BUS 475 Final
Internal capital market
corporate-level strategy whereby the firm's headquarters assess the performance of business units and allocates money across them
Agency theory
deals with business relationship problems when decision-making authority is delegated from one person to another -Stockholders - principal -Senior managers - Agent
Strategic outsourcing
decision to allow one or more of a company's value-chain activities to be performed by independent, specialist companies
Virtual corporation
companies pursued extensive strategic outsourcing to the extent that they only perform the central value creation functions that lead to competitive advantage
Self-contained division
independent business unit or division that contains all the value-chain functions it needs to pursue its business model successfully
Credible commitment
believable promise or pledge to support the development of a long-term relationship between companies
Information asymmetry
agent has more information about the resources being managed than the principal -Laws for monitoring agents -Codetermination law -SEC -GAAP
Merger
an agreement between 2 companies to pool their resources and operations and join together to better compete in a business or industry
On-the-job consumption
describes the behavior of senior management's use of company funds to acquire perks -Empire building: buying new business to increase the size of the company through diversification
Hostage taking
means of exchanging valuable resources to guarantee that each partner to an agreement will keep its side of the bargain
Quasi integration
use of long-term relationships, or investment into some of the activities normally performed by suppliers or buyers
Vertical integration
when a company expands its operations either backward or forward into an industry -Backward - produces inputs for the company's products -Forward - uses, distributes, or sells the company's products
Location economies
• Achieve low-cost position • To differentiate its product offering • To gain competitive advantage over rivals who base all their value creation activities at a single location
Disadvantages of diversification
• Changes in the industry or company o Management o Technology • Diversification for the wrong reasons o Pooling risks o Entry into a wrong business or at wrong time or for wrong reasons • Bureaucratic costs o Cots associated with solving the transaction difficulties between business units and corporate headquarters o Factors responsible • # of business units in a company's portfolio • Degree to which coordination is required to realize the advantages of diversification
Red flags signaling Board problems
• Company has to restate earnings • Poor employee morale • Negative risk assessment from auditor • Poor customer satisfaction track record • Management misses strategic performance goals • Company is target of employee lawsuits • Stock price declines
Types of strategic controls systems
• Personal control o How a manager shapes and influences the behavior of another in a face-to-face interaction in the pursuit of a company's goals • Output control o Establishes performance goals and then measures performance relative to these goals • Behavior control o Establishes comprehensive system of rules that specify the appropriate behavior through: • Operating budget • Standardization • Rules and procedures
Roots of unethical behavior
• Personal ethics • Failing to ask oneself if a decision is ethical • Organizational culture de-emphasizes business ethics • Pressure to meet unrealistic performance goals • Unethical leadership
Organizational design
• Process of deciding how a company should create, use, and combine: o Organizational culture • Means through which a company assigns employees to specific tasks and roles that are to be linked together o Control systems • Provides managers with incentives for employees as well as feedback on how the company performs o Culture • Specific collection of values, norms, benefits, and attitudes
Implementing strategy in a single industry
• Product structure o Grouping employees into separate product groups • To focus on the best ways to increase effectiveness of the product • Market structure o Grouping employees into separate customer groups • To focus on satisfying needs of a particular customer group in the most effective way • Geographical structure o Grouping employees into different geographic regions • To satisfy the needs of customers within different regions of a state of country • Matrix structure o Grouping employees in 2 ways simultaneously to maximize the rate at which different kinds of products can be developed • Product-team structure o Grouping employees by product or project line but employees focus on the development of only one particular type of product
Leveraging skills of global subsidiaries
• Realize that valuable skills can arise anywhere within a firm's global network • Establish an incentive system that encourages local employees to acquire new competencies • Have a process for identifying valuable new skills • Help transfer valuable skills within the firm
Acquisition
• Company uses its capital resources to purchase another company o Principal way companies enter new industries to pursue vertical integration and diversification • Used by companies to move fast to establish a presence in an industry o Less risky than internal new ventures o Easy way to enter an industry that is protected by high barriers to entry • Pitfalls o Integrating the acquired company o Overestimating economic benefits o Expense of acquisitions o Inadequate pre-acquisition screening • Guidelines for success o Target identification and pre-acquisition screening o Bidding strategy o Integration o Learning from experience
Problems with horizontal integration
• Difficult to implement • Conflict with the FTC o Increases in prices o Abuse of market power o Crushing potential competitors
Ethical issues in strategy
• Due to potential conflict between o Goals of the enterprise o Goals of individual managers o Fundamental rights of important stakeholders • Noblesse oblige o Responsibility of people of high birth to give something back to the society that made their success possible
Advantages of multidivisional structure
• Enhanced corporate financial control o Profit center: each self-contained division is treated as a separate financial unit and financial controls are used to establish its performance goals and measure profitability • Enhanced strategic control • Profitable long-term growth • Stronger pursuit of internal efficiency o Organizational slack: unproductive use of functional resources by divisional managers that go undetected unless corporate managers monitor their activities
Types of competencies
• Entrepreneurial capabilities • Required to take advantage of the free cash flow • To promote entrepreneurship, a company must: o Encourage managers to take risks o Give managers the time and resources to pursue novel ideas o Not punish managers when a new idea fails o Make sure the company's free cash flow is not wasted in risky ventures that would generate a low return on investment • Organizational design capabilities • Organizational design skills: ability of the managers to create a structure, culture, and control systems that motivate and coordinate employees to perform at a high level o Influences a company's entrepreneurial capabilities o Determines a company's ability to create functional competencies • Strategic capabilities • Managing different business units to perform better than they would if they were independent companies • Turnaround strategy: managers of a diversified company identify inefficient and poorly managed companies in other industries • Ways to improve the performance of the acquired company o Top managers of the acquired company are replaced with a more aggressive team o New top management team sells off expensive assets o New management team works to devise new strategies to improve performance o Establishing stretch goals for employees at all levels
Problems in implementing multidivisional structure
• Establishing divisional-corporate authority relationship • Restrictive financial controls lead to short-run focus • Competitive for resources • Transfer pricing o Problem of establishing the fair price of a resource or skill developed in one division that is to be sold to another division • Duplication of functional resources
National Competitive Advantage attributes
• Factor endowments o Nation's position in factors of production necessary to compete in an industry • Local demand conditions o Nature of home demand for the industry's product or service • Related and supporting industries o Presence or absence in the nation of supplier and related industries that are internationally competitive • Firm strategy, structure, and rivalry o Conditions in the nation governing • How companies are created, organized, and managed • Nature of domestic rivalry
ROIC
• High profitability leads to excess funds that can then be used to pay dividends, increasing stockholder wealth • High profitability leads to excess funds available for long-term investment in growing the corporation or improving its performance • Other investors see profitability and then buy more of that firm's stock, driving up the share value and increasing stockholder wealth
Risks of outsourcing
• Holdup o Risk that a company will become too dependent upon the specialize • Increased competition o Building of an industry-wide resource that lowers the barriers to entry in that industry • Loss of information and forfeited learning opportunities
Benefits of vertical integration
• Increases product differentiation • Lowers costs • Reduces industry competition when it o Facilitates investments in efficiency-enhancing specialized assets o Protects product quality o Results in improved scheduling
Problems with vertical integration
• Increasing cost structure • Disadvantages when: o Demand is unpredictable o Technology changes fast • Vertical disintegration: when a company decides to exit industries either forward or backward in the industry value chain to its core industry to increase profitability
Tall organizations
• Limitations o Communications problems • Long time taken in decision making and adherence • Distortion of commands and orders o Increases expenses • Solution o Principle of the minimum chain of command • Company should design its hierarchy with the fewest levels of authority necessary to use organizational resources effectively
Benefits of outsourcing
• Lower cost structure • Enhanced differentiation • Focus on the core business
Benefits of horizontal integration
• Lowers cost structure • Increases product differentiation • Leverages a competitive advantage • Reduces rivalry within the industry • Increases bargaining power over suppliers and buyers
Growing profit
• Participating in a market that is growing • Taking market share from competitors • Consolidating the industry through horizontal integration • Development of new markets through international expansion, vertical integration or diversification
Corporate governance
• Refers to the method by which a firm is being governed, directed, administered, or controlled and to the goals for which it is being governed • Mechanisms o Used by principals to: • Align incentives with agents • Monitor and control agents o Types • Board of directors • Inside vs. Outside • Stock-based compensation • Stock options: right to purchase company stock at a predetermined price at some point in the future • Financial statements • Takeover constraint • Risk of being acquired by another company • Corporate raiders: purchase large blocks of shares in companies that appear to be pursuing strategies inconsistent with maximizing stockholder wealth • Greenmail: pushing companies to either change their strategy to benefit stockholders, or charging a premium for the stocks when the company wants to buy them back
Restructuring
• Reorganizing and divesting business units and exiting industries o To refocus upon a company's core business and rebuild its distinctive competencies • Reasons o Investors feel these companies no longer have multibusiness models o Complexity of the financial statements of highly diversified enterprises disguises the performance of individual business units o Response to declining financial performance brought about by over-diversification o Diminished advantages of vertical integration or diversification from innovations in strategic management
Unethical behavior arising from agency problems
• Self-dealing o Managers using company funds for personal use • Information manipulation o Managers use their control over corporate data to distort or hide info • To enhance their own financial situation or the competitive position of the firm • Anticompetitive behavior o Aimed at harming actual or potential competitors to enhance the long-run prospects of the firm • Opportunistic exploitation o Managers rewriting the terms of a contract to make it favorable to the firm • Substandard working conditions o Managers underinvest in working conditions or pay employees below-market rates • To reduce production costs • Environmental degradation o Occurs when a company's actions directly or indirectly result in pollution or other forms of environmental health • Corruption o Can arise when managers pay bribes to gain access to lucrative business contracts
Challenges for principals
• Shaping the agent's behavior to act in accordance with the goals set • Reducing the information asymmetry • Developing mechanisms for removing agents who do not act in accordance with the goals
How to save from economies of scale
• Spreading the fixed costs and setting up production facilities over its global sales volume • Serving a global market, a company utilizes its production facilities more intensively • Bargaining down the cost of key inputs with suppliers • Increasing its sales volume more rapidly
Rights of stakeholders
• Stockholders o Timely and accurate info about their investments • Customers o Be fully informed about the products and services they purchase • Employees o Safe working conditions o Fair compensation for the work they perform o Just treatment by managers • Suppliers o Expect contracts to be respected • Competitors o Expect that the firm will abide by the rules of competition and not violate the basic principles of antitrust laws
Governance mechanisms inside a company
• Strategic control systems o Formal target-setting, measurement, and feedback systems • Employee incentives o Motivate employees to work toward goals central to maximizing long-term profitability
Types of stakeholders
• Supportive o High potential for cooperation, low for threat • Marginal o Low potential for cooperation and threat • Non-supportive o High potential for threat, low for cooperation • Mixed-blessing o High on potential for threat and cooperation
How to increase diversification
• Transfer competencies between business units in different industries o Commonality: skill or competency that when shared by 2 or more business units allows them to operate more effectively and create more value for customers o Increases profitability when it: • Lowers the cost structure of one or more company business units • Enable one or more of its business units to better differentiate their products • Leverage competencies to create business units in new industries • Share resources between business units to realize synergies or economies of scope o Economies of scope: synergies that arise when one or more of a diversified business unit are able to lower costs or increase differentiation • Use of product bundling o Allows companies to expand their range providing customer's a complete package o Goal - bundle products to offer customers: • Lower prices • Superior set of services • Utilize general organizational competencies that increase the performance
Internal new venturing
• Transferring resources and creating a new business unit a new industry to innovate new kinds of products o Used by companies that are: • Technology-based and pursue related diversification • Venturing to enter a newly emerging industry • Pitfalls o Market entry on too small of a scale o Poor commercialization of the new-venture product o Poor corporate management of new-venture diversification
