Strategic Management Final (Ch 8-12)
Why Do Firms Need To Grow?
1. Increase Profits 2. Lower Costs 3. Increase Market Power 4. Reduce Risk 5. Motivate Management
Three Dimensions of Corporate Strategy
1. Vertical Integration 2. Diversification 3. Geographical Scope Core Competencies: unique strengths embedded deep within a firm - allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost Economies of Scale: occur when a firm's average cost per unit decreases as its output increases. Given size, a large company can spread its fixed costs over the millions of G/s it produces, gaining more buying power and larger market share because of it Economies of Scope: savings that come from producing two (or more) outputs or providing different services at less cost than producing individually, though using the same resources and technology - leveraging this can be beneficial to offer services at a lower cost together than it would individually (ex: amazon offering large range of products online, lower than than offering each product individually) Transaction Costs: all costs associated with an economic exchange. Concept is developed in transaction cost economics, a strategic management framework, and enables managers to answer the question of whether or not is is cost-effective for their firm to expand its boundaries through vertical integration or diversification.
CAGE Distance Framework
A decision framework based on the relative distance between home and a foreign target country along four dimensions: cultural distance, administrative and political distance, geographical distance, and economic distance C) Cultural - collective mental and emotional programming of the mind that differentiate human groups - social norms and morals, beliefs, and values - cultural distance: disparity between internationally expanding a firms some country and its targeted host country A) Administrative and Political - absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal and financial institutions G) Geographical Distance - costs to cross-boarder trade rise with distance - does not simply capture how far two countries are but also includes physical size and such E) Economic - wealth and per capita income of consumers is more important determinant of economic distance
Alliance Management Capability
A firms ability to effectively manage three alliance-related tasks concurrently: 1) partner selection and alliance formation, 2) alliance design and governance, 3) post-formation alliance management VRIO Framework in Post Formation Alliance Management: - concerns ongoing management of the alliance - relation specific investments, establish knowledge sharing routines, and building interfere trust
Organizational Inertia
A firms resistance to change the status quo, which can set the stage for the firm's subsequent failure - failure to change can result in overall failure as a firm Successful firms often: 1) master and fit with the current environment 2) success is measured by financial measurements 3) structures, measures, and systems to accommodate and manage size 4) a resulting organizational inertia tends to minimize opportunities and challenges create by shifts in the internal and external environment
Shared Value Creation Framework
A model proposing that managers have a dual focus on shareholder value creation and value creation for society - markets are defined not only be economic needs by also by societal needs - advances the perspective that externalities such as pollution, wasted energy, and costly accidents actually create internal costs, as lest in lost reputation if not directly on the bottom line 1) Expand Customer base to bring in nonconsumers 2) expand traditional internal firm value chains to include more nontraditional partners 2) focus on creating new regional clusters
Leveraged Buyout
A single investor buys, with the help of borrowed money leveraged against the company;s assets, the outstanding shares of a publicly traded company in order to take it private
Groupthink
A situation in which opinions coalesce around a leader without individuals critically evaluating and challenging that leader's opinions and assumptions. - leads to flaws decision making with potentially disastrous consequences Founder imprinting: process by which the founder defines and shapes and organizations culture, which can persist for decades past his/her departure
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 - attempts to address the principal-agent problem - stockholders are legal owners, but they delegate decision making to professional managers - agents may be more interested in maximizing total comp rather than total returns - corporate governance ensures that values are aligned between the two parties
Agency Theory
A theory that vies the firm as a nexus of legal contracts - adverse selection: situation that occurs when information asymmetry increases the likelihood selecting inferior alternatives - moral hazard: describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other sponsibilities because the costs accrue to the other party
Taper Integration
A way of orchestrating value activities in which a firm is backwardly integration, but it also relies on outside-market firms for some of its supplies, and/or forwardly integrated but also relies on some outside-market firms for some distribution - example: apple and nike: own retail outlets, both brick and mortar and online Benefits: 1. exposes in-house suppliers and distributors to market competition so that they performance comparisons are possible. - allows a firm to retain and fine-tune its competencies in upstream and downstream value chain activities 2. enhances a firms flexibility 3. firms can combine internal and external knowledge, paving path for innovation
Business Ethics
An agreed-upon code of conduct in business, based on societal norms
Restructuring the Corporate Business with BCG
BCG Growth-Share Matrix: a corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along the relative market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into four categories, (dog, cash cow, star and question mark), each of which warrants a different investment strategy 1. Dogs: low, stable earnings. Neutral or negative cash flow - underperforming businesses - low market growth and low market share strategy = havest/divest 2. Star: high stable growing earnings and neutral cash flows - hold or invest for growth - high market share and high market growth 3. Cash Cow: high stable earnings and high stable cash flow - hold for future investment - high market share and low market growth - need cash to avoid turning to a dog 4. Question Mark: low unstable or growing earnings and negative cash flow - could turn to dogs or stars - high market growth, low market share - strategy is to increase market share or harvest/divest
Shareholder capitalism and Public stock companies
shareholders, the providers of the necessary risk capital and the legal owners of public companies - have the most legitimate claim on profits public stock company is an important institutional arrangement in modern ,free market economies - society grants the right to incorporation State Charter > Shareholders > board of directors > management > employees 1. Limited liability for investors 2. transferability of investor ownership 3. legal personality 4. separation of legal ownership and management control
Specialized Assets
Unique assets with high opportunity cost: they have significantly more value in their intended use than in their next best use. They come in three types: site specificity, physical asset specificity, and human-asset specificity 1. Site Specificity: assets required to be co-located, such as equipment necessary for mixing bauxite and aluminum smelting 2. Physical-asset specificity: assets whose physical and engineering properties are designed to satisfy a particular customer, such as a bottling machinery for Coca Coal. 3. Human-Asset Specificity: investments made in human capital to acquire knowledge and skills, such as mastering the routines and procedures of a specific organization, which are not transferable to a different employer
Organizational Culture and Competitive Advantage
Unique culture must help it in some way to increase economic value creation (V-C) - must be increasing perceived value of the product/service and lower the cost of its production/delivery - valuable, rare, difficult to immitate, and firm must be organized to capture value added.
Simple Structure
Used by small firms with low organizational complexity - founders tend to make all important decisions and run day-day operations - entrepreneurial ventures such as Facebook in 2004 - simple structures of flat hierarchies operated in decentralized fashion. - low degree of formalization and specialization - neither professional mangers nor sophisticated systems are in place, which often leads to an overload for founder or CEO when firm experiences growth
Strategic Alliances
Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services. - alliances have become ubiquitous especially in high tech - umbrella term the denotes different hybrid organizational forms, such as longterm contracts, equity alliances, joint ventures, etc.
Vertical Market Failure
When the markets along the industry value chain are too risky, and alternatives too costly in time or money
Organizational Structure
a key to determining how the work efforts of individuals and teams are orchestrated and how resources are distributed
Transaction Costs
all internal and external costs associated with an economic exchange, whether within a firm or in markets 1. External Transaction Costs: costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract 2. Internal Transaction Costs: costs pertaining to organizing an economic exchange: aka recruiting and retaining employees, paying salaries and benefits, administrative, etc. Transaction Cost Economics: explains and predicts the boundaries of the firm. Insights gained help managers decide what to do in house versus what services and products to obtain from the external market
Board of Directors
centerpiece of corporate governance, composed of inside and outside directors who are elected by the shareholders - inside: board members who are part of the company's senior management team; appointed by shareholders to provide the board with necessary info pertaining to company inner workings and performance outer: board members who are not of the firm, but are frequently senior executives from other firms of full time professionals CEO/Chairperson Duality: situation where the CEO of a publicly traded company is also the chairperson of the board of directors - declining but still upheld - about 70% of SP50 had this in 2005 but 56% in 2012 - board of directors oversees business activities - CEO reports to board of directors and acts as a liaison between company and board - CEO has high level responsibilities and all other management of a company while the functions of bard include improving budget and so on
Organic Organization
characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making
Principal-Agent Problem
Major disadvantage of organizing economic activity within firms, as opposed to within markets. - can arise when an agent such as a manager, performing activities on behalf of the principal (owner), pursues his or her own interests - high powered incentives, increased flexibility, search costs, opportunism by other parties, incomplete contracting, enforcement of contracts
Strategy and Structure
directly impacts a firms performance - relationship is dynamic - successful new ventures generally grow first by increasing sales, then by obtaining larger geographical reach, and finally by diversifying through vertical integration and entering into new and unrelated markets
functional structure
groups employees into distinct functional areas based on domain expertise - often correspond to distinct stages in value chain such as R&D, engineering, sales, manufacturing, etc - department head of each reports to CEO, who coordinates and integrates the work of each function - allows for a higher degree of specialization and deeper domain expertise than a simple structure - cost leadership - blue ocean = ambidextrous organization: able t balance and harness difference activities among the tradeoff -differentiation Exploitation: applying current knowledge to enhance short term performance Exploration: searching for new knowledge to enhance a firms future performance
M&A and Competitive Advantage
in most cases, M&A does not lead to competitive advantage - track record is rather mixed - many MA activities destroy shareholder value because it accrues to the shareholders of the firm that was taken over because acquirers often pay a premium when buying the target company - sometime companies overpay aka winners curse Reasons for Mergers: - principal-agent problems - desire to overcome competitive advantage - superior acquisition and integration capability
Mergers and Acquisitions
Merger: the joining of two independent companies to form a combined entity - firms agree to join in order to create a combined entity Acquisition: the purchase or takeover of one company by another; can be friendly or unfriendly. - considered a hostile takeover when the target company does not want to be acquired Why Do firms merge with competitors: - horizontal integration: process of merging with competitors, leading to industry consolidation aka acquiring a competitor - firms should do it if the target firm is more valuable inside the acquiring firm than as a continued standalone company - NAV must be positive to aid in gaining and sustaining a CA - industry wide trend toward horizontal integration leads to industry consolidation Reasons for Horizontal Integration: 1) reduction in competitive intensity 2) lower costs 3) increased differentiation Reasons for Acquiring other Firms: - To gain access to new markets and distribution channels - To gain access to a new capability or competency - To preempt rivals
Amazon's Example of Integration
Morphed from a mere online book retailer into the "everything" store. IT transformed into the world's largest online retailer. From books, it diversified into consumer electronics, media content, cloud computing services, and other business endeavors. - Jeff Bezos decided to compete in a number of different industries, some related to AMZNs business and some not
Strategic Outsourcing
Moving one or more value chain activities outside the firms boundaries to other firms in the industry value chain - reduces its level of vertical integration - rather than developing own HR management systems, firms outsource to companies such as Oracle, PeopleSoft, EDS, etc
Organizational Design
Process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization - structure, culture, control - allows managers to effectively translate chosen strategy into realized one - structure can be defined as the design of organization which the enterprise is administered - good design creates a CA because the managers and company are designed to succeed
Information Asymmetries
Situation in which one party is more informed than another because of the possession of the private information - when firms transact in the market, such unequal information can lead to a lemons problem - caveat-emptor - buyer beware. Information asymmetries can result in crowding out of desirable goods and services by inferior ones.
Joint Ventures
Standalone organization created and jointly owned by two or more parent companies - Hulu is jointly owned by NBC and Disney - strong ties, trust, commitment that be result between partners - risk is that knowledge shared with the new partner could be misappropriated by opportunistic behavior - any rewards from the collaboration must be shared
Stock Options
Incentive mechanism to align the interests of shareholders and managers, by giving the recipient the right but not obligation to buy a company's stock at a predetermined price sometime in the future
Types of Corporate Diversification
2 Variables: - Percentage of revenue from the dominant or primary business - Relationship of the core competencies across the business unit 1. Single Business: derives more than 95% of its revenue from 1 business. remaining 5% is not yet significant to success of the firm 2. Dominant Business: derives 70-95% of revenues from single business and it pursues at least one other business activity that accounts for the remainder of revenue - shares competencies in products, services, technologies and distribution 3. Related Diversification: corporate strategy in which a firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity - Related-Constrained: executives pursue only businesses where they can apply the resource and core competencies already available in the primary business - Related-Linked: executives pursue various business opportunities that share only a limited number of linkages 4. Unrelated Diversification Strategy: corporate strategy in which a firm derives less than 70% of its revenues from a single business and there are few, if any, linkages among its businesses - Conglomerate: company that combines two or more SBUS under one overarching corporation; follows unrelated diversification strategy
Advantages and Disadvantages of Going Global
Advantages: 1) Gain access to a larger market - becoming an MNE provides significant ties for companies given economies of scale and scope 2) Gain access to low-cost input factors 3) Develop new competencies Disadvantages: 1) liability of foreignness 2) loss of reputation 3) loss of intellectual property
Types of Corporate Diversification
Diversification: an increase in the variety of products and services a firm offers or markets and the geographical regions in which it competes Product Diversification Strategy: corporate strategy in which a firm is active in several different product markets Geographical Diversification Strategy: corporate strategy in which a firm is active in several different countries Product-Market Diversification Strategy: corporate strategy in which a firm is active in several different markets and several different countries
Mechanistic Organization
Characterized by a high degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making - communication and authority lines are top-down and well defined
Build-Borrow-or-Buy Framework
Conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual agreement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy). - build = internal development - borrow = strategic alliances - buy = acquiring a firm Questions: 1. Relevancy: how relevant are the firms existing internal resources to solving the resource gap? 2. Tradability: how tradable are targeted resources that may be available externally? 3. Closeness: how close do you need to be to your external resource partner? 4. Integration: how well can you integrate the targeted firm, should you determine you need to acquire the resource partner?
Corporate Diversification and Firm Performance
Corporation pursue diversification to gain and sustain competitive advantage - u-shaped relationship between type of diversification and overall firm performance - high and low levels of diversification and generally associated with lower overall performancee, while moderate levels are associated with higher firm performance - companies that focus on a single business or unrelated diversification often fail to achieve additional value as companies that pursue dominant or related diversification strategies Diversification Discount: situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business parts Diversification Premium: stock price of a diversified firm is valued at greater than the sum of their individual business units
Poison Pill
Defensive provisions to deter hostile takeovers by making the target firm less attractive
Industry Value Chain
Depiction of the information of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing 1. Backward Vertical Integration: changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain 2. Forward Vertical Integration: changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain
Organizational Culture
Describes the collectively shared values and norms of an organizations members. - values define what is considered important, norms define appropriate employee attitudes and behaviors - socialization: process whereby employees values and norms though immersions in its day to day operations - allows employees to function productively and to take on specific roles within the organization
Parent-Subsidary Relationship
Describes the most-integrated alternative to performing an activity within ones own corporate family. The corporate parent owns the subsidiary and can direct it via command and control - transaction costs that arise are frequently due to political battle turns, capital budgeting, etc
MNE Strategies to Enter Foreign Markets
Exporting: less investment and control - producing goods in one country to sell in another = one of the oldest forms of internationalization - can do contract based, strategic alliances, or subsidiary Globalization Hypothesis: assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogeneous Local Responsiveness: the need to tailor product and service offerings to fit local consumer preferences and host-country requirements 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 - international - multi domestic - global-standardization - transnational International strategy: strategy involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets - low pressure for responsiveness and low pressure for cost reductions - large domestic markets or strong exporters - well suited for high-end products such as machine tools or luxury goods - products and services tend to have strong brands Multi domestic Strategy: Strategy pursued by MNEs that attempt to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies - high pressure for responsivnesss - low for cost reduction - compete in host countries with large or lucrative but idiosyncratic domestic markets - food industries or consumer products -MNE wants to be perceived as local Global Standardization Strategy: attempt to reap significant economies of scale and location economies by pursuing global division of labor based on wherever best of class capabilities resides at the lowest cost - computer hardware or Thinkpad etc - low responsiveness, high pressure for cost reductions -MNES that are offering standardized products and services Transnational Strategy: attempts to combine benefits of localization with those of global standardization = high responsiveness plus low cost - blue ocean strategy = reconcile product differentiations at low cost = MTV is an example Death of Distance Hypothesis: assumption that geographical location alone should not lead to firm-level competitive advantage because firms are now, more than ever, able to source inputs globally National Competitive Advantage: world leadership in specific industries
Matrix Structure
Organizational structure that combines the functional structure with the M-form - vertical axis of geopgraical location - horizontal axis of m form SBUS - tend to use this to pursue a transnational strategy International: uses functional multi domestic: multidivisional global standardization: multidivisional transnational: global matrix - disadvantages: difficult to implement, often not clear - predictable
NonEquity Alliances
Partnership based on contracts between the firms - supply agreements, distribution agreements, licensing agreements - vertical strategic alliances connecting different parts of the industry value chain Explicit Knowlege: knowledge that can be codified, concerns knowing about a process of product - licensing agreements, patents, user manuals, fact sheets, scientific publications, etc
Equity Alliance
Partnership in which at least one partner takes partial ownership in the other - less common than contractual and require larger investment - signal stronger commitments - sharing of tacit information: knowledge that cannot be codified, knowing how to do a certain task - can be acquired only through actively participating in the process - Corporate VC (CVC): equity investments by established firms in entrepreneurial ventures, CVC falls under the broader rubric of equity alliances - equity alliances tend to product stronger ties and greater trust between partners - offer a window into new technology that can be exercised if successful or abandoned if not promising
Corporate Strategy
The decisions that senior management makes and the goal-directed actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously 1. In what stages of the industry value chain should the company participate (vertical integration)? 2. What range of products and services should the company offer (diversification)? 3. Where should the company compete geographically in terms of regional, national, or international markets (geographical scope)?
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 - reduce costs of doing business around the world, opens doors to much larger market than any one home country, and allows companies to source supplies at lower costs, to learn new competencies, and further differentiate products Multinational Enterprise (MNE): a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries Foreign Direct Investment (FDI): a firms investments in value chain activities Global Strategy: part of a firms corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world Stages of Globalization: 1) 1.0 = 1990-1941: all important business functions were located in the home country. only sales and distributions took place overseas 2) 2.0 = 1945-2000: end of WWII, came a new focus on growing business - not only to meet needs that went unfulfilled during war years, but also to reconstruct damage from the war. foreign direct investment 3) 21st Century: - MNES are vanguard of globalization and global collaboration networks are everywhere - creating global network of expertise is beneficial not only in service industries but also in the industrial sector
Multidivisional Structure
organizational structure that consists of several distinct strategic business units (SBUs) each with its own profit and loss responsibility - each SBU is operated more or less independently from one another - led by CEO who is responsible for unit strategy and its operations - CEOs of each division report to corporate office, which is led by executives - firms that pursue either related or unrelated diversification = m form is preferred - disadvantages: increasing bureaucracy - competing with one another potentially - spinning out SBUs make them indpenede than be beneficial
Strategic Alliances
voluntary agreements between firms that involve sharing of knowledge, resources and capabilities with the intent of developing processes, products, or services - use of SA is to implement a corporate strategy that has exploded in the pat few decades, with thousands forming each year - relational view of CA: strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries Why? 1. strengthen competitive position 2. enter new markets 3. hedge against uncertainty 4. access critical complementary assets 5. learn new capabilities
