Strategic Management: Exam 2

· Understand the three different types of restructuring strategies employed by firms and their short/long-term outcomes.

-Downsizing: a voluntary method of reducing the number of employees or operating units by the management of an organization. But the change in the business composition of the firm will depend upon the situation, it may or may not change.-Down scoping: includes different methods used to eliminate or abolish unrelated businesses to firm's basic or core businesses. It is a positive activity when compared to downsizing.-Leveraged buyouts: is a popular restructuring strategy. In this strategy a firm will purchase all the assets of another company leading the latter becoming a private firm.

· Understand what agency relationships are, why they occur, and their consequences

All agency relationships are fiduciary relationships. This means the relationship involves a certain level of trust and confidence. The agent is obligated to act in the best interests of the principal because the agent's actions will create legal obligations for the principal. The agency relationship allows the agent to work on behalf of the principal as if the principal was present and acting alone.

How can Boston Consulting Group (BCG) growth-share matrix help you guide portfolio planning

Boston Consulting Group (BCG) growth-share matrix A corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into four categories (dog, cash cow, star, and question mark), each of which warrants a different investment strategy.

· Compare and contrast the different options MNEs have to enter foreign markets.

CAGE distance framework A decision framework based on the relative distance between home and a foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance. Cultural. Administrative and political. Geographic. Economic.

What is Corporate Strategy?

Corporate strategy comprises the decisions that leaders make and the goal-directed actions they take in the quest for competitive advantage in several industries and markets simultaneously.3 It provides answers to the key question of where to compete. Corporate strategy determines the boundaries of the firm along three dimensions: vertical integration along the industry value chain, diversification of products and services, and geographic scope (regional, national, or global markets).

· Describe the roles of corporate, business, and functional managers in strategy formulation and implementation.

Corporate strategy concerns questions relating to where to compete as to industry, markets, and geography. Business strategy concerns the question of how to compete. Three generic business strategies are available: cost leadership, differentiation, or value innovation. Functional strategy concerns the question of how to implement a chosen business strategy. Different corporate and business strategies will require different activities across the various functions.

· Be able to explain transaction cost economics theory to explain the boundaries of the firm. When you a firm make resources in-house vs. buying it from external market. What are the alternatives on the Make-or-Buy?

Determining the boundaries of the firm so that it is more likely to gain and sustain a competitive advantage is the critical challenge in corporate strategy.8 Transaction cost economics provides useful theoretical guidance to explain and predict the boundaries of the firm. Insights gained from transaction cost economics help strategic leaders decide what activities to do in-house versus what services and products to obtain from the external market

· Apply Porter's diamond framework to explain why certain industries are more competitive in specific nations than in others.

Factor conditions. Demand conditions. Competitive intensity in focal industry. Related and supporting industries/complementors.

· Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy.

Globalization The 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. multinational enterprise (MNE) A company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries. global strategy Part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world. foreign direct investment (FDI) A firm's investments in value chain activities abroad. Part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world.

· Understand how the market for corporate control acts as a governance mechanism and what managerial defense tactics are commonly used to guard against hostile takeovers

Here's how the market for corporate control works: If a company is poorly managed, its performance suffers and its stock price falls as more and more investors sell their shares. Once shares fall to a low enough level, the firm may become the target of a hostile takeover (as discussed in Chapter 9) when new bidders believe they can fix the internal problems that are causing the performance decline. Besides competitors, so-called corporate raiders or private equity firms and hedge funds may buy enough shares to exert control over a company.

· Understand how the organizational structure is related to firm strategy

In an international strategy, the company leverages its home-based core competency by moving into foreign markets. An international strategy is advantageous when the company faces low pressure for both local responsiveness and cost reductions. Companies pursue an international strategy through a differentiation strategy at the business level. The best match for an international strategy is a functional organizational structure, which allows the company to leverage its core competency most effectively. This approach is similar to matching a business-level differentiation strategy with a functional structure (discussed in detail earlier). When a multinational enterprise (MNE) pursues a multidomestic strategy, it attempts to maximize local responsiveness in the face of low pressures for cost reductions. An appropriate match for this type of global strategy is the multidivisional organizational structure. That structure would enable the MNE to set up different divisions based on geographic regions (e.g., by continent). The different geographic divisions operate more or less as standalone SBUs to maximize local responsiveness. Decision making is decentralized. When following a global-standardization strategy, the MNE attempts to reap significant economies of scale as well as location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost. Since the product offered is more or less an undifferentiated commodity, the MNE pursues a cost-leadership strategy. The optimal organizational structure match is, again, a multidivisional structure. Rather than focusing on geographic differences as in the multidomestic strategy, the focus is on driving down costs due to consolidation of activities across different geographic areas.

· Identify the reasons why firms engage in diversification

Leverage existing core competencies to improve current market position. Build new core competencies to protect and extend current market position. Redeploy and recombine existing core competencies to compete in markets of the future. Build new core competencies to create and compete in markets of the future.

· Know the three components of organizational design: Structure, Culture, & Control

Organizational design is the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization. The key components of organizational design are structure, culture, and control. The goal is to design an organization that allows managers to effectively translate their chosen strategy into a realized one.

What is restructuring and when should a firm think about restructuring?

Restructuring describes the process of reorganizing and divesting business units and activities to refocus a company to leverage its core competencies more fully

· Know the different forms of diversification.

Single business. Dominant business. Related diversification. Unrelated diversification: the conglomerate.

· Know the four building blocks of Organizational structure and the difference between Mechanistic and Organic Organizations

Specialization Formalization Centralization Hierarchy mechanistic organization. Characterized by a high degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making. organic organization Characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making

· Understand how firms utilize effective control systems.

Strategic control-and-reward systems are the third and final key building block when designing organizations for competitive advantage. Strategic control-and-reward systems are internal-governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees). These systems allow managers to specify goals, measure progress, and provide performance feedback. output controls Mechanisms in a strategic control-and-reward system that seek to guide employee behavior by defining expected results (outputs), but leave the means to those results open to individual employees, groups, or SBUs. input controls Mechanisms in a strategic control-and-reward system that seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures that are considered before the value-creating activities.

· Evaluate top-down strategic planning, scenario planning, and strategy as planned emergence.

Strategic planners provide detailed ana-lyses of internal and external data and apply it to all quantifiable areas: prices, costs, margins, market demand, head count, and production runs. Five-year plans, revisited regularly, predict future sales based on anticipated growth. Top executives tie the allocation of the annual corporate budget to the strategic plan and monitor ongoing performance accordingly. Based on a careful analysis of these data, top managers reconfirm or adjust the company's vision, mission, and values before formulating corporate, business, and functional strategies. Appropriate organizational structures and controls as well as governance mechanisms aid in effective implementation

· Understand why firms choose to engage in strategic alliances

Strengthen competitive position. Enter new markets. Hedge against uncertainty. Access critical complementary assets. Learn new capabilities.

· Know why firms choose to engage in acquisitions

To gain access to new markets and distribution channels. To gain access to a new capability or competency. To preempt rivals.

· Know the three forms of internal corporate governance mechanisms (Board, ownership concentration, and executive compensation) and how they reduce agency problems

The board of directors determines executive compensation packages. To align incentives between shareholders and management, the board frequently page 431grants stock options as part of the compensation package. This mechanism is based on agency theory and gives the recipient the right, but not the obligation, to buy a company's stock at a predetermined price sometime in the future. If the company's share price rises above the negotiated strike price, which is often the price on the day when compensation is negotiated, the executive stands to reap significant gains. Executive compensation has attracted significant attention in recent years. Two issues are at the forefront: (1) the absolute size of the CEO pay package compared with the pay of the average employee and (2) the relationship between firm performance and CEO pay.

· Know the Build-Borrow-Buy Framework and when firms choose to engage in each

The build-borrow-or-buy framework provides a 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, page 311and 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 a competitive advantage. Note that in the build-borrow-or-buy model, the term resources is defined broadly to include capabilities and competencies

· Explain why companies compete abroad, and evaluate the advantages and disadvantages of going global.

The decision to pursue international expansion results from the firm's assessment that doing so enhances its competitive advantage and that the benefits of globalization exceed the costs. Simply put, firms expand beyond their domestic borders if they can increase their economic value creation (V − C) and enhance competitive advantage. As detailed in Chapter 5, firms enlarge their competitive advantage by increasing a consumer's willingness to pay through higher perceived value based on differentiation and/or lower production and service delivery costs. Expanding beyond the home market, therefore, should reinforce a company's basis of competitive advantage—whether differentiation, low-cost, or value innovation

· Explain the relationship between strategy and business ethics.

The ethical pursuit of competitive advantage lays the foundation for long-term superior performance. Law and ethics are not synonymous; obeying the law is the minimum that society expects of a corporation and its managers. A manager's actions can be completely legal, but ethically questionable. Some argue that management needs an accepted code of conduct that holds members to a high professional standard and imposes consequences for misconduct.

· Describe the shared value creation framework and its relationship to competitive advantage.

The shared value creation framework proposes that managers maintain a dual focus on shareholder value creation and value creation for society. It recognizes that markets are defined not only by economic needs but also by societal needs. It also advances the perspective that externalities such as pollution, wasted energy, and costly accidents actually create internal costs, at least in lost reputation if not directly on the bottom line. Rather than pitting economic and societal needs in a trade-off, Porter suggests that the two can be reconciled to create a larger pie. The shared value creation framework seeks to enhance a firm's competitiveness by identifying connections between economic and social needs, and then creating a competitive advantage by addressing these business opportunities.

· Explain the role of strategic leaders and what they do.

The theory states that strategic leaders interpret page 34situations through the lens of their unique perspectives, shaped by personal circumstances, values, and experiences. Their leadership actions reflect characteristics of age, education, and career experiences, filtered through personal interpretations of the situations they face. The upper-echelons theory favors the idea that effective strategic leadership is the result of both innate abilities and learning

What are two types of vertical integration?

backward vertical integration Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain. forward vertical integration Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.

What are benefits and risks of vertical integration?

benefits: lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets, and securing critical supplies and distribution channels risks: increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions

· Know the two methods managers utilize to guard against alliance risk

create VRIO resource combinations -Make relation-specific investments -Establish knowledge-sharing routines -Build inter firm trust •Build capability through repeated experiences over time. -Repeated alliance exposure improves learning

· Understand when and why acquisitions are more likely to fail or succeed

differences in corpor

Why Firms Need to Grow?

increase profits lower costs increase market power reduce risk motivate management

· Apply the integration-responsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally.

international strategy Strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets. multidomestic strategy Strategy pursued by MNEs that attempts to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies. global-standardization strategy Strategy attempting to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost. transnational strategy Strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable).

· Know the difference between mergers/acquisitions and takeovers.

merger The joining of two independent companies to form a combined entity. acquisition The purchase or takeover of one company by another; can be friendly or unfriendly. hostile takeover Acquisition in which the target company does not wish to be acquired.

· Know the three types of alliance risks

non-equity equity alliance joint venture

· Define organizational culture and its elements

organizational culture The collectively shared values and norms of an organization's members; a key building block of organizational design.

· Know which strategy firms are likely to follow based upon their level of diversification

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.

· Describe public stock companies and shareholder capitalism.

shareholder capitalism Shareholders—the providers of the necessary risk capital and the legal owners of public companies—have the most legitimate claim on profits. The public stock company is an important institutional arrangement in modern, free market economies. It provides goods and services as well as employment, pays taxes, and increases the standard of living. There exists an implicit contract based on trust between society and the public stock company. Society grants the right to incorporation, but in turn expects companies to be good citizens by adding value to society.

· Know the common organizational structure forms: Simple, functional, multidivisional & Matrix

simple structure Organizational structure in which the founders tend to make all the important strategic decisions as well as run the day-to-day operations functional structure Organizational structure that groups employees into distinct functional areas based on domain expertise multidivisional structure (M-form) Organizational structure that consists of several distinct strategic business units (SBUs), each with its own profit-and-loss (P&L) responsibility matrix structure Organizational structure that combines the functional structure with the M-form

· Be able to match organizational structure with appropriate firm and their strategies.

single business strategy: functional structure dominant business strategy: functional structure Related diversification strategy: cooperative multidivisional (m-form)Centralized decision making High level of integration at corporate headquarters Co-opetition among SBUs Competition for resources Cooperation in competency sharing Unrelated diversification strategy: competitive multi divisional (m-form)Decentralized decision making Low level of integration at corporate headquarters Competition among SBUs for resources

What are the alternatives of vertical integration?

taper integration A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies and/or is forwardly integrated but also relies on outside-market firms for some of its distribution. strategic outsourcing Moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain

· Which form of corporate diversification has the highest and lowest firm Performance, Why?

that companies that focus on a single business, as well as companies that pursue unrelated diversification, often fail to achieve additional value creation. Firms that compete in single markets could potentially benefit from economies of scope by leveraging their core competencies into adjacent markets.

What are three dimensions of corporate strategy?

vertical integration: In what stages of the industry value chain should the company participate? The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages. Diversification: What range of products and services should the company offer? Geographic scope: Where should the company compete geographically in terms of regional, national, or international markets?