BADM 449 Exam 2

Discuss the relationship between the level of diversification and firm performance

High and low levels of diversification = lower performance Moderate levels of diversification = higher firm performance

incremental innovation

Targets existing markets with existing technologies -Builds on established knowledge base -Results from steady improvement -Ex: gillette blades - from 1 to 6!

What is the definition of business-level strategy?

refers to goal directed actions managers take in their quest for competitive advantage in a single product market

Explain why Porter believes that firms that pursue a blue ocean strategy can get "stuck in the middle."

"Stuck in the middle": trade-offs may lead to neither the lowest cost nor the most differentiated firm

how it is related to the concept of "creative construction"?

"creative construction" an adaptation-based (i.e., "Lamarckian") view of innovation and entrepreneurship

What is the difference between a merger and a joint venture?

-A merger is combining of two companies that already exist -A joint venture is a new company owned by two existing companies

Describe the two fundamentally different types of synergy.

-Cost subadditivity (economies of scope) -Revenue super additivity (offering complete solution rather than one product; bundling)

Explain why incumbent firms tend to focus on incremental innovation.

-Economic incentives: Established companies are focused on defending position -Organizational inertia: Established companies rely on formalized business processes and structures -Innovation ecosystem: Established companies are part of an ecosystems (Suppliers, buyers, complementors)

What is the difference between a merger and an acquisition?

-Merger: Combining of two companies Friendly approach (Disney, Pixar) Generally similar in size -Acquisition: Purchase or takeover of a company Can be friendly or unfriendly Hostile takeover ex) Vodafone buys mannesmann

Describe what relevancy, tradability, closeness, and integration refer to in the BBB framework.

-Relevance: How relevant are existing internal resources to solving the resource gap? -Tradability: How tradable (on the market) are the targeted resources that may be available externally -Closeness:How close do you need to be to your external resource partner? -Integration: How well can you integrate the targeted firm should you determine you need to acquire the resource partner?

Name and describe the three different types of asset specificity.

-Site specific: Co-located operations, such as coal plant and electric utility -Physical assert specificity: Unique physical and engineering properties (coca cola bottle) -Human asset specificity: Investments made in human capital (knowledge and skills for a specific process)

What are the cost drivers for cost leadership?

cost of input factors economies of sale learning / experience curve effects

Provide some of the main reasons why firms enter into strategic alliances.

-To expand into a new market -Improve their product line or service -Develop a competitive advantage over competitors -Allows two firms with a common goal to work together and benefit along the way -Entering new markets (local partner for global growth), Hedging against uncertainty, accessing critical complementary assets, learning new capabilities

Describe the three categories of motivations for diversification—that is, value-enhancing, value-neutral, and devaluating motivations.

-Value-enhancing: increase market power, R&D, develop new competencies, transferring core competencies, economies of scope, utilizing excess capacity, leveraging brand name -Value-neutral: poor economic performance in current business -Devaluating: agency problem, managerial capitalism, maximize management compensation, sales growth maximization

the long tail

80% of sales are not the "hits" -Long tail in a digital world -Both opportunity and threat -Technology enables easier access to the tail -Selling less of more -Online firms can gain large share of revenue from selling small number of nearly unlimited choices -Short head is mainstream -At brick and mortar -Significant inventory costs

Factor Conditions:

A country's endowments: -Natural, human, and other resources -Resource rich countries: focus on commerce -Resource lacking countries: focus on human capital Other important factors: -Capital markets -A supportive institutional framework -Research universities -Public infrastructure (airports, roads, schools, health care system, etc.)

Discuss the concept of the learning curve. How does this differ from economies of scale? What does an 80% learning curve mean? What are the limits of learning curves?

A learning curve is how long it takes to acquire new skills or knowledge -The difference between the two is that with a learning curve, a firm can do something at a less expensive unit cost after time, however, economies of scale translates to lower cost as production increases -An 80% learning curve means that as total production quantity doubles, the average time per unit falls by 20% -Limitations of learning curves: new employees learn faster than old ones, it recognizes current skill levels so it cant predict the future curve with 100% certainty, varying differences in rates of production

How can real options enhance net present value (NPV) analysis?

A theoretically accurate NPV analysis should include real options values -The asymmetry deriving from having the right but not the obligation to exercise an option is at the heart of real options value -Managers making investments under uncertainty can create economic value by building in flexibility, because flexibility has economic value

equity

At least one partner takes partial ownership position -Stronger commitment toward the relationship -Facilitates the sharing of tacit knowledge -Tacit knowledge concerns the "know how" -Partners exchange personnel to acquire tacit knowledge -Tends to produce stronger ties and greater trust -Can help overcome the information paradox -Pros: Stronger tie, trust and commitment can emerge, window into new technology (option value) -Cons: Less flexible, slower, can entail significant investments

List the entry modes firms can use to expand internationally. Which of these provides the most control and which provides the least control?

Contract based: Exporting, Least investment and control Strategic alliance: Long term contracts (licensing and franchising) -Equity alliances -Joint ventures Subsidiary -Acquisition -Greenfield -Most investment and control

administrative and political

Captured in factors such as -Shared monetary or political associations -Political hostilities -Weak or strong legal and financial institution Political and administrative barriers -Tariffs -Trade quotas -FDI restrictions (china) -Corporate tax rates

Describe the build-borrow-buy (BBB) framework and the decision tree associated with it.

Conceptual model that aids in determining whether a firm should -Build: internal development -Borrow: enter a contracts/ strategic alliance -Buy: acquire new resources, capabilities, and competencies

Describe "corporate entrepreneurship"

Corporate entrepreneurship - large firms vs small firms -Large firms have benefits small firms dont have like tangible and intangible resources (money and experience) -Small firms have benefits that large firms dont have like strong incentive -As firms grow, organizational inertia tends to reduce their innovative potential -Today - more firms remain innovative or reignite innovation through a focus on corporate entrepreneurship -Best of both worlds (resources of large firms AND incentive intensity and entrepreneurial spirit of small firms)

Explain why corporate-level strategy is more important when the firm's business units are more interdependent.

Corporate-level strategy is more important because there is a greater emphasis on creating synergy between each BU and therefore top-management is responsible for realizing synergies to improve efficiency and effectiveness amongst BUs -Stronger the interdependence, the more crucial corporate - level strategy and thus, role of corporate HQ is

Discuss the generic business strategies, including the strategic position and competitive scope that each of them involves.

Cost leadership (Walmart) Differentiation (Cocacola) Focused cost leadership (BIC) Focused differentiation (Tesla)

joint venture

Creases and owned by two or more companies -Long term commitment -Stepping stone toward full integration of partnership -Try before you buy concept -Often used to enter foreign markets -Pro: Strongest tie, trust and commitment likely to emerge, may be required by institutional setting -Cons: Can entail long negotiations and significant investments, long term solution, JV managers have double reporting time (2 bosses)

What is meant by "crossing the chasm" in the context of innovation?

Crossing from early adapters to early majority -Companies can decline here and fail like Trea compared to blackberry

Given that acquisitions often fail, what are three reasons why firms keep doing them?

Desire to overcome competitive disadvantage Superior acquisition and integration capability Principal agent problems

cultural

Disparity between firms home country and its targeted host country -Language, social norms and morals, beliefs, values -Differentiation among human groups Made up of Hofstede's dimensions -Power distance -Individualism -masculinity/ femininity -uncertainty avoidance -Long- term orientation -indulgence

What is transaction cost economics?

Explain and predict the scope of the firm -Transaction costs: costs associated with economic exchanges"Firms vs. markets" (ie. "make or buy") have differential costs

Explain the "information paradox" and how it applies to alliances.

Firm A is in need of knowledge that Firm B has -Since firm A is reluctant to acquire Firm B bc it doesn't know how much money the knowledge is worth -Firm B is not going to offer any information about their knowledge because if it did, Firm A would have obtained the knowledge free of charge -Doing an alliance first is a way to avoid this situation

Describe the three different stages of globalization from the start of the twentieth century onwards.

Globalization 1.0 - 1900-1941 -Sales, operations, and some procurement -Strategy flowed from HQ to international sites Globalization 2.0 - 1945-2000 -To reconstruct damage from the war -Focus on European countries, Japan, and Australia -Greater local - responsiveness -HQ ser goals, international sites influenced tactics Globalization 3.0 - 21st century -Business function locations are based on costs, capabilities, and PESTEL factors -Companies can operate 24/7, 365 days a year -"Centers of excellence"

Competitive Intensity in a Focal Industry:

Highly competitive environments lead to better firm performance. Example: Fierce environment for German car companies helped prepare them for global competition Fierce domestic competition (e.g., Volkswagen, BMW, and Daimler) No-speed-limit autobahn Require top-notch engineering of chassis and engines High gas prices put pressure on low fuel consumption Demanding customers

Discuss the four stages of the innovation process.

Idea - abstract concepts or research findings Invention - transformation of an idea into a product or process or the modification and recombination of existing ones Innovation - commercialization of an invention by entrepreneurs Imitation - copying a successful innovation

When should a firm choose "make" and when should it choose "buy"?

If Cost (in house) is less than Cost (market), then the firm should vertically integrate (ie. make not buy)

What is the difference between invention and innovation?

Invention -- transformation of an idea into products or process/ modification and recombination of existing ones Innovation -- commercialization of an invention by entrepreneurs

Global-standardization strategy

Key goal: efficiency (through standardized products) Key danger: lack of local responsiveness Locus of decision rights: Centralized Interdependence between BUs: High Types of controls: Strategic Prominent strategy among U.S. firms due to large, culturally homogeneous home base

Localization Strategy (multidomestic strategy)

Key goal: local responsiveness (through products that are customized to specific countries) Key danger: inefficiency Locus of decision rights: decentralized Interdependence between BUs: Low Types of controls: Financial Prominent strategy among European firms due to broad variety of cultures and markets in Europe

Related and Supporting Industries/Complementors:

Leadership in related and supporting industries Fosters complementors in downstream industries Firms that provide an additional good or service Combined with the primary product Leads customers to value the focal firm's offering more Further strengthens national competitive advantage

architectural innovation

Leverages existing technology into new markets Alters the architecture of a product -A new product, with known components, used in a novel way -ex: commercializing xerography invention

disruptive innovation

Leverages new technologies in existing markets -New product / process meets existing customer needs -ex mini-mills in the steel industry; also laptop computers

What are some of the disadvantages of firms expand internationally?

Liability of foreignness Additional cost of doing business in an unfamiliar cultural and economic environment Cost of coordinating across geographic distance Economic development may increase cost of doing business Riding wages with improved living standards Difficulty in protecting intellectual property Loss of reputation Loss of intellectual property

single business diversification strategy

Low level of diversification

Cost reduction (a.k.a. global integration) (cost leadership):

MNEs enter global marketplace with the intention to reduce operating costs -Example: Toyota Prius

risks of vertical integration

May increase cost Internal suppliers lose incentives to complete May reduce quality Single captured customer can slow experience effects May reduce flexibility Slow to respond to changes in technology or demand Increase in the potential for legal repercussions (antitrust) -For example, FTC carefully reviewed pepsi plans to buy bottlers

benefits of vertical integration

May lower costs May improve quality Facilitates scheduling and planning Secures critical supplies and distribution channels Facilitates investments in specialized assets

non equity

Most common form of contacts (Supply agreements, Distribution agreements, Licensing agreements) -Vertical strategic alliances -Firms tend to share explicit knowledge that is codified -Licensing agreements, partners exchange codified knowledge regularly -Pros: Flexible, fast, easy to initiate and terminate -Cons: Weak tie, lack of trust and commitment

Describe how and why the speed of innovation has accelerated over the last century.

New tech and innovations have been leading to new industries

unrelated diversification strategy

No businesses share competencies

What three different types of strategic alliances can we distinguish between?

Non equity Equity Joint ventures

What three criteria does an invention have to satisfy in order to qualify as an innovation?

Novel, useful, implemented

What are "options to abandon" and when do they have high value?

Option to abandon - to discontinue an operation and liquidate the assets High value when...a good chunk of the investment is not sunk

What are "options to grow" and when do they have high value?

Option to grow - to expand the scope of activities to capitalize on new perceived opportunities High value when there is high value when a learning curve may result and if follow-up plant investments have high NPV

What are "options to wait" and when do they have high value?

Option to wait - before taking an action until more is known or timing is expected to be more favorable if by waiting there is no decrease in the level of uncertainty, then if the narrow NPV is positive, you should go now. High value when...

Discuss the three different types of interdependencies that can exist among a firm's business units and what corporate-level strategy each of these types of interdependencies maps onto.

Pooled (unrelated diversification) -ex: soda company buying a movie studio Sequential (vertical integration) -ex: zara Reciprocal ( related diversification) -ex: Disneys purchase of ABC

What is an acquisition premium? Why are firms willing to pay a premium when acquiring another firm?

Premium → difference b/w price and market value of firm -Pay premium if company sees potential for synergy or to ward of competitors

What is the difference between product and process innovation, and how does the importance of each vary over the industry life cycle?

Product innovation: introduction of new product -Important in introduction phase Process innovation: new or improved process -Important in growth stage

Discuss how social entrepreneurship is different from other forms of entrepreneurship.

Pursuit of social goals AND creation of profitable business -Ex: Wikipedia = open source and free knowledge, but continued on donations

What is corporate-level strategy?

Pursuit of value creation through configuration and coordination of a firm's activities in several industries and markets simultaneously -object is to create synergy!

Describe Vernon's classic view of international strategy. Is this model still accurate today? How does it differ from the contemporary view of international strategy?

Raymond Vernon (!966) international strategy preliminary serves to extend product life cycle -Innovation occurs in home country -Demand then develops abroad -This demand is satisfied through exporting -Further increases in foreign demand justify foreign direct investment This model is overly simplistic today

Over recent decades, how have firms changed in terms of the process through which they internationalize?

Recently, new firms have started to break with traditional incremental process -They make bigger jumps in expansion -Expand into variety of countries very early on, mostly because they don't have a choice -Need scale economies quickly to compete with increasingly large incumbent firms -Successful born globals have founders/ CEOS with great international experience (otherwise "leapfrogging" internationalization tends not to work

What are some of the key reasons (i.e., advantages) why firms expand internationally?

Resource exploitation -Increase market size to Extend product lifecycle, Gain economies of scale, Lower a firms overall risk Resource exploration -Location advantage, Low cost input factors (labor, natural resources, capital), Educated labor force, Learning new capabilities

What is meant by the concept of "creative destruction"?

Schumpeter's perennial gale of creative destruction - "describes the "process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one" Ex. cable providers (xfinity) → streaming content (netflix), typewriters → PCs

What is a transnational strategy and why is it so difficult to implement?

Seeks to achieve both global efficiency and local responsiveness -Difficult to achieve because of simultaneous requirements -Strong central control and coordination to achieve efficiency -Decentralized to achieve local market responsiveness -Firms need complex organizational structures to make this work

Why do alliances based on equity allow for more effective knowledge sharing than alliances based on contracts?

Shares "know-how"/tacit knowledge which can be more useful than explicit knowledge

What are the alternative organizational forms for governing transactions and where are they positioned on the "make" vs. "buy" continuum?

Short term contracts Long term contract (licensing/ franchising) Equity alliances Joint ventures Parent- subsidiary relationship

What are specialized assets and what role do they play in the "make or buy" decision?

Specialized assets: Unique assets with high sunk costs -They have significantly more value in their intended use than in their next - best use

Provide and discuss an example of "corporate entrepreneurship."

Spin offs: Large firm takes a small part of itself public through IPO -It retains strong equity ties with small new firm -As result, this small new firm has small size, simple structure, and incentive intensity conducive to innovation, and at same time has access to deep pockets of large parent firm

What is a "strategy canvas"?

Strategy canvas: graph showing the strategy of different companies in the same industry -Strategy canvas of JetBlue vs. Low-Cost Airlines and legacy carriers

There is no simple answer on whether it is better to be a leader or a follower when innovating. Provide an example where the leader was successful and an example where the follower was successful.

Successful leader → polaroid outcompete Kodak in camera Successful follower → boeing outcompete Comet in airplanes

Local responsiveness (differentiation):

Tailor product and service offerings to fit local consumer preferences and host-country requirements -Higher cost -Example: McDonald's uses mutton in India

What are the advantages and disadvantages of using the firm (i.e., "make") as the governance mechanism for a transaction, and what are the advantages and disadvantages of using the market (i.e., "buy") as the governance mechanism for a transaction?

The Principal-Agent problem: agent's pursue their own interests (corporate jets, golf outings, expensive hotel) → solution: stock options to make agents owners

What is meant by the "death-of-distance hypothesis"? So far, has this hypothesis turned out to be accurate or not?

The assumption that geographic location should not lead to firm-level competitive advantage because firms are able to source inputs globally T-his assumption is NOT accurate

What is value innovation and how is it associated with blue ocean strategy?

The blue ocean strategy uses value innovation to reconcile trade-offs Value innovation is accomplished through simultaneously pursuing differentiation (Value up) and low cost (cost down)

demand conditions

The characteristics of demand -For example, due to dense urban living conditions, hot and humid summers, and high energy costs, it is not surprising that Japanese customers demand small, quiet, and energy-efficient air conditioners. From a firm's domestic market Customers hold companies to high standards of value creation. -Developments in research -Cost containment -Other marketplace applications

minimum efficient scale

The lowest rate of output at which a firm takes full advantage of economies of scale

What is synergy

The value of two or more activities combined is greater than the sum of values of each of them independently

What are its three key dimensions?

Vertical Integration - Industry value chain Diversification - Products and services Geographic Scope - Geography

Discuss the meaning of upstream (backward) and downstream (forward) integration

Vertical integration: the ownership of inputs or distribution channels -Backward (or "upstream") vertical integration: owning inputs of the value chain --Ex. A bakery that purchases a wheat processor -Forward (or "downstream") vertical integration: owning activities closer to the customer --Ex. Farmer directly sells crops at farmer's market, instead of giving to grocery stores

How are the benefits from entrepreneurship typically distributed?

While the traditional entrepreneur aims to create a product, service or process for which a consumer will pay, the social entrepreneur aims to create a product, service or process from which society will benefit

Explain the "who," "what," "why," and "how" questions that business-level strategy is meant to address.

Who -- which customer segments will we serve? What -- customer needs will we satisfy? Why -- do we want to satisfy them? How -- will we satisfy customers needs?

Explain Porter's Diamond Model of National Competitive Advantage and the four elements of which it consists.

Why some nations outperform others in certain industries

real option

a 'real option' is a choice available to a company regarding an investment opportunity. The term 'real' means that it refers to a tangible asset and not a financial instrument.

Dominant Business Diversification Strategy

additional business activity pursued

related constrained diversification strategy

all businesses share competencies

Explain the meaning of taper integration and how it helps to mitigate some of the risks of vertical integration.

backward integrated but also relies on outside market firms for suppliers OR forward integrated but also relies on outside market firms for some of its distribution

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

Explain why business-level strategy is about creating differences between firms, and the two ways in which the firm can create such differences.

key is to make differences to that people want to buy from you for some reason -produce at lower costs (focus on efficiency) -differentiate product to command a premium price by performing different activities (focus on effectiveness)

radical innovation

new technologies and new market -Draws on novel methods and materials -Forms from an entirely new knowledge base or -Forms from a recombination of existing knowledge -Ex: X-ray tech, iphone, airplane

What are the value drivers for differentiation?

product features (through strong R&D capabilities) customer service (ex: Zappos) complements (ex: bundling AT&T services)

related linked diversification strategy

some businesses share competencies

What is meant by an integrator strategy (or "blue-ocean strategy")? What is a key danger of this strategy?

successfully combining the cost leadership and differentiation strategies -Uses value innovation to reconcile trade offs -Metaphor of blue ocean strategy: Untapped market space, Creation of additional demand, Opportunity for highly profitable growth -Danger - "stuck in the middle" trade-offs may lead to neither the lowest cost nor the most differentiated firm

constant returns to scale

the situation in which a firm's long-run average costs remain unchanged as it increases output

diseconomies of scale

the situation in which a firm's long-run average costs rise as the firm increases output

economic

wealth and per capita income of consumer -Wealthy countries tend to engage in more cross-border trade. -Wealthy countries trade with wealthy countries. To benefit from economies of experience, scale, scope, and standardization, Due to similar infrastructure and resources -Wealthy countries trade with poor countries To access low-cost input factors