B-Pol Exam 2
in a market economy, capital markets are believed to efficiently allocate capital how/why
- Efficiency results as investors take equity positions with high expected future cash-flow values. - Capital is allocated through debt as shareholders and debt holders try to improve the value of their investments by taking stakes in businesses with high growth and profitability prospects.
what does downscoping do
- Has a more positive effect on firm performance than does downsizing - Causes firms to refocus on their core business - is often used with downsizing simultaneously - is used more frequently in US firms than in European companies
a corporate level strategy is concerned with 2 key issues
- How corporate headquarters should manage those businesses - In what product markets and businesses the firm should compete
To enter a global market, a firm selects the entry mode that is best suited to its situation.
- In some instances, the various options will be followed sequentially, beginning with exporting and eventually leading to greenfield ventures. - In other cases, the firm may use several, but not all, of the different entry modes, each in different markets
location advantages
- Locating facilities outside their domestic market can sometimes help firms reduce costs - easier access to lower cost labor, emerge, natural resources, critical supplies, customers
the degree of benefit a firm can capture through a location advantage is affected by
- Manufacturing and distribution costs - The nature of international customers' needs - Cultural and formal country institutions (e.g., laws and regulations)
Among the challenges associated with integration processes are the need to:
- Meld two or more unique corporate cultures - Link different financial and information control systems - Build effective working relationships (particularly when management styles differ) - Determine the leadership structure and those who will fill it for the integrated firm
compared to domestic acquisitions, cross border acquisitions
- Often require debt financing to complete - Have more complicated negotiations - Experience more difficulty in merging the two firms due to different corporate cultures as well as different social cultures and practices
international diversification facilitates innovation in a firm because it
- Provides a larger market to gain greater and faster returns from investments in innovation - Exposes the firm to new products and processes - Can generate the resources necessary to sustain a large-scale R&D program
among the probelsma associated with using an acquisition strategy are
- The difficulty of effectively integrating the firms involved - Incorrectly evaluating the target firm's value • - Overestimating the potential for synergy - Creating a firm that is too diversified - Creating an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing the acquisition - Developing a combined firm that is too large, necessitating extensive use of bureaucratic, rather than strategic, controls - creating debt loads that preclude adequate long term investments
a firm that pursues an international strategy may become more difficult to manage due to
- The growth in the firm's size - Greater operational complexity - Different cultures and institutional practices (e.g., those associated with governmental agencies) that are part of the countries in which the firm competes
2 key reasons why firms form strategic alliances are
- To create value they couldn't generate by acting independently and entering markets more rapidly - Because most (if not all) companies lack the full set of resources needed to pursue all identified opportunities and reach their objectives in the process of doing so on their own
Possible disruptions to a firm's operations when seeking to implement its international strategy create numerous problems, including:
- Uncertainty created by government regulation - The existence of many, possibly conflicting, legal authorities - Corruption - The potential nationalization of private assets
4 risks that cooperative strategies often carry
- a firm may act in a way that its partner thinks is opportunistic - a firm misrepresents the resources it can bring to the partnership - a firm may fail to make available to its partners the resources that it committed to the cooperative strategy - one firm may make investment that are specific to the alliance while its partner does not
a corporate level strategy is used as
- a means to grow revenues and profits - focuses on diversification - is expected to help the firm earn above average returns by creating value
Synergy produces joint interdependence among businesses that constrains the firm's flexibility to respond, which may lead the firm to:
- become risk averse and uninterested in pursuing new product lines that have potential but are not proven - constrain its level of activity sharing
financial economies can be created when firms learn how to create value by
- buying assets at a low cost - restructuring the assets - selling the assets at a price that exceeds their cost in the external market
2 primary approaches firms use to manage cooperative strategies are
- cost minimization - opportunity maximization
the ability to simultaneously create economies of scale by sharing activities and transferring core competencies is
- difficult for competitors to understand and imitate - is very expensive to undertake - often results in discounted assets by investors
firms use 3 types of restructuring strategies
- downsizing - downscoping - leveraged buyouts
An unrelated diversification strategy can create value through two types of financial economies: (1) efficient internal capital allocations, and (2) purchasing other firms, restructuring their assets, and selling them.
- efficient internal capital market allocation - asset restructuring
as a firms size increases, so does
- executive compensation - social status
4 determinants of national advantage
- factors of production, - related and supporting industries, - demand conditions, - patterns of firm strategy, structure, and rivalry
Managerial tendencies to over diversify may be held in check by:
- governance mechanisms - monitoring by owners - executive compensation practices - the market for corporate control
Some limits constrain the ability to manage international expansion effectively.
- international diversification increases coordination and distribution costs - management problems are exacerbated by
low performance research shows that
- low returns are related to greater levels of diversification - an overal curvilinear relationship may exist between diversification and performance
compared with internal product development processes, acquisitions provide
- more predictable returns - this is because the performance of the acquired firm's products can be assessed prior to completing the acquisition - faster market entry
joint ventures have
- partners who own equal percentages and contribute equally to the venture's operations - Are often formed to improve a firm's ability to compete in uncertain competitive environments
vertical integration allows a firm to gain market power by developing the ability to
- save on its operations - avoid sourcing and market costs - improve product quality - possibly protect its technology from imitation by rivals - potentially exploit underlying capabilities in the marketplace
tacit collusion
- tends to take place in industries dominated by a few large firms - results In production output that is below fully competitive levels and above fully competitive prices - can lead to less competition in markets in which both firms operate
managerial motives to diversify being value-creating and value-neutral levels include
- the desire for increased compensation - reduced managerial risk
efforts to build trust between partners in strategic alliances
- the initial condition of the relationship - the negotiation process to arrive at an agreement - partner itneractions - external events - the cultures of the countries involved - the relationships between the countries' governments
A firm's ability to create value through diversification is influenced by the degree to which resources are:
- valuable - rare - difficult to imitate - non substitutable
Value-Neutral Diversification
-Anti-trust regulation -Tax laws -Low performance -Uncertain future cash flows -Risk reduction for firm -Tangible Resources -Intangible Resources
Value-Creating Diversification
-economies of scope (related diversification) -market power (related diversification) -financial economies (unrelated diversification)
to increase market power, firms use
-horizontal acquisitions -vertical acquisitions -related acquisitions
2 dominant types of complementary strategic alliances
-vertical -horizontal
Firms using the related linked diversification strategy can create value by transferring core competencies in at least two ways:
1. Because the expense of developing a core competence has already been incurred in one of the firm's businesses, transferring it to a second business eliminates the need for that business to allocate resources to 2. Because intangible resources are difficult for competitors to understand and imitate, the unit receiving a transferred corporate-level competence develop it.
4 business level cooperative strategies are used to help the firm improve its performance in individual product markets
1. Complementary strategic alliances 2. Competition response strategy 3. Uncertainty-reducing strategy 4. Competition-reducing strategy
Value-Reducing Diversification
1. Diversifying managerial employment risk 2. Increasing managerial compensation
collusion is often used to reduce competition. 2 types of collusive strategies
1. Explicit collusion 2. Tacit collusion
firms can use one or more of 5 entry modes to enter international markets
1. Exporting 2. Licensing 3. Strategic alliances 4. Acquisitions 5. New wholly owned subsidiaries
Incentives of International Strategy
1. Extend a product's life cycle 2. Gain easier access to raw materials 3. Opportunities to integrate operations on a global scale 4. Opportunities to better use rapidly developing technologies 5. Gain access to consumers in emerging markets
Reasons for Acquisitions
1. Increased market power 2. Overcoming entry barriers 3. Cost of new product development and increased speed to market 4. Lower risk compared to developing new products 5. Increased diversification 6. Reshaping the firm's competitive scope 7. Learning and developing new capabilities
Basic benefits of international strategy
1. Increased market size 2. Economies of scale and learning 3. Location advantages
Problems in Achieving Success
1. Integration difficulties 2. Inadequate evaluation of target 3. Large or extraordinary debt 4. Inability to achieve synergy 5. Too much diversification 6. Managers overly focused on acquisitions 7. Too large
3 major types of strategic alliances that firms use include
1. Joint ventures 2. Equity strategic alliances 3. Nonequity strategic alliances
there are three types of leveraged buyouts
1. Management buyouts (MBOs) 2. Employee buyouts (EBOs) 3. Whole-firm buyouts
3 international corporate level strategies
1. Multidomestic 2. Global 3. Transnational
there are 5 categories of businesses according to increasing levels of diversification
1. Single business 2. Dominant business 3. Related constrained 4. Related linked 5. Unrelated
the 3 international corporate level strategies vary in terms of 2 dimensions
1. The need for global integration 2. The need for local responsiveness
4 types of distances associated with liability of foreignness
1. cultural 2. administrative 3. geographic 4. economic
the 2 major categories of risks firms need to understand and address when diversifying geographically through international strategies are
1. political risks 2. economic risks
downsizing is
A planned reduction in the number of employees needed in a firm in order to reduce costs and make the business more efficient
Related Acquisition
Acquiring a firm in a highly related industry. (Firms seek to create value through the synergy that can be generated by integrating some of their resources and capabilities.)
compared with business level cooperative strategies, corporate level cooperative strategies commonly are
Broader in scope More complex More challenging More costly to use
economies of scale and learning
By expanding the number of markets in which they compete, firms may be able to enjoy economies of scale. • Firms that make continual process improvements enhance their ability to reduce costs and increase the value their products create for customers
at the business level, firms select from among the generic strategies of
Cost leadership Differentiation Focused cost leadership Focused differentiation Integrated cost leadership/differentiation
financial economies (unrelated diversification)
Efficient internal capital allocation and Business restructuring
joint ventures can be effective in
Establishing long-term relationships Transferring tacit knowledge between partners
multiple factors and conditions are influencing the increasing use of international strategies, including opportunities to
Extend a product's life cycle Gain access to critical raw materials, sometimes including relatively inexpensive labor Integrate a firm's operations on a global scale to better serve customers in different countries Better serve customers whose needs appear to be more alike today as a result of global communications media and the Internet's capabilities to inform Meet increasing demand for goods and services that is surfacing in emerging markets
increased market size
Firms can expand their potential market size by using an international strategy to establish stronger positions outside their domestic market
the primary reasons of failure for strategic alliances are
Incompatible partners Conflict between the partners Difficulty in managing
A firm uses a related diversification strategy when:
It generates more than 30 percent of its revenue outside a dominant business Its businesses are related to each other in some manner.
factors of production refer to the inputs necessary for a firm to compete in any industry
Labor Land Naturalresources Capital Infrastructure(transportation,delivery,andcommunication systems)
many factors contribute to the positive effects of international diversification, such as:
Private versus government ownership Potential economies of scale and experience Location advantages Increased market size The opportunity to stabilize returns
Moderate to High Levels of Diversification (related diversification)
Related Constrained - Less than 70% of revenue comes from the dominant business, and all businesses share product, technological, and distribution linkages. Related Linked - Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses.
Compared to mergers and acquisitions, corporate-level strategic alliances:
Require fewer resource commitments Permit greater flexibility in terms of efforts to diversify partners' operations
Low Levels of Diversification
Single Business - 95% or more of revenue comes from a single business. Dominant Business - Between 70% and 95% of revenue comes from a single business.
Corporate-level cooperative strategies can create competitive advantages and value for customers when:
Successful alliance experiences are internalized. The firm uses such strategies to develop useful knowledge about how to succeed in the future. The firm is able to develop such strategies and manage them in ways that are valuable, rare, imperfectly imitable, and nonsubstitutable.
Effective acquisitions have the following characteristics:
The acquiring and target firms have complementary resources that are the foundation for developing new capabilities. The acquisition is friendly, thereby facilitating integration of the firm's resources. The target firm is selected and purchased on the basis of completing a thorough due-diligence process. The acquiring and target firms have considerable slack in the form of cash or debt capacity. The newly formed firm maintains a low or moderate level of debt by selling off portions of the acquired firm or some of the acquired firm's poorly performing units. The acquiring and acquired firms have experience in terms of adapting to change. R&D and innovation are emphasized in the new firm.
the decision regarding which entry mode to use is primarily a result of
The industry's competitive conditions The country's situation and government policies The firm's unique set of resources, capabilities, and core competencies
economic risks of using an international strategy include
The perceived security risk of a foreign firm acquiring companies that have key natural resources or firms that may be considered strategic with regard to intellectual property Terrorism Differences and fluctuations in the value of currencies
Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry. a. True b. False
True
very high levels of diversification
Unrelated: Less than 70% of revenue comes from the dominant business, and there are no common links between businesses
Corporate-level strategic alliances are attractive:
When a firm seeks to diversify into markets in which the host nation's government prevents mergers and acquisitions Because they can be used as a "test" to determine whether partners might benefit from a future merger or acquisition between them
strategic alliance
a cooperative strategy in which firms combine some of their resources to create a competitive advantage.
junk bonds are
a financing option through which risky acquisitions are financed with money (debt) that provides a large potential return to lenders (bondholders)
vertical; acquisition
a firm acquiring a supplier or distributor of one or more of its goods or services - the newly formed firm controls additional parts of the value chain, which leads to increased market power
strategic alliance involves
a firm collaborating with another company in a different setting in order to enter one or more international markets
Market power exists when
a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level, or both
mutual forebearance
a form of tacit collusion in which firms do not take competitive actions against rivals they meet in multiple markets
due diligence is a process through which
a potential acquirer evaluates a target firm for acquisitions
Firms can create operational relatedness by sharing either:
a primary activity (inventory delivery systems) a support activity (purchasing practices)
a leveraged buyout is a
a restructuring strategy whereby a party (typically a private equity firm) buys all of a firm's assets in order to take the firm private.
liability of foreignness
a set of costs associated with various issues firms face when entering foreign markets, including unfamiliar operating environments; economic, administrative, and cultural differences; and the challenges of coordination over distances
a joint venture is
a strategic alliance in which two or more firms create a legally independent company to share some of their resources to create a competitive advantage.
network cooperative strategy
a strategy by which several firms agree to form multiple partnerships to achieve shared objectives
Franchising
a strategy in which a firm (the franchisor) uses a franchise as a contractual relationship to describe and control the sharing of its resources with its partners (the franchisees)
synergistic strategic alliance
a strategy in which firms share some of their resources to create economies of scope
diversifying strategic alliance
a strategy in which firms share some of their resources to engage in product and/or geographic diversification.
cross border strategic alliance
a strategy in which firms with headquarters in different countries decide to combine some of their resources to create a competitive advantage
corporate-level cooperative strategy
a strategy through which a firm collaborates with one or more companies to expand its operations
a business level cooperative strategy
a strategy through which firms combine some of their resources to create a competitive advantage by competing in one or more product markets
international strategy
a strategy through which the firm sells its goods or services outside its domestic market
a merger is
a strategy through which two firms agree to integrate their operations on a relatively coequal basis.
Internal product development is often viewed as a. carrying a high risk of failure. b. the only reliable method of generating new products for the firm. c. a quicker method of product launch than acquisition of another firm. d. critical to the success of biotech and pharmaceutical firms.
a. carrying a high risk of failure
firms sometimes complete acquisitions to gain
access to capabilities they lack
what is more common, mergers, acquisitions or takeovers?
acquisitions
cross-border acquisition
acquisitions made between companies with headquarters in different countries
Horizontal Complementary Strategic Alliance
an alliance in which firms share some of their resources and capabilities from the same stage (or stages) of the value chain for the purpose of creating a competitive advantage.
A non equity strategic alliances
an alliance in which two or more firms develop a contractual relationship to share some of their resources to create a competitive advantage.
equity strategic alliances
an alliance in which two or more firms own different percentages of a company that they have formed by combining some of their resources to create a competitive advantage.
licensing is
an entry mode in which an agreement is formed that allows a foreign company to purchase the right to manufacture and sell a firm's products within a host country's market. - least costly form of international diversification - attractive entry mode option for smaller and newer firms
a cross-border acquisition is
an entry mode through which a firm from one country acquires a stake in or purchases all of a firm located in another country. - quickest means for a firm to enter an International market
greenfield venture
an entry mode through which a firm invests directly in another country or market by establishing a new wholly owned subsidiary. - Is the most expensive and risky means of entering a new international market - Is complex to create - Affords maximum control to the firm - Has the greatest amount of potential to contribute to the firm's strategic competitiveness - Is used more prominently when the firm's business relies significantly on the quality of its capital-intensive manufacturing facilities - May require the hiring of a host-country national or consultant in order to obtain knowledge and expertise about the new market - May not be a preferable mode of entry when the country risk is high
exporting
an entry mode through which the firm sends products it produces in its domestic market to international markets. - popular entry mode choice for small businesses to initiate an international strategy
global strategy
an international strategy in which a firm's home office determines the strategies that business units are to use in each country or region.
multi-domestic strategy
an international strategy in which strategic and operating decisions are decentralized to the strategic business units in individual countries or regions for allowing each unit the opportunity to tailor products to the local market
Transnational Strategy
an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness.
external incentives include
antitrust tax laws
complementary strategic alliances
are business-level alliances in which firms share some of their resources in complementary ways to create a competitive advantage.
A cooperative strategy a. is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. b. is a strategy in which firms work together to achieve a shared objective. c. is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. d. specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets
b. a strategy in which firms work together to achieve a shared objective
market power (related diversification)
blocking competitors through multipoint competition, vertical integration
two types of international strategies
business level international strategy and corporate level international strategy
a transnational strategy integrates
characteristics of both multi domestic and global strategies requires flexible coordination
competition reducing strategies are used to avoid excessive
competition while the firm marshals its resources to improve its strategic competitiveness.
Reducing a company's dependence on specific products or markets shapes the firm's
competitive scope
A drawback for firms using the unrelated diversification strategy in a developed economy is that
competitors can imitate financial economies more easily than they can replicate the value gained from the economies of scope developed through operational relatedness and corporate relatedness
corporate level core competencies are
complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise
New wholly owned subsidiary
complex, often costly, time consuming, high risk, maximum control, potential above-average returns
economies of scope are
cost savings a firm creates by successfully sharing resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses
financial economies are
cost savings realized through improved allocations of financial resources based on investments inside or outside the firm
Firms seek to create value from economies of scope through all of the following EXCEPT a. activity sharing. b. skill transfers. c. transfers of corporate core competencies. d. de-integration.
d. de-integration
Synergy exists when a. cost savings are realized through improved allocations of financial resources based on investments inside or outside the firm. b. two units create value by utilizing market power in their respective industries. c. firms utilize constrained related diversification to build an attractive portfolio of businesses. d. the value created by business units working together exceeds the value the units create when working independently.
d. the value created by business units working together exceeds the value the units create when working independently
The company using the related diversification strategy wants to
develop and exploit economies of scope between its businesses
in the cost minimization approach the firm
develops formal contracts with its partners that specify - how the cooperative strategy is to be monitored - how partner behavior is to be controlled
diversification is sometimes pursued for value neutral reasons
different incentives to diversify sometimes exists the quality of the firm's resources may permit only diversification that is value neutral rather than value creating
diversified firms vary according to their level of
diversification and the connections between and among their business
Firms considering the use of any international strategy first develop
domestic market strategies
shareholders of acquired firms often
earn above-average returns.
value creating influences
economies of scope, market power, financial economies
uncertainty reducing strategies are used to
edge against the risks created by the conditions of uncertain competitive environments (such as new product markets).
vertical integration
exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration)
Multipoint Competition
exists when two or more diversified firms simultaneously compete in the same product areas or geographical markets
Vertical Complementary Strategic Alliance
firms share some of their resources and capabilities from different stages of the value chain for the purpose of creating a competitive advantage
bureaucratic controls are
formalized supervisory and behavioral rules and policies designed to ensure consistency of decisions and actions across a firm's units
economic risks include
fundamental weaknesses in a country or region's economy with the potential to cause adverse effects on firms' efforts to successfully implement their international strategies
exporting has
high cost, low control
because it has less accurate information, the external capital market may fail to allocate resources adequately to
high potential investments
the acquiring firm's stock price often falls
immediately after the transaction is announced
a franchise is a form of business organizations
in which a firm that already has a successful product or service (the franchisor) licenses its trademark and method of doing business to other businesses (the franchisees) in exchange for an initial franchise fee and an ongoing royalty rate.
value neutral influences
incentives and resources
a corporate level diversification strategy can be used to
increase a firm's value by improving its overall performance have neutral effects reduce a firm's value
what type of resources are more flexible in facilitating diversification
intangible
restructuring
is a strategy through which a firm changes its set of businesses or its financial structure.
an international diversification strategy
is a strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into a potentially large number of geographic locations or markets.
two important trends influencing a firm's choice and use of international strategies, particularly international corporate level strategies are
liability of foreignnes regionalization
licensing has
low cost, low risk, little control, low returns
unrelated firms (conglomerates)
make no effort to share activities or transfer core competencies between or among their businesses
value-reducing influences
managerial motives to diversify
Global Strategy assumes
more standardization of products across country boundaries
Firms can foster market power through ____________- competition and ______________ integration
multipoint, vertical
political risks denote the probability of disruption
of the operations of multinational enterprises by political forces or events whether they occur in host countries, home country, or result from changes in the international environment.
determining the worth of a target firm is difficult. this difficulty increases the likelihood a firm will
pay a premium to acquire a target
acquisitions have
quick access to new markets, high costs, complex negotiations, problems of merging with domestic operations
downscoping
refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm's core businesses
market power may be gained by firms successfully using a
related constrained or related linked strategy
competition response strategies are formed to
respond to competitors' actions, especially strategic actions
shareholders of the acquiring firms typically earn
returns close to zero
alliance network
set of strategic alliance partnerships firms develop when using a network cooperative strategy
tacit collusion exists when
several firms in an industry indirectly coordinate their production and pricing decisions by observing each other's competitive actions and responses.
strategic alliances have
shared costs, shared resources, shared risks, problems of integration
Economies of scope (related diversification)
sharing activities and transferring core competencies
a takeover is a
special type of acquisition where the target firm does not solicit the acquiring firm's bid; thus, takeovers are unfriendly acquisitions.
corporate level strategy
specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets
an acquisition is a
strategy through which one firm buys a controlling, or 100 percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio
Horizontal Acquisition
the acquisition of a company competing in the same industry as the acquiring firm - increase a firm's market power by exploiting most based and revenue based synergies - result in higher performance when the firms have similar characteristics
private synergy is created when
the combination and integration of the acquiring and acquired firms' assets produce capabilities and core competencies that could not be developed by combining and integrating either firm's assets with another company. Possible when firms' assets are complementary in unique ways, this makes it very difficult for competitors to imitate
in the opportunity maximization approach
the firm develops less formal contracts, with fewer constraints on partners' behaviors, which makes it possible for partners to explore how their resources can be shared in multiple value-creating ways
a multi domestic strategy usually expands
the firm's local market share because the firm focuses its attention on the local clientele's needs
The more related the acquired firm is to the acquiring firm
the greater is the probability that the acquisition will be successful
demand conditions is characterized by
the nature and size of customers' needs in the home market for the products firms competing in an industry produce.
value is created by a corporate level diversification strategy when
the strategy allows a company's businesses to increase revenues or reduce costs while implementing their business level strategies
Firms do not seek operational relatedness or corporate relatedness when using
the unrelated diversification corporate level strategy
Explicit collusion exists when
two or more firms negotiate directly to jointly agree about the amount to produce as well as the prices for what is produced. - this is illegal
Firms in emerging economies often use an
unrelated diversification strategy
dynamic alliance networks
used primarily as a tool of innovation.
stable alliance netowkrs
used to extend competitive advantages into new areas.
Key reasons firms use cross-border alliances include:
• - the performance superiority of firms competing in markets outside their domestic market - governmental restrictions on a firm's efforts to grow through mergers and acquisitions
criss border strategic alliances are
• Are increasing in number • Are not as risky as mergers and acquisitions • Can be complex • Can be difficult to manage
alliance networks can be
• Can be stable or dynamic • Vary by industry characteristics
the most commonly used corporate level cooperative strategies are
• Diversifying alliances • Synergistic alliances • Franchising
diversification
• Is successful when it reduces variability in the firm's profitability as earnings are generated from different businesses • Provides firms with the flexibility to shift their investments to markets where the greatest returns are possible rather than being dependent on only one or a few markets
at the corporate level was international strategies are considered?
• Multidomestic • Global • Transnational
cross border strategic alliances are riskier than their domestic counterparts because of
• The differences in companies and their cultures • The frequent difficulty in building trust in order to share resources among the partners
non equity strategic alliances
•Are less formal •Demand fewer partner commitments than do joint ventures and equity strategic alliances •Generally do not foster an intimate relationship between partners
Large or extraordinary debt can result from:
•Bidding wars •Paying a large premium
A firm uses a cooperative strategy to:
•Create value for a customer that it likely could not create by itself •Try to create competitive advantages •Outperform its rivals in terms of strategic competitiveness •Earn above-average returns
Uncertain Future Cash Flows
•Diversification may be an important defensive strategy: •As a firm's product line matures or is threatened •During a financial downturn •For family firms competing in mature or maturing industries •Diversifying into other product markets or into other businesses can reduce the uncertainty about a firm's future cash flows.
due diligence should
•Evaluate the accuracy of the financial position of the target •Evaluate the accounting standards used by the target •Examine the quality of the strategic fit between the two companies •Examine the ability of the acquiring firm to effectively integrate the target to realize the potential gains from the deal
•Executives sometimes pay a large premium because they are influenced by:
•Hubris •Escalation of commitment to complete a particular transaction •Self-interest
Firms use acquisition strategies to:
•Increase market power •Overcome entry barriers to new markets or regions •Avoid the costs of developing new products and increase the speed of new market entries •Reduce the risk of entering a new business •Become more diversified •Reshape their competitive scope by developing a different portfolio of businesses •Enhance their learning as the foundation for developing new capabilities
vertical integration limitations
•Internal transactions may be expensive and reduce profitability. •Bureaucratic costs may be present. •Substantial investments in specific technologies are required, reducing a firm's flexibility. •Changes in demand create capacity balance and coordination problems.
the integration process is
•Is considered by some to be the strongest determinant of whether either a merger or an acquisition is successful •Is difficult and challenging •Tends to generate uncertainty and often resistance because of cultural clashes and organizational politics
activity sharing
•Is costly to implement and coordinate •May create unequal benefits for the divisions involved •Can lead to fewer managerial risk-taking behaviors
internal incentives include
•Low performance •Uncertain future cash flows •The pursuit of synergy •Reduction of risk for the firm
in general, larger international markets
•Offer higher potential returns •Pose less risk •Have a strong science base, which is needed to facilitate efforts to more effectively sell and / or deliver products that create value for customers
Private synergy is:
•Possible when firms' assets are complementary in unique ways •Difficult to create •Difficult for competitors to understand and imitate •Affected by direct transaction costs (e.g., legal fees, charges by investment banks to conduct due diligence) and indirect transaction costs (e.g., the time spent evaluating targets and negotiating the acquisition)
A firm using a global strategy:
•Seeks to develop economies of scale •Assumes customers throughout the world have similar needs
synergy is created by
•The efficiencies derived from economies of scale •The efficiencies derived from economies of scope •Sharing resources (e.g., human capital and knowledge) across the businesses in the newly created firm's portfolio
product diversification concerns:
•The scope of the markets and industries in which the firm competes •How managers buy, create, and sell different businesses to match skills and strengths with opportunities presented to the firm
market power is usually derived from
•The size of the firm •The quality of the resources it uses to compete •Its share of the market(s) in which it competes
management problems are exacerbated by
•Trade barriers •Logistical costs •Cultural diversity •Access to raw materials •Differences in employee skill levels •Differences in host countries' governmental policies and practices