a joint venture?

Strong ties, trust, and commitment between partners but they require long negotiations and significant investments.

Why did Airbus invest $600 million in Mobile, AL to build jetliners?

Take advantage of business friendly conditions such as lower taxes, labor cost and cost of living

What is horizontal integration? What are the three main benefits of a horizontal integration strategy?

The process of merging with competitors, leading to industry consolidation. 1. Reduction in competitive intensity 2. Lower cost 3. Increased differentiation

What are the pros and cons of a non-equity alliance?

They are flexible and easy to initiate and terminate but they are temporary and can also lead to weak ties.

How do colony-colonizer relationships impact trade?

They have a strong positive effect on bilateral trade between countries.

What are the pros and cons of an equity alliance?

They produce stronger ties and greater trust between partners but they require a lot of investments which lacks flexibility and speed towards reaping benefits.

Using which two criteria do strategic leaders evaluate the relevance of internal resources? Under what conditions are the firm's internal resources sufficiently relevant to pursue internal development?

They test whether they are similar or superior. They are relevant if both conditions are met.

Why do firms such as Eli Lilly, HP, P&G and IBM compete to obtain trustworthy reputations?

To become the alliance "partner of choice" for small technology firms, universities and individual inventors.

Why did Google acquire Waze?

To gain access to new compatibility and to prevent rivals from gaining access.

What is a strategic alliance? Are they rare or common? Why are strategic alliances attractive in comparison to "going it alone"?

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities.

What is the most important determinant of Economic distance between two countries?

Wealth and per capita income of consumers

Relating to M&A and Competitive advantage, what is the "winner's curse"? On average, do M&As destroy or create shareholder value?

Winners curse is when you end up winning the prize but may have overpaid for it. They destroy on average.

Can creating a control system that encourages desired values foster ethical behavior in employees?

Yes

Do wealthy countries engage in relatively more cross-border trade than poorer ones?

Yes

What is a joint venture?

a commercial enterprise undertaken jointly by two or more parties that otherwise retain their distinct identities.

What is alliance management capability?

a firm's ability to effectively manage three alliance-related tasks concurrently: 1) partner selection and alliance formation, 2) alliance design and governance, and 3) post-formation alliance management

What is a board of directors?

a panel of individuals who are elected by a corporation's shareholders to oversee the management of the firm

What is fiduciary responsibility?

a requirement that they act in the best interest of the client

What is a poison pill?

a tactic utilized by companies to prevent or discourage hostile takeovers

What is explicit knowledge?

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