MGT499 UNIT THREE EXAM
Mergers and acquisitions are a popular vehicle for corporate-level strategy implementation for three reasons:
(1) because of principal-agent problems (2) the desire to overcome competitive disadvantage (3) the quest for superior acquisition and integration capability
An alliance management capability consists of a firm's ability to effectively manage alliance-related tasks through three phases
(1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management.
As a corporate strategy, firms use horizontal integration to
(1) reduce competitive intensity (2) lower costs (3) increase differentiation.
5 reasons to enter an alliance
(1) strengthen competitive position (2) enter new markets (3) hedge against uncertainty (4) access critical complementary resources (5) learn new capabilities
Firms engage in acquisitions
(1) to access new markets and distributions channels, (2) to access new capability or competency, and (3) for strategic preemption.
Alternatives to Vertical Integration: outsourcing
- Moving one or more internal non-core value chain activities outside the firm's boundaries - off-shoring and onshoring
How to grow a firm
- New value chain activities - New geographic markets - New products/services
Corporate Strategy
- a quest for competitive advantage when competing in multiple areas
disadv of firms
- administrative cost - low powered incentives - principal agent problems
Things she said will be on exam for sure
- backwards and forward integration
Adv of firms
- command and control - coordination - transaction-specific investment - community of knowledge
adv of markets
- high powered incentives - flexbility
disadv of markets
- search cost - opportunism - enforcement of contracts - income contracting
The scope of the firm determines boundaries along the three dimensions
- vertical integrations (stages of industry value chain) - geographic scope (regional, national, global market) - horizontal integration (product and services)
Three diversification strategies
1. Product diversification: selling different kinds of products 2. Geographic diversification 3. Product - market diversification
4 main types of business diversification
1. Single business 2. Dominant business 3. Related diversification 4. Unrelated diversification: the conglomerate
types of Corporate Diversification
1. Single business: low level of diversification. 2. Dominant business: additional business activity pursued. 3. Related diversification:• Constrained: all businesses share competencies 4. Unrelated diversification (conglomerate): no businesses share competencies.
why firms need to grow
1. increase profits 2. lower costs 3. increase market power 4. reduce risk 5. motivate management
conglomerate
A company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy.
Which of the following are true of alliance management capability? (Select all that apply.) Multiple select question. Every firm has alliance management capability. A firm may need to employ it with several different alliances. It has little effect on a firm's competitive advantage. It involves partner selection and alliance formation.
A firm may need to employ it with several different alliances. It involves partner selection and alliance formation.
define taper integration
A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies and/or is forwardly integrated but also relies on outside-market firms for some of its distribution.
What is a major problem for between 30% and 70% of all strategic alliances? Multiple choice question. At least one partner in the alliance considers the venture to be a failure. The government forces the alliance to shut down due to monopoly concerns. One partner buys the other partner out at a major discount. One partner effectively steals the product of the venture, cutting the other out of the profits.
At least one partner in the alliance considers the venture to be a failure.
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.
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
industry value chain
Depiction of the transformation 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.
True or false: Firms tend to enter strategic alliances when they have no other choice. True false question. True False
False
True or false: In most cases, mergers and acquisitions create competitive advantage. True false question. True False
False
Which is not the risk of vertical integration? a) Too much vertical integration may create a legal problem b) Internal suppliers may lose the incentive to improve quality c) It would increase internal transaction cost to search a right partner firm d) a firm's strategic flexibility is compromised when environment is changing
It would increase internal transaction cost to search a right partner firm
Transaction Cost Economics
Key question: Should a firm produce in-house (make) or outsource (buy)? This theory suggests that the answer depends on transaction costs; a firm should choose an option that entails 'less' transaction cost
The type of diversification depends on 2 key variables
The percentage of revenue from the dominant/primary business and The relationship of the core competencies across the business units
What is a true statement about strategic alliances? Multiple choice question. They have a high failure rate. They rarely, if ever, fail. They have an average failure rate. They have a low failure rate.
They have a high failure rate.
Which statements about joint ventures are true? Multiple select question. They involve the sharing of both explicit and tacit knowledge. Only one partner contributes equity. They are primarily used in short-term commitments. They are the least common of the three types of strategic alliances.
They involve the sharing of both explicit and tacit knowledge. They are the least common of the three types of strategic alliances.
Which of the following statements about equity alliances is true? Multiple choice question. They are more common than contractual, non-equity alliances. They are based on full ownership. They result in weak ties between the partners. They require larger investments than non-equity alliances.
They require larger investments than non-equity alliances.
foward vertical integration
a focal firm entering into its buyers' business
backward integration
a focal firm entering into its suppliers' business
Which of the following best illustrates physical-asset specificity? A) a unique training program developed in an organization B) a ship container designed to carry more than the average load of iron ore C) a generic machine that can be used to churn different mixtures D) a machine solely designed to give a candy its trademarked shape
a machine solely designed to give a candy its trademarked shape
Which of the following terms refers to when one firm purchases or takes over another firm? Multiple choice question. merger wholly owned subsidiary strategic alliance acquisition
acquisition
hich of the following terms refers to when one firm purchases or takes over another firm? Multiple choice question. acquisition strategic alliance merger wholly owned subsidiary
acquisition
Strategists can grow their firms by growing organically through internal development or externally through alliances and ______. Multiple choice question. divesting businesses PESTEL analysis capabilities acquisitions
acquisitions
A firm with alliance management capability is able to effectively manage which of the following tasks? (Check all that apply.) Multiple select question. purchase of the alliance partner alliance design and governance post-formation alliance management partner selection and alliance formation
alliance design and governance post-formation alliance management partner selection and alliance formation
What are the phases of alliance management? (Check all that apply.) Multiple select question. alliance design and governance post-formation alliance management tacit and explicit knowledge collaboration strategic network manipulation partner selection and alliance formation
alliance design and governance post-formation alliance management partner selection and alliance formation
Which term refers to a company's ability to handle the three specific tasks related to an alliance concurrently and effectively? Multiple choice question. alliance management capability alliance governance formative specification partner alliance design
alliance management capability
Which term refers to a company's ability to handle the three specific tasks related to an alliance concurrently and effectively? Multiple choice question. formative specification alliance governance alliance management capability partner alliance design
alliance management capability
Radial Autos currently sources components such as airbags, upholstery, and brake pads from various suppliers in the industry value chain. In order to lower production costs and reduce the risk of interruptions in the supply of components, Radial should pursue A) backward integration B) forward integration C) product diversification. D) geographic diversification.
backward integration
A conceptual model that helps strategists choose between seeking internal development, entering into an alliance, or acquiring new resources, capabilities, and competencies is called the "______ framework." Multiple choice question. build-borrow-or-buy organic growth capability development internal-versus-external growth
build-borrow-or-buy
Make or Buy Continuum
buy, short term contracts, long term contracts, equity alliances, joint ventures, parent subsidiary relationship, make
Economies of scope
cost advantages/savings that come from producing an increasing range of products/services at less cost than producing each individually by sharing same resources/capabilitie
Internal transaction cost
cost associated with organizing an economic exchange within a firm; administrative costs and etc. often increase as a firm becomes more vertically integrated. - e.g. the costs of recruiting and retaining employees, paying salaries and benefits, setting up a shop floor, providing office space, organizing/monitoring/supervising work..
External transaction costs
cost of searching for a firm/individual with whom to contract, and then negotiating, monitoring and enforcing the contract e.g. furniture store partnering with a delivery company
On average, mergers and acquisitions ______ shareholder value. Multiple choice question. create take the place of strengthen destroy
destroy
true or false: Corporate strategy is focused solely on determining the stages of industry value chain in which the firm should compete.
false
true or false: firms that pursue extremely high of extremely low levels of diversification perform better than those that pursue moderate levels of diversification
false
If Costin-house > Costmarket then
firm should outsource (i.e. purchasing in the market)
An advantage of using a non-equity alliance to govern a strategic alliance is its ______. Multiple choice question. ability to distract new entrants to the industry use of tacit knowledge flexibility and ease of initiation long-term planning period
flexibility and ease of initiation
Non-equity alliance's pros and cons
flexible, fast, easy to get in and out; cons: weak ties, lack of trust/commitment.
One reason why a firm might enter into a strategic alliance is to ______. Multiple choice question. exit markets increase the number of entrants in the market weaken competitive position hedge against uncertainty
hedge against uncertainty
Horizontal integration can ______. Multiple choice question. help a firm improve its strategic position in an industry decrease the geographic scope of a firm lower the cost of production through decreased economies of scope
help a firm improve its strategic position in an industry
Specialized assets have a ______ opportunity cost
high
When two competitors merge, leading to industry consolidation, they are engaging in ______. Multiple choice question. backward integration forward diversification vertical integration horizontal integration
horizontal integration
A firm must decide whether to build, borrow, or buy to answer the question of ______. Multiple choice question. how it will achieve growth when to start growth why it must grow who must initiate growth
how it will achieve growth
Which of the following are benefits of a horizontal integration? (Check all that apply.) Multiple select question. integration failure increased rivalry increased differentiation reduced competition
increased differentiation reduced competition
Horizontal integration through mergers and acquisitions can create costs. Which of the following are sources of such costs? (Check all that apply.) Multiple select question. increased differentiation reduction in competitive intensity increased potential for legal repercussions reduced flexibility
increased potential for legal repercussions reduced flexibility
Corporate Strategy concerns the scope of the firm in terms of
industry value chain, products and services, geography
Sources of COSTS in a horizontal integration strategy are ______. Multiple select question. displaced competitive intensity integration failure reduced flexibility reduced potential for legal repercussions
integration failure reduced flexibility
A standalone organization that two or more parent companies create and own together is a ___. Multiple choice question. franchise joint venture non-equity alliance licensing agreement
joint venture
A standalone organization that two or more parent companies create and own together is a ___. Multiple choice question. licensing agreement franchise non-equity alliance joint venture
joint venture
The three mechanisms to govern alliances are non-equity alliances, equity alliances, and ______. Multiple choice question. licensing structure joint venture wholly owned subsidiaries franchise
joint venture
The three mechanisms to govern alliances are non-equity alliances, equity alliances, and ______. Multiple choice question. wholly owned subsidiaries franchise licensing structure joint venture
joint venture
Some foreign countries require companies to be structured as __ in order to enter that foreign market. The companies gain access to the market, while the country gains advanced technology and know-how. Multiple choice question. joint ventures equity alliances non-equity alliances contractual market agreements
joint ventures
Decisions relating to the range of products and services a firm will offer determine the firm's are
level of diversification
Which of the following forms of agreement do non-equity alliances typically take? (Check all that apply.) Multiple select question. innovation marketing licensing distribution supply
licensing distribution supply
long term contract
licensing or franchising greater than one year
BCG growth share matrix dog
low market growth rate, low relative market share divest the strategic business unit
Gaining new capabilities or competencies is one of the three main reasons companies ______. Multiple choice question. submit to hostile takeovers make acquisitions eliminate employees enter new markets
make acquisitions
A(n) ______ is when two firms agree to join and create a combined entity, and a(n) ______ is when one firm buys or takes over another firm. Multiple choice question. joint venture; non-equity alliance acquisition; merger merger; acquisition non-equity alliance; joint venture
merger; acquisition
A(n) ______ is when two firms agree to join and create a combined entity, and a(n) ______ is when one firm buys or takes over another firm. Multiple choice question. joint venture; non-equity alliance non-equity alliance; joint venture merger; acquisition acquisition; merger
merger; acquisition
A partnership that is based on contracts between companies is referred to as a(n) ______. Multiple choice question. non-equity alliance diversification allowance alliance wholly owned subsidiary
non-equity alliance
The most common type of alliance is a(n)
non-equity alliance
The most common type of alliance is a(n) ______. Multiple choice question. acquisition non-equity alliance joint venture equity alliance
non-equity alliance
The most common type of alliance is a(n) ______. Multiple choice question. non-equity alliance joint venture acquisition equity alliance
non-equity alliance
non-equity alliance matches Choice, partnership based on contracts between firms partnership based on contracts between firms equity alliance matches Choice, partnership in which at least one partner takes partial ownership in the other partnership in which at least one partner takes partial ownership in the other joint venture matches Choice, standalone organization created and owned by two or more parent companies standalone organization created and owned by two or more parent companies
non-equity alliance matches Choice, partnership based on contracts between firms partnership based on contracts between firms equity alliance matches Choice, partnership in which at least one partner takes partial ownership in the other partnership in which at least one partner takes partial ownership in the other joint venture matches Choice, standalone organization created and owned by two or more parent companies standalone organization created and owned by two or more parent companies
What are the three mechanisms that alliances can be governed by? (Check all that apply.) Multiple select question. non-equity alliances equity alliances joint ventures upstream alliance downstream alliance
non-equity alliances equity alliances joint ventures
Vertical Integration
ownership of its inputs, production, or outputs in the value chain Not all industry stages are equally profitable
Although the three tasks of alliance management capability often occur at the same time, in general what is the first phase of alliance management? Multiple choice question. post-formation alliance management strategic network manipulation partner selection and alliance formation alliance design and governance
partner selection and alliance formation
Pros and cons of outsourcing
pro • Increased flexibility (to compare prices and services among many different providers) • High power incentives (entrepreneurs' ability to capture a venture's profit via IPO or acquisition) • Useful options for small-medium size firms or those with no expertise cons • Search costs • Incomplete contracting (specifying & measuring performance) • Difficulty of enforcing contracts for potential opportunistic behaviors by other parties
Pros and cons of making internally
pro: - More control through coordination of high complex tasks • The ability to make command and control decisions by fiat along clear hierarchical lines of authority • Investment for specialized assets • Creation of a community of knowledge cons • Can take longer time • High level of investment • Need expertise • Administrative costs (i.e. internal transaction cost) because of necessary bureaucracy
The build-borrow-or-buy framework
provides a conceptual model that aids strategists in deciding whether to pursue internal development (build), enter a contract arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy).
When a company makes incremental investments as part of a larger investment and takes the time to analyze the information gained following each incremental investment, the company is taking a
real-options perspective
What are sources of value creation in a horizontal integration strategy? (Check all that apply.) Multiple select question. restricted access to suppliers and distribution channels decreased differentiation reduction in competitive intensity lower costs
reduction in competitive intensity lower costs
3 types of asset specificity
site specificity physical specificity human asset specificity
In order for an alliance to qualify as ______, it must have the potential to alter a company's competitive advantage. Multiple choice question. a partnership strategic a merger tradable
strategic
A voluntary arrangement between firms to share knowledge, resources, and capabilities to develop products, processes, or services is known as a ______. Multiple choice question. wholly owned subsidiary merger strategic alliance hostile takeover
strategic alliance
Which of the following are the three choices in the build-borrow-or-buy framework? (Check all that apply.) Multiple select question. elimination of product costs strategic alliances acquisition of new resources internal development
strategic alliances acquisition of new resources internal development
Equity alliance's pros and cons
stronger ties, potential for trust/commitment, window into new technology (option value); cons: less flexible, slower, can entail significant investment.
Joint venture pros and cons
strongest tie, trust/commitment most likely, may be required by institutional setting; cons: potentially long negotiations and significant investments, long-term solution, managers may have two reporting lines (two bosses).
Equity alliances allow for the sharing of ______, which involves information that cannot be codified for completing tasks. Multiple choice question. weak ties temporary commitments explicit knowledge tacit knowledge
tacit knowledge
The partners in non-equity alliances can have weak ties because such alliances are often ______ in nature, which can cause lack of trust and commitment. Multiple choice question. temporary permanent sufficient intangible
temporary
Which of the following is an example of an internal transaction cost? A) the cost of searching for a contract manufacturer B) the cost of signing a contract with a supplier C) the cost of monitoring and enforcing a contract D) the cost of paying salaries and benefits
the cost of paying salaries and benefits
Horizontal integration is a good option if ______. Multiple choice question. the target firm will have more value when combined with the acquiring firm the acquiring firm is new to the industry and has no competitors the target firm is in a different industry than the acquiring firm the target firm is more valuable as a continued standalone company
the target firm will have more value when combined with the acquiring firm
If Costin-house < Costmarket,
then the firm should make internally, i.e. vertically integrate (i.e. own production of the inputs, or own output distribution channels)
Why does Facebook acquire startups? Multiple choice question. to preempt rivals to put the startups out of business to secure a monopoly to find tax shelters
to preempt rivals
True or false: firms are more capable than markets at coordinating highly complex tasks, while markets are more capable of providing high-powered incentives for entrepreneurship
true
true or false: Backward vertical integration is often undertaken to overcome the threat of opportunism and to secure key raw materials
true
true or false: Managers have alternatives other than the two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").
true
specialized assets
unique assets that are highly valuable within a focal firm, but of little value or no use in the external market
When firms are ___________ integrated, they are willing to make investments in specialized assets.
vertically
When companies get involved in a bidding war and the winner overpays for the acquisition, the acquiring company has fallen victim to the ______. Multiple choice question. principal-agent problem winner's curse hostile takeover strategic preemption
winner's curse
taper integration
• Backward integrated but also relies on outside market firms for supplies OR • Forward integrated but also relies on outside market firms for some of its distribution
Risks of Vertical Integration
• Increasing cost • Over time, internal suppliers may lose the incentives to increase quality or come up with innovative new products compared to external suppliers • Reduces a firm's strategic flexibility in the face of changing environment (technology or demand in the market) • Increasing the potential for legal repercussions- A high level of vertical integration vs. monopoly concerns
benefits of taper integration
• It exposes in-house suppliers and distributors to market competition so that performance comparisons are possible • It enhances a firm's flexibility in the face of changing technology/demand • It allows a firm to combine internal and external knowledge, which could pave the path for innovation
Benefits of Vertical Integration
• Securing critical supplies • Facilitating scheduling and planning (e.g. Apple's ability to control the product launch of Mac) • Improving quality • Facilitating investments in specialized assets - lowering cost
