Business Strategy Chapter 7-9

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Two forms of managerial hubris

1) Managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively and, therefore, create additional shareholder value. This justification is often used for an unrelated diversification strategy 2) Although most top level managers are aware that the majority of acquisitions destroy rather than create shareholder value, they see themselves as the exception to the rule

Firms evaluate the relevance of internal resources in 2 ways

1) Similar to those the firm needs to develop 2) Superior to those of competitors in the targeted area

Decline stage

4 options to decline stage: Exit- bankruptcy or liquidation Harvest- Reduce investments in product support to minimal resources, maximize cash flows from existing product lines Maintain- maintain strategy with its brand, continuing marketing strategy Consolidate- buying rivals. Helps to stake out stronger position

Conglomerate

A company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy

Markets and technology framework

A conceptual model of categorize innovations along the market and technology dimmesnions

Boston consulting group 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 the markets growth ( Vertical axis). SBUs are plotted into four categories (Dog, cash cow, star, and Question mark) each of which warrants a different investment strategy.

Alliance management capability

A firms ability to effectively mange three alliance related tasks concurrently: Partner selection and alliance and formation Alliance design and governance Post formation alliance management

Absorptive Capacity

A firms ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones.

Innovation ecosystem

A firms embeddedness in a complex network of suppliers, buyers, and complementary, which requires interdependent strategic decision making.

Patent

A form of intellectual property that gives the inventor exclusive rights to benefit from commercializing a technology for a specified period of time in exchange for public disclosure of the underlying idea

Licensing

A form of long term contracting in the manufacturing sector that enables firms to commercialize intellectual property.

Managerial hubris

A form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary

Open innovations

A framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones. The sharing goes both ways: some external ideas and inventions are insourced while others are spun out.

Core competence market matrix

A framework to guid corporate diversification strategy by analyzing possible combinations of existing/ new core competencies and existing/ new markets

Related constrained diversification strategy

A kind of related diversification strategy in which executives pursue only businesses where they can apply the resources are core competencies already available in the primary business

Related linked diversification strategy

A kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages

Franchinsing

A long term contract in which a franchiser grants a franchisee the right to use the franchisers trademark and business processes to offer goods and services that carry the franchisers brand name.

Credible commitment

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

Architectural Innovation

A new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets

Alliance champion

A senior corporate level executive responsible for high- level support and oversight.

Joint venture

A stand alone organization created and jointly owned by two or more parent companies

Joint venture

A standalone organization created and jointly opened by two or more companies

Transaction cost economies

A theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to a competitive advantage.

Strategic Alliances

A voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services

Taper integration

A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside market firms of or some of its supplies and or is forwardly integrated but also relies on the outside market firms for some of its distribution.

Hostile takeover

Acquisition in which the target company does not which to be acquired

Transaction costs

All internal and external costs associated with an economic exchange, whether within a firm or in markets.

Standard

An agreed upon solution about a common set of engineering features and design choices

Diversification

An increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes

Radical innovation

An innovation that draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of the existing knowledge bases with a new stream of knowledge

Disruptive innovation

An innovation that leverages new tech to attack existing markets from the bottom up.

Incremental innovation

An innovation that squarely builds on established knowledge base and steadily improves an existing product or services

Reverse innovation

An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes also called frugal innovations

Real Options perspective

Approach to strategic decision making that breaks down a larger investment decisions into a set of smaller decisions that are staged sequentially over time.

Early Majority

The customers coming into the market in the shakeout stage *herding effect: the early majority enters in large numbers

Network Effects

The positive effect that one user of a product or services has on the value of that product for other users

Enterpenurship

The process by which people undertake economic risk to innovate- to create new products, processes, and sometimes new organizations

Horizontal integration

The process of merging with competitors, easing to industry consolidation

Acquisition

The purchase or takeover of one company by another; can be friendly or unfriendly

Strategic entreprenuership

The pursuit of innovations using tools and concepts from strategic management

Social entrepreneurship

The pursuit of social goals while creating a profitable business

Shakeout stage

The rate of growth declines, becomes more cut throat, rivalry increases amongst firms.

Maturity stage

The remaining firms from the shakeout stage. Demand in the maturity stage is limited. Industry growth is minimal or negative. Typically become economies of scale.

Alliance leader

The technical expertise and knowledge needed for specific technical area and is responsible for the day to day management of alliance

Invention

The transformation of an idea into a new product or process, or the modification and recombination of existing ones

Dogs

The underperforming business, small market share in low growth market; low unstable earnings, combined with neutral or negative cash flows.

Why do firms acquire other firms

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

Specialized assets

Unique assets with high opportunity costs: they have significantly more value in their intended use than in their next best use. They come in three types: site specificity, physical asset specificity, and human asset specificity.

VRIO Framework

Valuable Rare Costly to Imitate Organized to capture value

Trade secret

Valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy

Strategic alliances

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.

The type of diversification

What range of products and services to offer

Late Majority

customers who enter the market in the maturity stage

To be disruptive tech

it begins as low cost solution to existing prob Initially, its performance is inferior to existing tech, but its rate of tech improvements over time is faster than the rate of performance increases required by diff market segments.

Internal capital markets

Can be a source of value creation in a diversification strategy if the conglomerates headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets.

Forward vertical integration

Changes in an industry value chain that involve moving ownership of activities closer to the end point of the value chain

Backward vertical integration

Changes in an industry value chain that involve moving ownership of activities upstream to the originating points of the value chain

Cash Cows

Compete in low growth market but hold considerable market share. Their earnings and cash flows are high and stable.

First mover advantage

Competitive benefits that accrue to the successful innovator

Build- borrow- or buy framework

Conceptual model that aids firms in deciding whether to pursue internal development, enter a contractual arrangement or strategic alliance, or acquire new resources, capabilities and competencies

Crossing the Chasm Framework

Conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group

How to respond to disruptive innovatinos

Continue to innovate in order to stay ahead of the competition Guard against disruptive innovation by protecting the low end of the market Disrupt yourself, rather than wait for others to disrupt you.

Co-operation

Cooperation by competitors to achieve a strategic objective

Related diversification strategy

Corporate strategy in which a firm derives less than 70 percent of its rev from a single business activity and obtains rev from other lines of business that are linked to the primary business activity

Unrelated diversification strategy

Corporate strategy in which a firm derives less than 70 percent of its rev from a single business and they're a few, if any linkages among its businesses

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

Product diversification strategy

Corporate strategy in which a firm is active ins several different product markets

External transaction costs

Costs of searching for a firm or an individual with whom to contract, and then negotiating, monitor, and enforcing the contract.

Internal transaction costs

Costs pertaining to organizing an economic exchange within a hierarchy; also called administrative costs

Growth Stage

Demand increases rapidly as first time buyers rush to enter the market, convinced by the proof of concept demonstrated in the introductory stage.

Industry value chain

Depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing

Types of business strategy

Differentiation strategy and cost leadership strategy

Corporate venture capital

Equity investments by established firms in entrepreneurial ventures; VCV falls under the broader rubric of equity alliances

The degree of vertical integration

In what stages of the industry value chain to participate

Why firms need to grow

Increase profits Lower costs Increase market power Reduce risk Motivate management

Risks of vertical integration

Increasing costs Reducing quality Reducing flexibility Increasing the potential for legal repercussions

Question marks

It is not clear whether they will turn into dogs or stars. Their earnings are low and unstable, but they might be growing. The cash flows however is negative. Ideally, corporate ex executives want to invest in question marks to increase their relative market share so they turn into stars.

Explicit knowledge

Knowledge that can be codified; concerns knowing about a process or product

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.

Four options to formulate corporate strategy via core competencies

Leverage existing core competencies to improve current market positions 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 ad compete in markets of the future

Benefits of vertical integration

Lowering costs Improving quality Facilitating scheduling and planning Facilitating investments in specialized assets Securing critical supplies and distribution channels

Value creation and costs in horizontal integration

Reduction in competitive intensity Lower costs Increased differentiation

Benefits of horizontal integration

Reduction in competitive intensity Lower costs Increased differentiation

Examples of successful enterpeneurs

Reed hastings - netflix Jeff below- Amazon Oprah Winfrey- TV show and CEO Harpo Productions Elon Musk

Organizational inertia

Resistance of changes in the status quo

Types of corporate diversification

Single business-95 % of revenue is from one business Dominant business-between 70-95% rev from one business and rev from their lines of business linked to the primary business activity Related diversification- 70 percent rev from one business activity and obtains rev from other lines of business linked to the primary business activity Unread diversification: the conglomerate-70 percent of rev comes from a single business and there are few if any linkages among its businesses.

Principal agent problem

Situation in which an agent performing activities on behalf of a principal pursues his or her own interests

Information asymmetry

Situation in which one party is more informed than another because of the possession of private information.

Diversification discount

Situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units

Diversification premium

Situation in which the stock price of related diversification firms is valued at greater than the sum of their individual business units

Learning races

Situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary

Relational view of competitive advantage

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

Why firms enter alliances

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

Enterpenuers

The agents that introduce change into the competitive system

Innovation

The commercialization of any new product or process, or the modification and recombination of existing ones

Tech enthusiast

The customer segment in the introductory stage of the industry life cycle

Laggards

The last consumer segment to come into the market, enter in the declining stage of life cycle.

Why do we see so many mergers

*On average, acquisitions destroy shareholder value rather than create it Principal agent problems The desire to overcome competitive disadvantage Superior acquisition and integration capability

For diversification to enhance firm performance it must do at least one of the following

Provide economies of scale, which reduce costs Exploit economics of scope, which increases value Reduce costs and increase value

Merger

The joint of two independent companies to form a combined entity

Two types of vertical integration

Fully vertically integrated-all activities are conducted within boundaries of firm Vertically disintegrated with a low degree of vertical integration- focus on only one or a few stages of the industry value chain.

Star

Hold a high market share in a fast growing market. Their earnings are high and either stable or growing.

Closeness

How close do you need to be to your external resource partner

Relevancy

How relevant are the firms existing internal resources to solving the resource gap

Tradability

How tradable are the targeted resources that may be available externally

Integration

How well can you integrate the targeted firm, should you determine you need to acquire the resource partner.

The innovation process

Idea > invention> innovation>Imitation

Winner take all markets

Markets where the market leader captures almost all of the market share and is able to extract a significant amount of the value created

Strategic outsourcing

Moving on or more internal value chain activities outside the firms boundaries to other firms in the industry value chain

Product innovation

New or recombined knowledge embodied in new products

Process innovation

New ways to produce existing products or deliver existing services

Alliances can be governed by the following mechanisms

Non equity alliances Equity alliances Joint ventures

Types of alliances

Partner selection and alliance formation Alliance design and governance Post formation alliance management

Non-equity alliance

Partnership based on contracts between firms

Equity alliance

Partnership in which at least one partner takes partial ownership in the other

Alliance manager

Positioned within the office of alliance management, serves as the alliance process resources and business integrator between the two alliance partners and provides alliance training and development, as well as diagnostic tools

Early adopters

The customers entering the market in the growth stage

Corporate Strategy

The decisions that senior management makes and the goal directed actions it takes to gain and sustain a competitive advantage in several industries and markets simultaneously.

3 dimensions that determine the boundaries of the firm

The degree of vertical integration The type of diversification The geographic scope

Vertical integration

The firm ownership of its production of needed inputs or the channels by which it distributes its outputs

Industry life cycle

The five different stages- introduction, growth, shakeout,maturity, and decline- that occur in the evolution of an industry over time.

Introduction stage

The innovators core competency is R&D, which is necessary to creating a new product category that will attract customers. Capital intensive process.

Vertical market failure

When the markets along the industry value chain are too risky, and alternatives too costly in time or money

The geographic scope

Where to compete


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