Business Policy Test Chapters 7-10

Sustainable business practices

Those that meet the needs of the present without compromising the ability to meet the needs of the future

A strong internal capital market:

allows a diversified company to add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential

Spin-off

an independent company created when a corporate parent divests a business either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent

The following factors may be used in quantifying the competitive strengths of a diversified company's business subsidiaries:

- relative market share - costs relative to competitors' costs - products or services that satisfy buyer expectations - ability to benefit from strategic fit with sibling businesses - number and caliber of strategic alliances and collaborative partnerships - brand image and reputation - competitive valuable capabilities - profitability relative to competitors

Management sometimes undertakes a strategy of unrelated diversification for the wrong reasons:

- risk reduction - growth - earnings stabilization - managerial motives

The greater the number of businesses a company is in and the more diverse they are, the more difficult it is for corporate managers to:

- stay abreast of what's happening in each industry and each subsidiary - pick business-unit heads having the requisite combination of managerial skills and know-how to drive gains in performance - tell the difference between those strategic proposals of business-unit managers that are prudent and those that are risky or unlikely to succeed - know what to do if a business unit stumbles and its results suddenly head downhill

Gain competitive advantage (or offset domestic disadvantages) in global markets

1. locating various value chain activities to lower costs and maximize production 2. deepen or broaden resources to coordinate dispersed activities in ways that a domestic-only competitor cannot.

Vulnerable Export Strategy

1. manufacturing costs in the home country are higher than in foreign countries where rivals have plants 2. costs of shipping the product are high 3. adverse shifts occur in currency exchange rates.

Checking the competitive advantage potential of cross-business strategic fit involves evaluating how much benefit a diversified company can gain from value chain matchups that present:

1. opportunities to combine the performance of certain activities, thereby reducing costs and capturing economies of scope 2. opportunities to transfer skills, technology, or intellectual capital from one business to another 3. opportunities to share use of a well-respected brand name across multiple product and/or service categories

Strategic options boil down to four broad categories of actions:

1. sticking closely with the existing business lineup and pursuing the opportunities these businesses present 2. broadening the company's business scope by making new acquisitions in new industries 3. divesting some businesses and retrenching to a narrower base of business operations 4. restructuring the company's business lineup and putting a whole new face on the company's business makeup

Factors That Shape Strategy Choice in International Markets

1. the degree to which there are important cross-country differences in demographic, cultural, and market conditions. 2. whether opportunities exist to gain location-based advantage based on wage rates, worker productivity, inflation rates, energy costs, tax rates, and other factors that impact cost structure. 3. the risks of adverse shifts in currency exchange rates. 4. the extent to which governmental policies affect the local business climate.

Corporate social responsibility (CSR)

A company's duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

What is corporate culture and why is it important?

A company's internal work climate is shaped by its core values, beliefs, and business principles and influences its traditions, work practices, and operating style.

Foreign Subsidiary Strategies

Advantages: - High level of control - Quick large-scale market entry - Avoids entry barriers - Access to acquired firm's skills Disadvantages: - Costs of acquisition - The complexity of the acquisition process - Integration of the firms' structures, cultures, operations, and personnel

Narrowly Diversified Firms

Are comprised of a few related or unrelated businesses.

Economies of Scope

Are cost reductions stemming from strategic fit along the value chains of related businesses (thereby, a larger scope of operations), whereas economies of scale accrue from a larger operation.

Adaptive Cultures

Are very supportive of managers and employees at all ranks who propose or help initiate useful change.

Multibusiness Enterprises

Have a business portfolio consisting of several unrelated groups of related businesses

Insular, Inwardly Focused Cultures

Have a strong neglect to what customers are saying and how their needs and expectations are changing

Broadly Diversified Firms

Have a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both.

Unrelated businesses

Have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level (e.g. Virgin Group Holdings Ltd).

High-performance Cultures

Standout traits are: A "can-do" spirit, pride in doing the right things, no excuses, etc.

The most important symbolic actions are those that top executives...

Take to lead by example

Change-Resistant Cultures

Unhealthy behaviors: Avoiding risks, hesitation and pursuing emerging opportunities, and widespread aversion to continuous improvement and performing value chain activities.

Profitability in emerging markets

rarely comes quickly or easily

The Impact of Government Policies on the Business Climate in Host Countries

change in taxes, loans, assistance, etc.

Key tools of continuous improvement

- Business process reengineering (quantum gains) - Total Quality Management (incremental gains) - Six Sigma Quality Control (effectiveness and efficiency)

Aside from cash flow considerations, two other factors to consider in assessing the financial resource fit for businesses in a diversified firm's portfolio are:

- Do individual businesses adequately contribute to achieving companywide performance targets? - Does the corporation have adequate financial strength to fund its different businesses and maintain a healthy credit rating?

What are some examples of complications of international markets

- Gov. Reg. - Differing Cultures - Expensive - Training - Payment (exchange rates and methods of payment)

What are some examples of ways to enter international markets?

- Internet (E-commerce) - Franchise - M & A's - Partnerships - Exporting - Licensing

Three dimensions of performance

- People - Planet - Profit

Strategic fit opportunities

- Transferring specialized expertise, technological know-how, or other valuable resources and capabilities from one business's value chain to another's. - Cost sharing between businesses by combining their related value chain activities into a single operation. - Exploiting common use of a well-known brand name. - Sharing other resources that support corresponding value chain activities across businesses. - Engaging in cross-business collaboration and knowledge sharing to create new competitively valuable resources and capabilities.

Performing radical surgery on a company's group of businesses is an appealing corporate strategy when its financial performance is squeezed or eroded by:

- a serious mismatch between the company's resources and capabilities and the type of diversification that it has pursued - too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries - too many competitively weak businesses - the emergence of new technologies that threaten the survival of one or more important businesses - ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors - an excessive debt burden with interest costs that eat deeply into profitability - ill-chosen acquisitions that have not lived up to expectations

Three types of acquisition candidates that are usually of particular interest:

- businesses that have bright growth prospects but are short on investment capital - undervalued companies that can be acquired at a bargain price - struggling companies whose operations can be turned around with the aid of the parent company's financial resources and managerial know-how

Resource fit exists when:

- businesses, individually, strengthen a company's overall mix of resources and capabilities - the parent company has sufficient resources that add customer value to support its entire group of businesses without spreading itself too thin

To succeed with a corporate strategy keyed to unrelated diversification, corporate executives must:

- do a superior job of identifying and acquiring new businesses that can produce consistently good earnings and returns on investment - do an excellent job of negotiating favorable acquisition prices - do such a good job overseeing and parenting the firm's businesses that they perform at a higher level than they would otherwise be able to do through their own efforts alone

Corporate social responsibility programs commonly involve:

- efforts to employ and ethical strategy and observe ethical principles in operating the business - making charitable contributions, supporting community service endeavors, engaging in broader philanthropic initiatives and reaching out to make a difference in the live of the disadvantaged - actions the protect the environment and, in particular, to minimize or eliminate any adverse impact on the environment stemming from the company's own business activities - actions to create a work environment that enhances the quality of life for employees - actions to build a workforce that is diverse with respect to gender, race, national origin, and other aspects that different people bring to the workplace

Executives in diversification must...

- identify and acquire new business - negotiating favorable acquisition prices - good job overseeing and parenting the firm's businesses and perform at a higher level

A simple and reliable analytical tool for gauging industry attractiveness involves calculating quantitative industry attractiveness scores based upon the following measures:

- market size and projected growth rate - the intensity of competition - emerging opportunities and threats - the presence of cross-industry strategic fit - resource requirements - seasonal and cyclical factors - social, political, regulatory, and environmental factors - industry profitability - industry uncertainty and business risk

Strategy options for competing in developing-country markets

- prepare to compete on the basis of low price - modify aspects of the company's business model or strategy to accommodate local circumstances (but not so much that the company loses the advantage of global scale and global branding). - Try to change the local market to better match the way the company does business elsewhere. - Stay away from those emerging market is where it is impractical or uneconomical to modify the company's business model to accommodate local circumstances.

Good business reasons why a company should devote time and resources to social responsibility initiatives, environmental sustainability, and good corporate citizenship:

- such actions can lead to increased buyer patronage - a strong commitment to socially responsible behavior reduces the risk of reputation-damaging incidents - socially responsible actions and sustainable business practices can lower costs and enhance employee recruiting and workforce retention - opportunities for revenue enhancement may also come from CSR and environmental sustainability strategies - well-conceived social responsibility strategies work to the advantage of shareholders

Internal Startup Strategy (Appealing)

- when creating an internal startup is cheaper than making an acquisition - when adding new production capacity will not adversely impact the supply-demand balance in the local market. - when a startup subsidiary has the ability to gain good distribution access (because of brand name) - when a startup subsidiary will have the size, cost structure, and resources to compete head-to-head against local rivals

Approaches to Diversifying the Business Lineup

-Diversification by acquisition of an existing business. -Entering a new line of business through internal development -Joint Ventures

Odds are that the result of unrelated diversification will be..

1 + 1 = 2 or less

Eight principal managerial tasks or components of strategy execution

1. Build an organization with the capabilities, people, and structure needed to execute the strategy successfully 2. Allocating ample resources to strategy critical activities 3. Ensuring that policies and procedures facilitate rather than impede effective strategy execution 4. Adopting process management programs that drive continuous improvement in how strategy execution activities are performed 5. Installing information and operating systems that enable company personnel to perform essential activities 6. Give incentives that are connected directly to the achievement of performance objectives (strategy execution) 7. Fostering a corporate culture that promotes good strategy execution 8. Exerting the internal leadership needed to propel implementation forward

Steps in changing a problem culture

1. Identify facets of present culture that are conducive to good strategy execution and operating excellence and those that are not 2. Specify what new actions, behaviors, and work practices should be prominent in the "new" culture 3. Talk openly about problems of present culture and how new behaviors will improve performance. 4. Follow with visible, forceful actions - both substantive and symbolic - to ingrain a new set of behaviors, practices, and cultural norms.

Strategy Options for Entering Foreign Markets

1. Maintain a national (one-country) production base and export goods to foreign markets. 2. License foreign firms to produce and distribute the company's products abroad. 3. Employ a franchising strategy. 4. Establish a subsidiary in a foreign market via acquisition or internal development. 5. Rely on strategic alliances or joint ventures with foreign partners to enter new country markets.

Three types of organization building actions are:

1. Staffing the organization 2. Acquiring, developing, and strengthening strategy-supportive resources and capabilities 3. Structuring the organization and work effort

Building Shareholder Value (Pass these tests)

1. The industry attractiveness test. 2. The cost-of-entry test 3. The better-off test

Why Companies Expand into International Markets

1. To gain access to new customers. 2. To achieve lower costs through economies of scale, experience, and increased purchasing power. 3. To gain access to low-cost inputs of production. 4. To further exploit its core competencies. 5. To gain access to resources and capabilities located in foreign markets.

The procedure of evaluating the pluses and minuses of a diversified company's strategy and deciding what actions to take to improve the company's performance involves six steps:

1. assessing the attractiveness of the industries that company has diversified into 2. assessing the competitive strength of the company's business units 3. evaluating the extent of cross-business strategic fit along the value chains of the company's various business units 4. checking whether the firm's resources fit the requirements of its present business lineup 5. ranking the performance prospects of the business from best to worst and determining a priority for allocating resources 6. crafting new strategic moves to improve overall corporate performance

Three types of acquisitions

1. businesses that have bright growth prospects but are short on investment capital 2. undervalued companies that can be acquired at a bargain price 3. struggling companies whose operations can be turned around with the aid of the parent company's financial resources and managerial know-how

Ability of related diversification to deliver competitive advantage and gains in shareholder value

1. capturing cross-business strategic fit via related diversification builds shareholder value in ways that shareholders cannot replicate by simply owning a diversified portfolio of stocks. 2. the capture of cross-businesses strategic fit benefits is possible only through related diversification 3. the benefits of cross-biz strategic fit are not automatically realized

Entering a new line of business through internal development

1. the parent company already has in-house most or all of the skills and resources needed to compete effectively 2. there is ample time to launch the business 3. internal entry has lower costs than entry via acquisition 4. the targeted industry is populated with many relatively small firms such that the new startup does not have to compete against large, powerful rivals 5. adding new production capacity will not adversely impact supply-demand balance 6. incumbent firms are likely to be slow or ineffective in responding to a new entrant's efforts to crack the market

When to Concentrate Internal Processes in a Few Locations

1. when the costs of manufacturing or other activities are significantly lower in some geographic locations than in others. 2. when there are significant scale economies 3. when there is a steep learning curve associated with performing an activity 4. when certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages.

Using Location to Build Competitive Advantage

1. whether to concentrate each internal process in a few countries or to disperse the performance of each process to many nations 2. in which countries to locate particular activities

Transnational Strategy

A think-global, act-local approach that incorporates elements of both multi-domestic and global strategies in all country markets, while allowing some country-to-country customization to fit local market conditions.

Cross-Country Differences in Demographic, Cultural, and Market Conditions

Buyer tastes

Cross-business strategic fit

Can exist anywhere along the value chain

Unethical and Greed-Driven Cultures

Companies that have little regard for ethical standards or are run by executives driven by greed and ego gratification (they are scandals waiting to happen)

The single most visible factor that distinguishes successful culture-change efforts from failed attempts...

Competent leadership at the top

Evironmental Sustainability

Deliberate actions to protect the environment, provide for the longevity of natural resources, maintain ecological support systems for the future generations, and guard against the ultimate endangerment of the planet

Dominant Business Firms

Derive between 50-80% percent of its revenues from a single business, but pursues at least one other business activity

Triple Bottom Line

Economic, social, and environmental impact metrics used to determine an organization's success

Global Strategies

Employ the same basic competitive approach in all countries where a company operates and are best suited to industries that are globally standardized in terms of customer preferences, buyer purchasing habits, distribution channels, or marketing methods.

Franchising

Franchisee bears most of the risk when expanding in foreign markets

How can companies that compete multi-nationally pursue competitive advantage in world markets

Locating their value chain activities in whichever nations prove most advantageous

Related businesses

Possess competitively valuable cross-business value chain and resource matchups (e.g. PepsiCo).

Three principal strategic options for competing internationally

Multidomestic Strategy (Think Local, Act Local) Global Strategy (Think Global, Act Global) Transnational Strategy (Think Global, Act Local)

Crafting new strategic moves to improve overall corporate performance

Options: - Stick closely with the existing business lineup and pursue opportunities it presents (i.e. stay the course) - Broaden the diversification base (scope) by making acquisitions and new industries (i.e. get bigger or buying some companies) - Divest some businesses and go back to a narrower base of business operations (i.e. divest/focus or sell off some "hogs") - Restructure the firm's business lineup to put a new face on its business markup (i.e. totally revamp everything)

Diversification Path

Related businesses or unrelated businesses, or both

Using Joint Ventures to Achieve Diversification

Situations call for a joint venture when: -Pursuing the expansion opportunity is too complex, uneconomical, or risky to go it alone. -The opportunities in a new industry require a broader range of competencies and know-how Drawbacks: -Potential for conflicting objectives -Operational and control disagreements -Culture clashes

Politicized Cultures

Unhealthy because political infighting consumes a great deal of organizational energy and often results in the company's strategic agenda taking a backseat to political maneuvering

Network Structure

The arrangement linking a number of independent organizations involved in some common undertaking

A think global, act global strategic theme prompts company manager to do what?

To integrate and coordinate the company's strategic moves worldwide and to expand into most, if not all, nations where there is significant buyer demand (build a global brand name)

The ultimate goal of decentralized decision-making is what?

To put decision-making authority in the hands of those people or teams closest and most knowledgeable about this situation

International Strategy

a company's strategy for competing in two or more countries simultaneously

Multidomestic strategy

calls for varying a company's product offering and competitive approach from country to country in an effort to be responsive to significant cross-country differences in customer preferences, buyer purchasing habits, distribution channels, or marketing methods.

CSR strategies that have the effect of both providing valuable social benefits and fulfilling customer needs in a superior fashion can lead to..

competitive advantage

Strategic Fit

exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand sharing

The Risks of Adverse Exchange Rate Shifts

favorable and unfavorable changes in currency exchange rates

Cash cow

generates operating cash flows over and above its internal requirements, thereby providing financial resources that may be used to invest in cash hogs, finance new acquisitions, fund share buyback programs, or pay dividends.

Cash hog

generates operating cash flows that are too small to fully fund its operations and growth; a cash hog must receive cash infusions from outside sources to cover its working capital and investment requirements

Corporate Restructuring

involves radically altering the business lineup by divesting businesses that lack strategic fit or are poor performers and acquiring new businesses that offer better promise for enhancing shareholder value

Corporate social agendas that address generic social issues..

may help boost a company's reputation but are unlikely to improve its competitive strength in the marketplace

Industry Cluster Knowledge Sharing Opportunities

operating in a location containing a cluster of related industries, including others with the same value chain system ((e.g., suppliers of components and equipment, distributors) and the makers of complementary products or those that are technologically related).

Political Risks

stem from instability or weakness in national governments and hostility to foreign business

Economic risks

stem from the stability of a country's monetary system, economic and regulatory policies, and the lack of property rights protections.

A company's corporate social responsibility strategy is defined by:

the specific combination of socially beneficial activities it opts to support with its contributions of time, money, and other resources

Opportunities for Location-based cost advantages

wage rates worker productivity energy costs environmental regulations tax rates inflation rates