Policy Strategy Exam 3

The advantages of firms include:

1. the ability to make and control decisions by fiat along clear hierarchical lines of authority, 2. coordination of highly complex tasks to allow for specialized division of labor, 3. Transaction-specific investments, such as specialized robotics equipment that is highly valuable within the firm, but of little or no use in the external market 4. Creation of a community of knowledge, meaning employees within firms have ongoing relationships, exchanging ideas and working closely together to solve problems

What is credible commitment?

• A long-term strategic decision that is both difficult and costly to reverse.

Backward vertical integration

• Backward vertical integration: moving ownership of activities upstream to the originating input of the value chain.

Disadvantages of horizontal integration; why do government authorities sometimes need to be involved in this?

• Because of the potential to reduce competitive intensity in an industry, government authorities such as the Federal Trade Commission(FTC) in the United States and/or the European Commission usually must approve any large horizontal integration activity.

Diversification premium and related diversification

• Diversification premium: situation in which the stock price of related diversification firms is valued at greater than the sum of their individual business units

What does relational view of competitive advantage propose?

• Strategic management framework that proposes that critical resources and capabilities are frequently embedded in strategic alliances that span firm boundaries

Non-equity alliances and information sharing

• The most common type of alliance is an non-equity alliance, which is based on contract between firms. The most frequent forms of non-equity alliances are supply agreements, distribution agreements, and licensing agreements. These contractual agreements are vertical strategic alliances, connecting different parts of the industry value chain. In a non-equity alliance, firms tend to share explicit knowledge-knowledge that can be codified. Patents, user manuals, fact sheets, and scientific publications are all ways to capture explicit knowledge, which concerns the notion of knowing about a certain process or product. Because of their contractual nature, non-equity alliances are flexible and easy to initiate and terminate. However, because they can be temporary in nature, they also sometimes produce weak ties between the alliance partners, which can result in a lack of trust and commitment

Drawbacks to short-term contracts and long-term contracts

• When engaging in short-term contracting, a firm sends out requests for proposals (RFPs) to several companies, which initiates competitive bidding for contracts to be awarded with a short duration, generally less than one year. The drawback of short-term contracts is that firms responding to the RFP have no incentive to make any transaction-specific investments due to short duration of the contract • Long-term contracts help facilitate transaction-specific investments. • Licensing is a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent • In service industries, franchising is an example

Distance- between administrative and political. What happens when this distance is decreased?

• Administrative and political distances are captured in factors such as the absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal and financial institutions. Colony-colonizer relationships also have a strong positive effect on bilateral trade between countries.

Cross-border strategic alliances (advantages and drawbacks)

• Advantages of going global: gain access to a larger market, gain access to low-cost input factors, develop new competencies • Disadvantages of going global: liability of foreignness, loss of reputation, and loss of intellectual property

Principal-agent problems that result from acquisitions

• When discussing diversification in the previous chapter, we noted that some firms diversify through acquisitions due to principal-agent problems. Managers, as agents, are supposed to act in the best interest of the principals, the shareholders. However, managers may have incentives to grow their firms through acquisitions-not for anticipated shareholder value appreciation, but to build a large empire, which is positively correlated with prestige, power, and pay. Besides providing higher compensation and more corporate perks, a large organization may also provide more job security, especially if the company pursues unrelated diversification

Benefits of vertical integration and alternatives to it

• Benefits include: lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets, securing critical supplies and distribution channels • Alternatives to vertical integration includes: taper integration and strategic outsourcing • Taper integration: it is a way of orchestrating value activities in which a firm is backwardly integrated, but it also relies on outside-market firms for some of its supplies, and/or is forwardly integrated but also relies on outside market firms for some of its distribution • Strategic outsourcing: moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. A fir that engages in strategic outsourcing reduces its level of vertical integration

Build, borrow, or buy decision framework—when do you utilize VRIO? (think about internal resources)

• Build-borrow-or-buy framework: conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy) • Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain competitive advantage. Note that in the build-borrow-or-buy model, the term resources is defined broadly to include capabilities and competencies (as in the VRIO model) • Determining whether your internal resources are superior to those of competitors in the targeted area, can best be assessed by applying the VRIO framework.

Economic arbitrage (application)

• Companies from wealthy countries also trade with companies from poor countries to benefit from economic arbitrage. Economic arbitrage is one of the main benefits of going global: access to low-cost input factors

Tact and explicit knowledge & joint ventures

• Explicit knowledge: knowledge that can be codified. Concerns knowing about a process or a product • A joint venture is a standalone organization created and jointly owned by two or more parent companies. Since partners contribute equity to a joint venture, they are making a long-term commitment. Exchange of both explicit and tacit knowledge through interaction of personnel is typical. Joint ventures are also frequently used to enter foreign markets where the host country requires such a partnership to gain access to the market in exchange for advanced technology and know-how. • The advantages of joint ventures are the strong ties, trust, and commitment that can result between the partners. However, they can entail long negotiations and significant investments. If the alliance doesn't work out as expected, undoing the JV can take some time and involve considerable cost. A further risk is that knowledge shared with the new partner could be misappropriated by opportunistic behavior. Finally, any rewards from the collaboration must be shared between the partners. • Tacit knowledge: knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task

Globalization hypothesis—assumptions

• Globalization hypothesis: assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous. • The strategic foundations of the globalization hypothesis are based primarily on cost reduction. Lower cost is a key competitive weapon, and MNEs attempt to reap significant cost reductions by leveraging economies of scale by managing global supply chains to access the lowest-cost input factors

How do economic and political integration between countries influence the world economy?

• Globalization is a process of closer integration and exchange between different countries and peoples worldwide, made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. Combined, these factors reduce the costs of doing business around the world, opening doors to a much larger market than any one home country • Globalization also allows companies to source supplies at lower costs, to learn new competencies, and to further differentiate products. Consequently, the world's market economies are becoming more integrated and interdependent

What is international strategy?

• Is essentially a strategy in which a company sells the same products or services in both domestic and foreign markets. It enables MNEs to leverage their home-based core competencies in foreign markets. An international strategy is one of the oldest types of global strategies and is frequently the first step companies take when beginning to conduct business abroad. It is advantageous when the MNE faces low pressures for both local responsiveness and cost reductions. An international strategy is often used successfully by MNEs with relatively large domestic markets and with strong reputations and brand names

Disadvantages of going global: liability of foreignness, loss or reputation, and loss of intellectual property

• Liability of foreignness: additional cost of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances. • Loss of reputation: MNE's search for low-cost labor has had tragic effects where local governments are corrupt and unwilling or unable to enforce a minimum of safety standards. Although much of the blame lies with the often corrupt host governments not enforcing laws, regulations, and building codes, the MNEs that source their companies also receive some of blame with negative consequences for their reputation. The MNEs are accused of exploiting workers and being indifferent to their working conditions and safety, all in an unending quest to drive down costs. This challenge directly concerns the MNEs corporate responsibility (CSR). Since some host governments are either unwilling or unable to enforce regulation and safety codes, MNEs need to rise to the challenge • The issue of protecting intellectual property in foreign markets also looms large. When required to partner with a foreign host firm, companies may find their intellectual property siphoned off and reverse-engineered

Multidomestic strategy- why would firms pursue this type of strategy?

• MNEs pursuing a multidomestic strategy attempt to maximize local responsiveness, hoping that local consumers will perceive their products or services as local ones. • This strategy arises out of the combination of high pressure for local responsiveness and low pressure for cost reductions. • MNEs frequently use multidomestic strategy when entering host countries with large and/or idiosyncratic domestic markets. • Faces reduced exchange-rate exposure because the majority of the value creation takes place in the host-country business units, which tend to span all functions

Mergers and acquisitions and competitive positions—how does this relationship work? Think about competitive positions via business level strategy (cost versus differentiation)

• Merger: describes the joining of two independent companies to form a combined entity. Mergers tend to be friendly • Acquisition: describes the purchase or takeover of one company by another. Acquisitions can be friendly or unfriendly. • There are three main benefits to a horizontal integration strategy: reduction in competitive intensity, lower costs, and increased differentiation

Various diversification strategies (product, geographic, product-market)

• Product diversification strategy: corporate strategy in which a firm is active in several different product markets • Geographic diversification strategy: corporate strategy in which a firm is active in several different countries • Product-market diversification strategy: corporate strategy in which a firm is active in several different product markets and several different countries

Four main types of business diversification (single, dominant, related, unrelated) (think application). Be sure to pay attention to core competencies, how value is created, and benefits.

• Single business: a single business firm derives more than 95 percent of its revenue from business. The remainder of less than 5% of revenue is not (yet) significant to the success of the firm • Dominant business: a dominant business firm derives between 70 and 95% of its revenue from a single business, but it pursues at least one other business activity that accounts for the remainder of revenue. The dominant business shares competencies in products, services, technology, or distribution. • Related diversification: a firm follows a related diversification strategy when it derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business linked to the primary business activity. The rationale behind related diversification is to benefit from economies of scale and scope: These multi-business firms can pool and share resources as well as leverage competencies across different business lines. • Unrelated diversification-the conglomerate: a firm follows an unrelated diversification strategy when less than 70% of its revenues comes from a single business and there are few, if any, linkages among its business. A company that combines two or more strategic business units under one overarching corporation and follows and unrelated diversification strategy is called conglomerate. ( can be advantageous in emerging economies)

Make-or-buy-continuum—understand integration along this continuum

• Transaction cost economics allows us to explain which activities a firm should pursue in-house("make") versus which goods and services to obtain externally ("buy"). These decisions help determine the boundaries of the firm. When the costs of pursuing an activit in-house are less than the costs of transacting for that activity in the market, then the firm should vertically integrate by owning production of the needed inputs or the channels for the distribution outputs.

Understand what transaction costs are—what does this framework explain and predict?

• Transaction costs are all the costs associated with an economic exchange. The concept is developed in transaction cost economics, a strategic management framework, and enables managers to answer the question of whether it is cost effective for their firm to expand its boundaries through vertical integration or diversification. This implies taking on greater ownership of the production of needed inputs or of the channels by which it distributes its outputs, or adding business units that offer new products and services • Insights gained from transaction cost economics help managers decide what activities to do in-house versus what services and products to obtain from the external market. The key insight of transaction cost economics is that different institutional arrangements-market versus firms- have different costs attached • Transaction costs are all internal and external costs associated wit an economic exchange, whether it takes place within the boundaries of the firm or in markets