Business Policy - Midterm 2

transaction comparables

- A basis for a method of valuing a company that is being targeted in a mergers and acquisitions deal. - Acquirers look for comparable transactions that have involved companies with a similar business model with the company being values.

international corporate-level strategies

Focuses on the scope of a firm's operations through geographic diversification. Required when the firm operates in multiple industries that are located in multiple countries or regions and in which it sells multiple products. - multidomestic - global - transnational

firm strategy, structure, and rivalry

Foster the growth of certain industries. - In Italy, the national pride of the country's designers spawns strong industries not only in shoes but also sports cars, fashion apparel, and furniture.

related and supporting

Italy has become the leader in the shoe industry because of related and supporting industries. For example, a well-established leather-processing industry provides the leather needed to construct shoes and related products. Also, many people travel to Italy to purchase leather goods, providing support in distribution.

comparables

Look at other companies in the industry to compare their prices.

escalating momentum

Major problem of negotiation - Psychology of managers - Investor expectations - Broker incentives - Impending markets downturn - Structure and people changes - Comparables and legal liability

multi domestic strategy

Meet specific needs of local customers. - An international strategy in which strategic and operating decisions are decentralized to the strategic business units in individual countries or regions for the purpose of allowing each unit the opportunity to tailor products to the local market. - The firm's need for local responsiveness is high, while its need for global integration is low. - The use of this strategy usually expands the firm's local market share because the firm can pay attention to the local clientele's needs. - Using this strategy results in less knowledge sharing for the corporation as a whole because of the differences across markets, decentralization, and the different international business-level strategies employed by local units. - This strategy does not allow for the development of economies of scale and thus can be more costly. - Most appropriate for use when the differences between the markets a firm serves and the customers in them are significant.

diversification: reasons that are value-creating

Used to increase the firm's value by improving its overall performance. - Value is created either through related diversification or unrelated diversification when the strategy allows a company's businesses to increase revenues or reduce costs while implementing their business-level strategies. ---> Economies of scope (related diversification) ---> Market Power (related diversification) ---> Financial economies (unrelated diversification) ---> More profit for shareholders

Exporting

high cost, low control - An entry mode through which the firm sends products it produces in its domestic market to international markets. - A popular entry mode choice for small businesses to initiate an international strategy. - Exporting costs: Potentially high transportation costs to export products to international markets and the expense of tariffs placed on the firm's products as a result of host countries' policies.

pestel analysis of the business environment...

identifies trends that usually apply across multiple industries, but might vary across countries.

Competitor analysis or understanding of historical competitive dynamics may...

identify potential rivals for the same target company or alliance partner.

game theory: implications for ways to cooperate

implications for ways to cooperate (relationships depend on care and trust) - People are more afraid of losing something, than the potential to gain. - Game theory teaches us it is important to mix things up. - Learning tools and how you can combine some things to create a "Recipe". - If you want to affect your competitor's decisions, you have to credibly signal intent or move first through an irreversible commitment of resources. - If you face the same competitors over time, you may be better off being a little unpredictable or increasing the uncertainty of the situation, which may require you to constrain yourself to moves that are less than optimal in the short run. - If you are stuck in a situation in which both you and someone else are disadvantaged by the rules of the game, cooperate on changing rules of game (exp: number of players, possible actions, shared payoffs) rather than expecting cooperation under the existing rules. - If game theory doesn't seem to predict what your competitors will do, the problem may be in your understanding of the rules. Game theory doesn't always give firm guidance about immediate choices, but it can alert you to when others are playing a whole different game.

joint venture

legally independent company, may have > 2 parents. - Usually 50/50 share in daughter firm, shared control. - Establishing a separate corporation.

Licensing

low cost, low risk, little control, low returns - 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 or a set of host countries' markets. - The licensor is normally paid a royalty on each unit produced and sold. - The licensee takes the risks and makes the monetary investments in facilities for manufacturing, marketing, and distributing products. - Attractive entry mode for smaller firms, and potentially for newer firms as well. - Potential benefit of this is the possibility of earning greater returns from product innovations by selling the firm's innovations in international markets as well as in the domestic market.

Acqusitions

quick access to new markets, high costs, complex negotiations, problems of merging with domestic operations

Strategic alliances

shared costs, shared resources, shared risks, problems of integration (exp: 2 corporate cultures) - Finds a firm collaborating with another company in a different setting in order to enter one or more international markets. - Firms share the risks and the resources required to enter international markets when using this. - Facilitates developing new capabilities and possibly core competencies that may contribute to the firm's strategic competitiveness. - Firms should be aware that establishing trust between partners is critical for developing and managing technology-based capabilities while using this.

Five Forces analysis of the industry...

should be done for both the acquirer's industry and target's industry if they are in different industries or countries.

VRIN or Value Chain analysis of the company...

should be repeated for each alliance partner, or for acquirer and target.

stakeholders

the individuals, groups, and organizations that can affect the firm's vision and mission, are affected by the strategic outcomes achieved and those enforceable claims on firm's performances.

networks of alliances

the set of strategic alliance partnerships that firms develop when using a network cooperative strategy. - Network cooperative strategy: A strategy where several firms agree to form multiple partnerships to achieve shares objectives. - An important advantage is firms gain access to their partners'' other partners. Having access to multiple collaborations increases the likelihood that additional competitive advantages will be formed as the set of shares resources expands. - Not only direct ties to multiple partners, but indirect ties between partners. - May be actively managed as a supply chain or distribution system. - May be accessed for new ideas or customers. - Competed against other networks, not just firms.

corporate relatedness

transferring core competencies - Creates value through: ---> Reduced costs to develop capability. ---> Leveraging intangible assets. - Transfer can be between business units or from a corporate to a subsidiary.

internal business processes perspective of balanced scoreboard

with a focus on the priorities for various business processes that create customer and shareholder satisfaction. - Product development - Demand manager - Asset utilization improvements - Improvements in employee morale - Changes in turnover rates

downsizing

- A reduction in the number of a firm's employees and, sometimes, in the number of its operating units. But, the composition of businesses in the company's portfolio may not change through this. - An intentional managerial strategy that is used for the purpose of improving firm performance. - Firms make intentional decisions about resources to retain and resources to eliminate. - Better in the short term. ---> Short term outcomes: reduced labor costs ---> Long term outcomes: loss of human capital, lower performance

LBO

- A restructuring strategy whereby a party (typically a private equity firm) buys all of the firm's assets in order to take the firm private. - Once a private equity firm completes this type or transaction, the target firm's company stock is no longer traded publicly. - Used to correct managerial mistakes or because the firm's managers were making decisions that primarily served their own interests rather than those of shareholders. - Significant amounts of debt are commonly incurred to finance a buyout. - Can represent a form of firm rebirth to facilitate entrepreneurial efforts and stimulate strategic growth and productivity. - Short term outcomes: high debt costs, emphasis on strategic controls - Long term outcomes: higher risk, higher performance

franchising extent

- 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 franchisee). - Attractive strategy to use in fragmented industries, such as retailing, hotels and motels, and commercial printing. - A franchise the a form of business organization 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 franchisee) in exchange for an initial franchise fee and ongoing royalty rate.

balanced scoreboard (basics)

- A tool firms use to determine if they are achieving an appropriate balance when using strategic and financial controls as a means of positively influencing performance. - Firms jeopardize their future performance when financial controls are emphasized at the expense of strategic controls.

Dimensions of trust: (post-merger integration)

- Ability - Benevolence - Integrity - Value congruence

vertical integration costs

- An outside supplier may produce at a lower cost, internal transactions may be expensive and reduce profitability relative to competitors. - Bureaucratic costs can be present. - May reduce the firm's flexibility, since it requires investments in specific technology. - Changes in demand create capacity balance and coordination problems.

Market Power (related diversification)

- Blocking competitors through multipoint competition - Vertical integration - 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. - Danger: strong divisions prop up inefficient divisions. - Usually is derived from the size of the firm, the quality of the resources it uses to compete, and its share of the markets in which it competes.

executive power

- CEO duality: Same person is CEO and board chair. - Long tenure - Family membership

demand conditions

- Characterized by the nature and size of customers' needs in the home market for the products firms competing in an industry produce. - Meeting the demand generated by a large number of customers creates conditions through which a firm can develop scale-efficient facilities and enhance the capabilities, and perhaps core competencies, required to use those facilities.

attributes of successful M&A

- Complementary assets or resources: - Friendly - Effective due diligence: - Acquirer has financial slack (cash or a favorable debt position). - Not too much debt - Acquiring firm has a sustained and consistent emphasis on R&D and innovation. - Manage change well: flexible, adaptable

inadequate evaluation of target/inability to achieve synergy

- Estimating the value of the target. - What is the correct "stand-alone price"? - Difficulty with private, international firms. - The winners curse - The synergy trap

vertical integration benefits

- Gain market power of rivals - Improve product quality and improve or create new technologies - Access to more information and knowledge that are complementary.

top management team characteristics, relationship to CEO succession and change

- Heterogeneity: diversity of the group (the more heterogenous you are, the harder it is for cohesion) - Cohesion: the people are willing to work together. - Expertise -Context

Top Management team compositions:

- Homogenous + internal = stable strategy - Heterogenous + internal = stable strategy with innovation - Homogenous + external = ambiguous - changes in TMT coming? - Heterogenous + external = strategic change

winner's curse

- In an acquisition, acquirers often overpay. If you think about the acquisition as the result of an auction, then you can understand why acquirers overpay. - The winning bid is naturally well above the average. Thus, the winner is "cursed", they tend to pay more than the true value of the assets.

How does market power work?

- Increased bargaining power vs. suppliers or buyers - Bundling: A strategy you can use to encourage customers to buy more goods. ---> Offering to sell multiple items together for one price. - Predatory pricing: Temporarily lower price so competitor can't make any money and goes out of business, then you jack the prices back up. - Reciprocal buying (restraint of trade): Only buy from own units. ---> Force supplier to only use certain suppliers in your network. - Mutual forbearance (multi market competition): a form of tacit collusion in which firms do not take competitive actions against rivals they meet in multiple markets.

benefits of international growth

- Increased market size - Increased economies of scale and learning - Location advantages: ---> Access to labor ---> Access to critical resources ---> Location isn't just about reducing cost. It can also be about learning/innovation.

acquistion reasons:

- Increasing market power (horizontal, vertical, related types) - Overcoming entry barriers - Cost of new product development and increased speed to market: - Lower risk compared to developing new products. - Increased diversification - Reshaping the firms competitive scope. - Learning and developing new capabilities

the external environment

- Industry structure - Rate of market growth - Number and type of competitors - Nature and degree of political/legal constraints - Degree to which products can be differentiated

acquisition problems:

- Integration difficulties - Inadequate evaluation of target/inability to achieve synergy - Large or extraordinary debt - Too much diversification - Managers overly focused on acquisitions - Too large

Integration difficulties

- Meld two or more unique corporate cultures - Link different financial and 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.

franchising types

- Product or trade name franchising ---> Exp: Coke, Shell - Business format franchising ---> Exp: McDonalds, 7-11

Disadvantages of licensing

- Provides the least potential returns because returns must be shared between the licensor and the licensee. - The international firm may learn the technology of the party with whom it formed an agreement and then produce and sell a similar competitive product after the licensing agreement expires. - It has little control over selling and distribution.

downscoping

- Refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm's core businesses. - Has a more positive effect on the firm performance that does downsizing, because firms commonly find that downscoping causes them to refocus on their core business. - Managerial effectiveness increases because the firm has become less diversified, allowing the top management team to better understand and manage the remaining businesses. - Leads to more positive outcomes in the short and long term. ---> Short term outcomes: reduced debt costs, emphasis on strategic controls ---> Long term outcomes: higher performance

determinants of national advantage

- factors of production - demand conditions - firm strategy, structure, and rivalry - related and supporting

4 perspectives of the balanced scoreboard

- financial -customer - internal business processes - learning and growth

Pure alliances

- Separate business entities with own management and little exchange of shares. - Option to purchase an equity stake

economies of scope (related diversification)

- Sharing activities = operational relatedness - Transferring core competencies = corporate relatedness

characteristics of the organization

- Size - age - culture - availability of resources - patterns of interaction among employees

stages of acquisitions

- Stage 1: Identification ---> Who would you want to acquire? (target) - Stage 2: Negotiation ---> Agree upon price and conditions of sale (training). ---> Deal structure: · Stock vs. cash · Full control vs. equity stake · Assumptions vs. payoff of debt · Board seats and top management · Immediate payouts vs. series of payments vs. earn-outs - Stage 3: Integration ---> Bringing them into the family.

Trust between alliance partners affected by 4 issues:

- The initial condition of the relationship - The negotiation process to arrive at an agreement - Partner interactions - External events

2 dimensions in which international corporate level strategies vary:

- The need for global integration - The need for local responsiveness.

factors of production

- This determinant refers to the inputs necessary for a firm to compete in an industry. - Land, labor, natural resources, capital, and infrastructure represent such inputs.

characteristics of the manager

- Tolerance for ambiguity - Commitment to the firm and its desired strategic outcomes - Interpersonal skills - Aspiration level - Degree of self confidence

valuation methods

- comparables - transaction comparables - discounted cash flow analysis

Financial economies (unrelated diversification)

- efficient internal capital allocation - business restructuring

entry mode (into a country market)

- exporting - licensing - strategic alliances - acquisitions - new wholly owned subsidiary (greenfield venture)

types of acquisitions

- horizontal acquisition - vertical acquisition - related acquisition - cross-border acquisition

CEO succession

- internal - external

2 important trends influencing a firms choice and use of international corporate level strategies:

- liability of foreignness - Regionalization

operational relatedness

- sharing activities in any part of the value chain. - Economies of scope - Fixed costs: spreading fixed costs across a large number of units. - Volume: If I can sell in bigger volumes, then the price of container relative to the good will be lower. - Inventory: A benefit or size, is the ability to manage inventory. - Can support cost reduction or product differentiation. - Danger: managers not rewarded for cooperation

dimensions of scope:

- vertical - product market - geographic - technological

Types of alliances

-joint venture -equity alliance -non-equity alliance

discounted cash flow analysis

A key valuation in tool in M&A, discounted cash flow analysis determines a company's current value, according to its estimated future cash flows.

due diligence

A process through which a particular acquirer evaluates a target firm for acquisition.

Related acquisitions

Acquiring a firm in a highly related industry. - Through this, firms seek to create value through the synergy that can be generated by integrating some of their resources and capabilities.

cross-border aqusitions

Acquisition made between companies with headquarters in different countries. - An entry mode through which a firm from one country acquires a stake in or purchases all of a firm located in another country. - The quickest means for firms to enter in international markets. - They provide rapid access to new markets. - Disadvantages: ---> Often require debt financing to complete, which carries an extra cost. ---> Negotiation can be exceedingly complex and are generally more complicated than are the negotiations associated with domestic acquisitions. ---> Dealing with the legal and regulatory requirements in the target firm's country and obtaining appropriate information to negotiate an agreement.

market for corporate control (acquisitions or takeovers)

An external governance mechanism that is active when a firm's internal governance mechanisms fail.

Transnational strategy

Balancing the two through IT, matrix structure. - A combination of the multidomestic and global strategies. - The firm seeks to achieve both global efficiency and local responsiveness. - Flexible coordination is required to implement this. - Such integrated networks allow a firm to manage its connection with customers, suppliers, partners, and other parties more efficiently rather than using arm's-length transactions.

Global strategy

Centralized, standardized product development and manufacture. - An international strategy in which a firm's home office determines the strategies that business units are to use in each country or region. - Indicates that the firm has a high need for global integration and a low need for local responsiveness. Seeks greater levels of standardization of products across country markets. - Seeks to develop economies of scale as it produces the same, or virtually the same, products for distribution to customer throughout the world who are assumed to have similar needs. - Most effective when the differences between markets and the customers the firm is serving are insignificant. - Centralized decision making as designed by headquarters details how resources are to be shared and coordinated across markets.

restructuring

Commonly used to correct or deal with the results of ineffective mergers and acquisitions. A strategy through which a firm changes its set of businesses or its financial structure. - downsizing - downscoping - LBO

dominant logic

Corporate managers are generally general managers, they apply same strategies across the industries. - Familiarity with types of projects or industries allows corporate managers to learn from experience. - They apply similar management tools, styles, and strategies across businesses in the corporate portfolio. - Danger: managers overconfident, unaware of change.

diversification: reasons that are value-neutral

Diversification can have neutral effects or even reduce a firm's value. - These reasons for diversification include a desire to match and thereby neutralize a competitor's market power. ---> EXP: To neutralize another firm's advantage by acquiring a similar distribution outlet. - Antitrust regulation (external) - Tax laws (external) - Low performance (internal): industry or firm level reasons - Uncertain future cash flows (internal) - Risk reduction for firm (internal) - Tangible resources: may create resource interrelationships in production, marketing, procurement, and technology, defined as activity sharing. - Intangible resources: more flexible than physical assets in facilitating diversification. · Intangible resources such as tacit knowledge could encourage even more diversification.

diversification: reasons that are value-destroying

Greater amounts of diversification reduce managerial risk in that if one business in a diversified firm fails, the top executive of that business don't not risk total failure by the corporation. - Can increase a firm's size and thus managerial compensation. - Diversifying managerial employment risk (reduced managerial risk of job loss, investments) - Increasing managerial compensation (the bigger the company is, the more the CEO gets paid)

managerial discretion and executive power

How much freedom does a top executive have to make decisions that can directly affect the success of the organization? - factors affecting managerial discretion: ---> the external environment ---> characteristics of the organization ---> characteristics of the manager

equity alliance

Partial ownership- not just of new companies formed

Vertical acquisition

Refers to a firm acquiring a supplier or distributor of one or more of its products. - Through this, the newly formed firm controls additional parts of the value chain, which is how the acquisition leads to increased market power. - A firm has the opportunity to appropriate value being generated in a part of the value chain in which is does not currently compete and to better control its own destiny in terms of cost and access.

Pure acqusition

Target is consumed into existing business entity, managers and directors leave.

Horizontal acquisition

The acquisition of a company competing in the same industry as the acquiring firm. - Increase's a firm's market power by exploiting cost based and revenue based synergies. - Occur frequently in the pharmaceutical industry. - Result in higher performance when the firms have similar characteristics, such as strategy, managerial styles, and resource allocation patterns. - Most effective when the acquiring firm effectively integrates the acquired firm's assets with its own, but only after evaluating and divesting excess capacity and assets that do not complement the newly combined firm's core competencies.

divestures

The action or process of selling off subsidiary business interests or investments. - Reasons for divestitures: ---> Poor performance ---> Different human resource requirements ---> Restructuring in terms of business unit reorganization ---> Resource redeployment

business restructuring/restructuring of assets

The diversified firm buys another company, restructures that company's assets in ways that allow it to operate more profitably, and then sells the company for a profit in the external market.

regionalization

This trend is becoming prominent largely because where a firm chooses to compete can affect its strategic competitiveness. As a result, the firm considering using international strategies must decide if it should enter individual country markets or if it would be better served by competing in one or more regional markets. - Allows a firm to marshal its resources to compete effectively rather than spreading their limited resources across multiple country-specific international markets. - Important to most multinational firms, even those competing in many regions across the globe.

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.

corporate diversification

can grow by moving into a new product market. - Offering a new good or service to customers. - Incentives to diversify come from both the external environment and a firm's internal environment.

New whole owned subsidiary (greenfield venture)

complex, often costly, time consuming, high risk, maximum control, potential above-average returns - An entry mode through which a firm invests directly in another country or market by establishing a new wholly owned subsidiary. - The process of creating this is often complex and potentially costly, but this entry mode affords maximum control to the firm and has the greatest amount of potential to contribute to the firm's strategic competitiveness as it implements international strategies. - Opening a new business for the firm without acquiring a previous established brand-name business.

financial perspective of balanced scoreboard

concerned with growth, profitability, and risk from the shareholders' perspective. - EVA - Profitability - Growth - Return on equity - Return on assets

customer perspective of balanced scoreboard

concerned with the amount of value customers perceive was created by the firm's products. - Differentiation - Percentage of repeat business - Quick response - Assessment of ability to anticipate customers' needs - Effectiveness of customer service practices - Quality of communications with customer

learning and growth perspective of balanced scoreboard

concerned with the firm's effort to create a climate that supports change, innovation, and growth. - Leadership - Organizational leadership - Ability to change - Improvements in innovation ability - Number of new products compared to competitors - Increases in employees' skills

Non-equity alliance

contractual agreement - may not be a formal contract

vertical integration

going back and becoming your own supplier or acquiring your supplier, or becoming your own retailer. - Exists when a company produces its own outputs (backward integration) or owns its own source of output distribution (forward integration).

synergy

exists when the value created by business units working together exceeds the value that those same units create working independently. - V(A) + V(B) < V(A+B) - Produces joint interdependence among businesses that constrains the firm's flexibility to respond. - Can you grow your profits by diversification? - Can come from operational relatedness, corporate relatedness, market power, and financial efficiencies.

multipoint competition

exists when two or more diversified firms simultaneously compete in the same product areas or geographical markets.