SDM: All Objectives

Describe the following considerations w.r.t. innovation: · Implementation & integration · Acquisitions · Alliances

Innovation Considerations: Implementing / integrating: · Facilitated through shared values/knowledge, strategic leadership & communication (e.g. allocating resources). · Appeal cross-functionally (horizontal vs. vertical) · Barriers from politics or frames of reference Acquisitions: · Careful selection of firms with complementary capabilities/assets to extend product/revenue lines. · Key risk from substituting acquisition for innovation. Alliances: · Alliances can help ID/exploit opportunities for innovation, but firms can use info for own benefit - careful consideration of partners for compatible skills/assets/goals. (SM13)

Define the following: - Inside view - Power curve of market

Inside view: · People focus only on case at hand, & then try to predict based on own experience, even if never done something before. · Execs model this & tell favorable stories about how products stand out. They sandbag, asking for more than what they know they'll get. Power Curve of Market: · Power law in the tails: Middle of graph almost no economic profit. · Economic profit = profit - economic CoC (SDM179)

Contrast insulation & non-insulating methods of cost allocations.

Insulation method: Costs based on share of allocation base and not on other BUs' performance. Non-insulating: · Costs depend on other BUs' performance. · Diversifies by allocating more to higher performance. · May incentivize BUs to monitor each other & cooperate to improve performance · Can distort performance measure. (ADMC7)

Describe the Integrated Cost Leadership / Differentiation Strategy

Integrated Cost Leadership / Differentiation Strategy: Low cost and differentiation. · Flexible manufacturing systems: Flexible human, physical, information resources to create differentiated products at relatively low costs · Information networks: Linking companies w/suppliers, distributors, & customers to ease flexibility & satisfy customer expectations. · Total quality systems: Focus on customer satisfaction, cost · Competitive risks: Reduce costs while differentiating, maintaining primary/support functions in value chain, can't attract customers - cost not low enough & can't differentiate à neither cost / differentiation leadership (SM4)

Describe the likelihood of attacks in interfirm rivalry.

Likelihood of attacks based on the following: · First mover advantage: Important in fast-moving markets, requires resource allocation/slack & investment (R&D, innovation, products) & flexibility. · Benefits: Customer loyalty from first move, gaining / holding mkt share · Risks: Dif. to estimate returns, cost, reducing slack for innovation · Second movers imitate and have more time to observe and improve on first-mover's actions/technology w/feedback from market - but too long and it costs them market share & loyalty Late mover (SM5)

Describe the likelihood of responses in interfirm rivalry.

Likelihood response - better use of capabilities for comp. adv., action damages firm's adv., firm's market position less defensible · action type - strategic has fewer responses bc of amount of time for competitors to respond and commitment/resources needed. Tactical responses quicker & fewer resources/commitment. · Reputation: Market leader actions elicit responses from competitors, but unpredictable competitors à firms less likely to respond to them. Market dependence: More market dependence, more likely to respond bc positions are threatened. (SM5)

Define the following market variances: · Price variance · Quantity variance · Mix variance · Sales variance

Marketing variances: Price & quantity variances Price variance = (actual price - std price) * actual quantity Quantity variance = (actual quantity - std qty) * std price Mix variance = (actual mix % - std mix %)*actual units of products sold * std price Sales variance = (actual units of all products sold - std units of products)*std mix% * std price · Mix & sales variances helpful when company sells multiple products that tend to be substitutes (ADMC13)

Describe the outcomes of interfirm rivalry.

Outcomes: Likelihood attack & response: Dependent on variety of features - Firm size: · Smaller firms: Nimble, variety of competitive actions / responses, less slack. · Larger firms: Variety of strategic possibilities, but slower competitive actions/responses, greater slack. Quality: Meets/exceeds customer expectations. · Product quality dimensions: Performance, features, flexibility, durability, serviceability, aesthetics, perceived quality Service quality dimensions: Timeliness, Courtesy, consistency, convenience, completeness, accuracy (SM5)

Definitions: - Merger - Acquisition - Takeover

Merger: Integrate, coequal basis Acquisition: Controlling share Takeover: Unsolicited Synergy: Value together > value apart Private synergy: Capabilities/CC only w/target (SM7)

Describe the Model of Competitive Rivalry

Model of Competitive Rivalry: All of the following provides feedback to the firm and its competitors- · Competitive analysis (market commonality, resource similarity) · Drivers of competitive behavior (awareness, motivation, ability) · Interfirm rivalry: Likelihood of attack (first-mover incentives, firm size, quality) & likelihood of response (type of competitive action, reputation, market dependence) · Outcomes (market position, financial performance) (SM5)

Describe the following types multiples: · Multiples of earnings · BV or replacement value multiples · Revenue multiples · Sector-specific

Multiples of Earnings: E.g., EPS, P/E, four quarter avg. (trailing P/E), expected EPS over next year (forward P/E) BV or replacement value multiples: Since accounting can distort values, may look at · EV / BV · Tobin's Q: MV / replacement cost of assets (avoids using BV). Revenue multiples: · Price / sales or EV / sales. · Revenues multiples make it easier to compare firms in different markets Sector-specific: Not recommended, would depend on the sector, not easily comparable, over/undervaluations persistent. (DoV7)

Define the following: · Budgeted volume (aka denominator volume) · Standard (earned or allowed) volume · Actual volume:

Budgeted volume (aka denominator volume): Forecasted expected & normal volume at BOY. Standard (earned or allowed) volume: The input that should have been used under standard units, calculated at EOY Actual volume: Actual incurred volume during the year. (ADMC13)

Describe network cooperative strategy, and the types.

Network cooperative strategy: Several firms, multiple partnerships. Shared objectives. Effective for geog. clustered firms. Sharing resources à more likely successful. Shared knowledge from multiple sources leads to more & better innovation. · Alliance network: Partnerships firms develop when using network cooperative strategy · Stable alliance: Forming stable networks in mature industries (predictable demand) for economies of scale/scope · Dynamic alliance: Used in industries w/frequent product innovations and short life cycles (SM9)

Define the following variances: · Overhead efficiency, volume & spending variances · OH spending variance · OH efficiency variance · OH volume variance · Total OH variance

Overhead efficiency, volume & spending variances Total OH variance = actual OH costs incurred - OH absorbed Over/under-absorbed OH = actual OH incurred - OH absorbed = AOH - (OH rate * SV) Total OH variance disaggregated into three variances summing to total OH variance: OH spending variance = actual OH incurred - flexible budget at actual volume = AOH - (FOH + VOH*AV) OH efficiency variance = flexible budget at actual vol - flexible budget - std vol = (FOH + VOH*AV) - (FOH + VOH*SV) OH volume variance = flexible budget at standard volume - OH absorbed = (FOH + VOH*SV) - (OHR*SV) = FOH(BV - SV)/BV (ADMC13)

Describe allocating OH via job costing

Overhead rate = average cost / volume · Develop prospective rates at BOY using indirect costs · Define input measure for volume (e.g., machine hours) - should have greatest association w/OH · Choose allocation base imposing the most externalities to "tax" Cost flows through t-accounts: T-account deducting indirect labor and indirect materials to overhead t-account (ADMC9)

List some ways suppliers and customers have power.

- Few suppliers/customers - Concentrated industry - Lack of substitutes - Critical buyer/supplier need - High switching costs - Forward/backward integration - Supplier/customer is significant materials/revenue source (SM2)

Describe the following relative valuation test: · Definitional tests of multiples

Analysts may use different values or adjust, so important to know how variables & multiples are defined. Consistency between numerator & denominator (e.g. equity measure vs. firm measure). · Inconsistent ratios (e.g. price/EBITDA) may lead to not accounting for debt or other differences among firms. Uniformity: Multiple has to be defined uniformly (e.g. accounting standards differences, differences in calendar year for earnings, ) (DoV7)

Describe the following relative valuation step: · Analytical tests of multiples

Analytical Tests · Determinants: Every multiple function of risk, growth & CF generating potential. Formulas for different multiples should be analyzed in terms of these three variables. (See formulas.) · Relationships: How multiples change as fundamentals change. Multiples assume linear relationship between one variable and the next (e.g. PEG ratio, (Price/Earnings) / Growth) · Companion variable: Variable that dominates the multiple (not the same for each multiple) (DoV7)

Describe how ABC compares to absorption costing.

Analyzing ABC · Generally, differences between ABC vs. absorption costing not material, but can be dramatic sometimes. High volume = lower ABC; lower volume = lower absorption cost (ADMC11)

Describe how the free cashflow to firms ratio is derived.

(DoV7)

Describe the determinant that yields the price/sales ratio.

(DoV7)

List some ways intensity of competition (rivalry intensity) can be present.

- Few competitors - Slow growth - High storage/fixed costs - Lack of differentiation - Low switching costs - High strategic stakes (need to perform well, e.g. location, market) - High exit barriers (specialized assets, exit costs, dependent relationships w/other companies, emotional barriers, government/social restrictions) (SM2)

Describe when allocating costs equals, exceeds or falls short of marginal costs.

Allocating costs & marginal costs: · Cost allocation usually average cost · If cost rate = total cost / base < Marginal Cost, underallocating costs (used when rising average cost overallocating; slope of R lower than M) · If R >M (slope of R greater than M), overallocating costs. Can discourage managers & disincentivize investing/profiting · If R = M, cost allocations are exactly equal to marginal costs (requires special studies to understand (ADMC7)

Describe how absorption costing produces inaccurate product costs.

Abs. Costing produces inaccurate product costs: - Absorption costing seeks to tie costs directly to products, but fails to account for every activity associated with a product's development (ADMC11)

Describe activity based costing & its pros/cons.

Activity based costing (ABC): Breaks costs down into costs by activities. Four categories of cost drivers: · Per unit · Per batch (e.g. purchase orders, inspections) · Per product level(vary by product line, e.g. engineering orders, product enhancement, etc.) · Capacity sustaining (e.g., security, admin for a factory) TC = VC * Q + BC * B + PC * L + OC VC / BC / PC / OC = unit / batch / product / capacity FC = BC * B + PC * L + OC FC = fixed costs Benefits: · Better understanding costs by analyzing drivers · Trace costs directly to activity · Potential for greater cost control & accuracy · More focused incentives for managers Cons: · Costly & complex: Requires assigning decision rights for all of this, analysis & bookkeeping costs, indirect costs of managing ABC · Opportunism: Managers can manipulate drivers, putting them outside of monitoring · Doesn't allocate opportunity cost - only historical costs. · Evaluates costs, but doesn't consider benefits of systems, e.g. can't allocate joint benefits (ADMC11)

Define/describe the following terms: - Agency costs - Free rider problem - Horizon problem - Adverse selection - Moral hazard

Agency costs: Agent maximizes own utility at cost to principle. Results from information asymmetry. Two sources: · Cost of agents actions · Costs to control behavior (e.g. incentive scheme) Free rider problem: Output greater from a team, but spread out across members - Incentive to shirk, and worsens with more team members. Horizon problem: Short-term focus/actions of agent if he expects to leave before principal. Adverse selection: insureds know more about own circumstances than insurer Moral hazard: Engaging in risky behavior when insulated from consequences of own actions (ADMC4)

Describe the following relative valuation step: · Application tests of multiples

Application tests Comparable firms: Similar cashflow, risk & growth potential; sector/industry doesn't matter. May continue to add on additional criteria (e.g., same size) if sample size is very large. · Alternatives to conventional practice: 1) May use firms similar in valuation fundamentals (e.g., beta, ROE, etc.) or 2) consider all firms in market as comparable and control for differences in fundamentals using statistical techniques Controlling for differences across firms: 1) Subjective adjustments: Adjustments usually subjective, biased & inconsistent. 2) Modified multiples, e.g., PEG ratio, where PE ratio divided by growth rate. Assumes comparability on all other measures & variable relationship is linear 3) Statistical techniques involve regression on sectors and markets. · Assumes multiples are normally distributed, variables are independent, distribution doesn't change with time, and focuses more on acceptable range of R-squared (tighter range for greater accuracy) rather than how high R-squared can get. (DoV7)

List some barriers to entry

Barriers: - Economies: Efficiency as firm grows from declining cost/scale. - Differentiation: Uniqueness, & subsequent brand loyalty. - Capital requirements: Resources to invest. - Switching/fixed/storage costs - Distribution channels - cost disadvantages: Proprietary tech, raw materials, location, subsidies) - Legal / political / gov. policy - Retaliation (SM2)

Describe business level cooperative strategy, and the types.

Business level cooperative strategy: Combine resources / capabilities to compete. Complementary strategic alliances: Share complementary resources for comp. adv. · Vertical alliances: Good for environmental changes, likely to succeed. · Horizontal alliances - New product development. Difficult to maintain since firms compete against each other · Competition Response Strategy: Responding to rivals attack. More temporary so less advantageous, and usually strategic than tactical so difficult to reverse. · Uncertainty Reducing Strategy: Hedge risk, especially in fast cycle or new markets. · Competition reducing strategy: Least likely to create competitive advantage. E.g., Collusion: Agree to produce certain amount or set prices at certain amount. Explicit collusion: Agree on price / production amounts. Illegal. Tacit collusion: Several firms observe each other & indirectly set price / production amount, indirectly coordinate with each other --> present in industries with high concentration, e.g. Airline , cereal (SM9)

Describe buyer value as it relates to differentiation.

Buyer value and differentiation: Uniqueness only valuable if it raises value to buyer (i.e., buyer value chain) · Buyer value: Value for buyer from lower cost, and/or raising product performance or buyer's performance. Can come from time savings, prestige/status, quality, etc. · Value chain & buyer value: Value generated from links between firm's value chain & buyer's value chain. E.g. trucks: Branding, spare parts (reducing wait time), credit policies, etc. (CA2 / CA3 / CA4)

Describe some invalid reasons to vertically integrate.

Common invalid reasons to integrate, · Smooth earnings volatility: (1) Returns in industry often positively correlated, so will not smooth, (2) s/h can diversify to reduce unsystematic risk · Assuring supply or outlets: In efficient markets, not a concern - even if price seems unfair relative to costs. Capturing more value by moving into value-added stages of chain (e.g. moving closer to customers) - Weak correlation. Economic surplus drives superior returns. (SDM138)

Describe Competitor Analysis

Competitive Analysis: Studying / understanding competitors · Market commonality: Operate / compete in same markets / segments · Resource similarity: Similar tangible / intangible resources to competitor à similar strengths / weaknesses. High/low resource similarity = high / low market commonality = high / low rivalry (SM5)

Describe the types of markets within competitive dynamics.

Competitive dynamics - actions/responses among all firms · Slow-cycle markets - comp. adv. shielded from imitation usually for long periods - imitation costly. E.g. Copyrights, patents, etc. · Fast-cycle markets: Imitation often, rapid & inexpensive. Reverse engineering to imitate. E.g. printers, cell phones, etc. --> Innovation key source of competitive advantage Standard cycle markets: Blend of slow & fast cycle markets. Comp. adv. partially sustainable. Competencies and capabilities less specialized, so imitation possible and less costly, but still slower. Innovation can drive competitive actions and intensify rivalry (SM5)

Describe Corporate Level Cooperative strategy, and the types

Corporate Level Cooperative strategy: Collaborating w/1+ firms to expand operations, e.g. diversify synergy à more attractive than M&A due to less resources & commitment. Types include, · Diversifying alliances: Share some of resources / capabilities to engage in product and/or geographic diversification · Synergistic alliances: Share some of resources / capabilities to create economies of scope --> Create synergies across firms · Franchising: Franchise as contractual relationship to describe & control sharing of resources / capabilities with partners/franchises. (Franchise - contractual agreement between legally independent companies where franchisor grants right to franchisee right to sell product or do business under its name/brand/trademarks). Good to use in fragmented industries, e.g. hotels, retail, motels, commercial printing · Assessing corporate-level strategies: Broader in scope and more complex, so more challenging & costly. Internalizing alliance experiences --> desired advantages, develop useful knowledge, (SM9)

Describe the following cost drivers for cost advantage: · Economies or diseconomies of scale · Learning · Pattern of capacity utilization · Linkages · Interrelationships · Integration · Timing · Location · Institutional factors · Discretionary policies independent of other drivers

Cost Drivers: Economies of scale: Efficiency w/ larger volume/cost amortization. Also consider effects of economies' sensitivity, organization, scale, & management. Learning: Learning lowers cost. Creates comp. adv. if proprietary. Spillover reduces industry cost. Capacity utilization: Cost from underutilization. Consider impact on strategy from time period w.r.t. seasonality, cycle, discontinuity Linkages: Links one activity/VCA to another. Two types: Within the VC (indirect, quality assurance, activity coordination, etc.), vertical (supplier, channels - i.e., warehouses, logistics, etc.) Interrelationships: Sharing activities, knowledge - especially if sensitive to economies - between sister unit and between activities. Integration: E.g. vertical integration reduces costs, bargaining power of suppliers/buyers, & avoids transaction costs. But may create inflexibility or exit barriers. Timing: First mover advantage, late mover advantages (e.g., learning from competitors), business cycle, market conditions, sustainable advantages Location: Impacts labor, mgmt. raw materials, energy, distance to suppliers, Institutional factors: Gov. regulation, taxes, unions, politics Discretionary policies independent of other drivers: E.g., how firm conducts business (e.g., no meals onboard for airlines). I.e., Product configuration, performance, features; mix of products offered; level of service provided; spending on marketing/tech.; buyers served; delivery time; etc. What firm wants to offered & cost of what is offered (CA2 / CA3 / CA4)

Describe the following Business Level Strategy Type: · Cost leadership

Cost Leadership (diagram p.113): · Theme - Acceptable: Broad market, low cost, acceptable quality, innovation for standardization & efficiency, complementary products/services, economies of scale, consider cost vs. benefits of outsourcing · Rivalries: Consider their size/number/location/resources · Bargaining Power of Buyers: Too much pressure on price leads to firm exits market, customer has to pay higher price · Bargaining Power of Suppliers: higher margins à absorb cost increases from supplier. E.g. fewer products/types offered, lower power over supplier · Threat of new entrants (barriers): Efficiency · Substitutes: Less concern --> Lower cost detracts from substitutes' value · Competitive risks: Innovation, understanding cust. needs, imitation by competitors. (SM4)

Compare & contrast how newer firms create value through strategic entrepreneurship as compared to larger firms.

Creating Value through Strategic Entrepreneurship · Newer firms ID entrep. opportunities due to flexibility & willingness to take risks · Larger firms leverage more resources/capabilities Both need to achieve/sustain comp. adv.: · Entrep. mindset among managers/employees, · Knowledge to ID/exploit opportunities, · Strong human capital. · Social capital helps ID compl. partners w/resources · Develop capabilities for firm's core competencies & comp. adv. to take exploit entrep. opportunities (SM13)

Describe the following: · Criteria for sustainable competitive advantage · The matrix of these criteria w.r.t. competitive consequences and performance implications.

Criteria for Sustainable Competitive Advantage · Valuable: Neutralize/exploit threats/opportunities. · Rare: Few possess · Costly to Imitate, e.g. evolution of firm culture, exactly how to use capabilities to duplicate, complexity from social phenomena · Non-substitutable capabilities (e.g. no strategic equivalents): Resources equivalent if can separate & exploit to implement same strategy. Strategic value increases when more dif. to substitute (e.g. relationships) For capability to be CC, 1) perform activity w/superior quality to customers compared w/competitors 2) value-creating activity competitors cannot perform (SM3)

Describe the following: - Decision rights - Influence costs - Decision management - Decision control - Controllability principle.

Decision rights: Delegating decisions - Consideration given between delegating to those w/knowledge (since costly to transfer) or retaining decision right (if difficult to monitor behavior of delegate). Influence costs: Costs / resources consumed in lobbying decision-maker. By not assigning decision rights, these may be lower (no one to lobby), but some decisions may still required evidence (e.g. promotions) Decision management: Aspects related to initiating / implementing decisions. Decision control: Aspects related to ratifying/monitoring decisions. · Example: FT hire (initiate) --> authorized by mgmt. (ratify) --> hire candidate (implement) --> evaluate (monitor) Controllability principle: Only holding mgmt. accountable for controllable actions/events. However, may, · Disincentivize risk mitigation · Ignore benchmarks/comparisons available. · Create opportunism. (ADMC4 / ADMC5)

Describe the Differentiation Business Level Strategy Type

Differentiation (see value chain diagram on p.116): · Theme - Distinct: Broad market, products distinctive in many ways to create value & insulate against rivals. Thorough customer understanding, how to demand premium, consistent upgrade in features without significant cost increases · Rivalries: Insulated using brand loyalty to create price insensitivity · Bargaining power of buyers: Insulated using brand loyalty to create price insensitivity · Bargaining power of suppliers: High margins help absorb price changes in high quality components · Potential entrants: Overcome customer loyalty · Product substitutes: Overcome customer loyalty · Competitive risks: Competition price differential too large, Customer reconsider their needs, Differentiation becomes less valuable, Customer perceptions of value narrows, Firm faces counterfeits from competitors (SM4)

Describe the following variances: · Direct labor variance · Direct materials variances

Direct labor variance Total labor variance = actual cost of labor - std. cost of labor = (actual wage x actual hours) - (std. wage x std. hours) = (Actual wage - std. wage) x actual hours + (actual hours - std. hours) x std. wage = wage variance + efficiency variance Direct materials variances: Same as labor, with additional piece for raw materials inventory Total materials variance: = (actual quantity bought - actual quantity used in production) * standard raw materials cost (ADMC12)

Reasons for vertical disintegration

Disintegration reasons: · VI had been done for spurious reasons · Firm is over-integrated · Globalization increases number of buyers, increases advantages & reduces risks of trading (so avoids VMF) · Specialist suppliers & mgmt. experience : Quality assurance, firm can't ensure excellence in all areas. Managers more experienced in quasi integration · Foreign competition forces cost-effectiveness · Technology/communication reduces bilateral trading costs (SDM138)

Describe how to dispose of standard cost variances.

Disposition of standard cost variances same as for over/underabsorbed OH: 1) writing it off through CoGS, 2) allocating it among work in progress, finished goods, & cost of sales or 3) recalculating cost of each job. (Pro-rating sends signal that prices should be increased) (ADMC12)

Describe the following relative valuation test: · Descriptional tests of multiples

Distribution comparison of multiples across entire market (not just within sector). Use median/percentiles in place of avg./std. dev. to avoid bias & predisposition. Outliers/averages: If outliers over threshold thrown out, comparisons of sectors/markets won't necessarily line up. Biases where estimates drop out (e.g. from negative multiples). Addressed by adjusting analysis for dropouts, computing aggregate multiples, or multiples that can be computed for group. · Time variations: Multiples change over time, so relative valuations have short shelf lives. (DoV7)

Describe distributional characteristics of value multiples.

Distributional characteristics of value multiples: Constrained to be greater than zero, so distributions skewed positive. Value / operating earnings multiples, e.g. EV/EBIT, EV/EBITDA: · Negatively skewed, average values are above median. Indicates falsehood that that rule of thumb stating firms trading at less than 7x EBITDA are cheap for M&A (many trade less than 7x) · Firms with negative EPS or negative income can't have earnings multiples computed, so less potential for bias than with P/E ratios (espec. true for firms with very large depreciation Value / Book Capital = (MV equity + MV debt) / (BV equity + BV debt) EV / invested capital = (MV equity + MV debt- Cash) / (BV equity + BV debt - Cash) · Both heavily negatively skewed, but EV/BV capital higher avg. median values EV/Revenues: Tend to have higher values than PE ratios for most firms since debt exceeds cash (except where cash exceeds debt, i.e. tech firms) (DoV9)

Describe the drivers of competitive behavior.

Drivers of competitive behavior · Awareness: Recognize competitors, interdependence, market commonality, resource similarity · Motivation: Incentive to take action or respond to competitor · Ability: Resources / flexibility to take action / respond · Resource dissimilarity: More dissimilar resources, greater delay in response. (SM5)

Describe some characteristics and drivers of a competitive landscape

Drivers of the competitive landscape: · Globalization: Interdependence of countries. Information/people/goods move freely, competing, diversification. · Technology: Diffusion (speed/availability) from innovation/disruption, information age, knowledge intensity Leads to the following results: Scarcity of capital, volatile markets, speed/innovation, flexibility to respond to environment. (SM1)

Describe the following drivers for differentiation: · Policy choices · Linkages · Timing · Location · Interrelationships · Learning & spillovers · Integration · Scale · Institutional factors

Drivers of uniqueness (ordered most important to least) Policy choices: Product features & performance, Services provided (credit, delivery, repair, etc.), Intensity of activity adopted (e.g., rate of advertising), Content of activity, Technology employed, Quality of inputs procured for activity, Procedures governing actions of personnel, Skill & experience of personnel, Information to control activity Linkages: Three types: 1. Those within the value chain (Meeting buyer needs, coordination of sales & service, optimization in meeting needs, higher investment in indirect activities), 2. Supplier linkages (coordinating w/suppliers (e.g., development time)), 3. Channel linkages (Training channels in selling & other business practices), Joint selling w/channels, Subsidizing channel investments in personnel, facilities, & performance of additional activities Timing: First to adopt image or perform activity, or intentional late moving Location: E.g., most convenient branch Interrelationships: Sharing value activities with sister units Learning & spillovers: Learning how to perform activity better Integration: Coordinating activities, in-house servicing, Scale: Larger scale perform activity can't do at smaller scale. Some activities' costs heavily fixed no matter the scale (e.g., national advertising). Institutional factors: Good relationships with unions, unique job definitions (CA2 / CA3 / CA4)

Compare expected volume to normal volume.

Expected volume: Projected volume over upcoming year · Using expected volume, avg. cost would increase if volume decreased. This would suggest increasing prices, when prices should be lower to increase demand. · Similarly, allocating higher OH to multiple cost centers when one is experiencing lower volume can create a death spiral for all (e.g. two factories w/one closing). Normal volume: Long-run average volume. Stabilizes earnings Normal volume improves decision management around pricing, but expected volume improves decision control: · Managers have less incentive to control over/under-absorbed OH if it's not passed to product costs. · Increased OH leads to pressure from upstream managers on downstream managers, and leads to increased monitoring if not using normal volume (ADMC9)

Define flexible overhead budget and the OH rate function.

Flexible overhead budget = Fixed OH + Variable OH * volume (V). V could be budgeted volume Overhead rate: The OHR function is defined as, OHR = BOH / BV = [FOH + (VOH*BV) ]/ BV OHR = FOH / BV + VOH Budgeted OH is that for the year and BV is budgeted volume (e.g. in hours). OH rate is slope of line through origin & point (BV, BOH) Overhead is absorbed using standard volume & standard costs (ADMC13)

List the four tests for doing relative valuation.

Four tests (steps) to using multiples · Definitional tests: Define the multiple consistently · Descriptional tests: Awareness of cross-sectional distribution of the multiple. · Analytical Tests: Drivers/behaviors of the multiple under different changes. · Application tests: Finding the right firms and controlling for differences. (DoV7)

Contast historical costs, OH, and standard costs.

Historical costs tell what costs were; Over/under-absorbed OH says if expectations were met. Standard costs set benchmarks for what expected future costs should be. (ADMC12)

Compare the Industry Organizational Model and the Resource Based Model of Above Average Returns

I/O Model: Industry, AAR. Locate industry, ID strategy, dev. assets/skills, use strengths/weaknesses. Assumptions: Industry dictates strategy, access to similar resources (differences short-lived), strategy based on industry, decisions follow utility theory. Resource-Based Model: Resources source AAR. ID resources, study environment/competitors, firm's capabilities & comp. adv., locate industry, dev. strategy. Assumptions: Resources/capabilities improve (can't imitate), strategy based on resources. (SM1)

Describe the incentives to overproduce from absorption costing & how to reduce it.

Incentives to Overproduce from Absorption Costing · Costs average over units produced. The more produced, the lower the cost per unit. · Since CoGS depend on units sold, costs would appear lower, artificially boosting profits. Excess cost would get inventoried. Reducing incentive to overproduce · Charging managers for inventory holding costs via residual income. But would have to be backed out in reporting · Having a policy against building inventory, but cumbersome & generates influence costs · Just in time production (JIT), but difficult to manage & time (ADMC10)

Describe interfirm rivalry.

Interfirm rivalry: · Strategic / tactical actions: LT/ST market-based moves & adjustments, use of resources, ability to reverse course · Competitive actions/response - build/defend positions or counter competitive actions (SM5)

Contrast internal innovation & internal corporate venturing.

Internal Innovation through R&D comes: · Incremental using existing knowledge/tech · Radical w/significant breakthroughs, new knowledge w/high potential for profits. Rare, difficult to achieve, risky, requires creativity. Internal corporate venturing - two types: Activities to develop internal innovations & inventions · Autonomous Strategic Behavior: Bottom-up process where product champions pursue new ideas through political process to develop commercialization of new good or service until achieves success in the marketplace. · Induced Strategic Behavior: · Top down process --> strategies foster innovation, matching structural hierarchy, allow managers to determine type & amount of innovation desired. Open innovation - create industry standards; Closed innovation - generate returns disallowing others to use it. (SM13)

Challenges of Internal Analysis

Internal analysis challenges: · Managing assets: ID/develop/deploy/protect resources, capabilities, CC. · Mistaking CC for capabilities (vice versa) · Conditions: Environment/customer uncertainty, changes/trends, use of judgement, relationship complexity, intrafirm conflicts/decisions (e.g. managers) · Differentiate between CC & capabilities. (SM3)

Describe International Cooperative strategy

International cooperative strategy · Cross border strategic alliance: Combine resources/capabilities for comp. adv. Dif. countries. · Why: Limited domestic growth, overcome liabilities moving into foreign country (cultural knowledge/politics) · More complex than domestic alliances, but int'l alliances outperform domestic à importance of intl' diversifying (SM9)

Describe levers & moves that matter to beat the market.

Levers · Endowment - what you start with (30% move on curve) · Revenue (size) · Debt level (leverage) · Past investment in R&D (innovation) · Trends that push you along · Industry trend · Exposure to growth geographies Moves that matter · Programmatic M&A: Steady stream of M&A deals (no more than <30% market cap in one year, >30% of market cap over 10 years) · Dynamic reallocation of resources: Moving resources when things failing or new opportunities arise (moving people around). · Strong capital expenditure: Spend >1.7x capital spending / sales vs. industry median. · Strength of productivity program: Improve productivity to put you at least in top 30% in your industry (fewer expenses). · Improvements in differentiation: Gross margin needs to reach top 30% in industry. E.g. selling products/services for equity in small business (SDM179)

Describe the pros and cons of using accounting / financial measures for controlling behavior.

Pros: · Useful for monitoring as part of performance evaluation. · Useful for decision control · Decisions not related to ratifying or monitoring can be made with aggregate accounting data. Cons: · Must ensure financial measures not under control of those being monitored · Non-financial measures better for decision management control and operations mgmt. since more timely & more frequently available · Decisions made with aggregate data - no ratifying or monitoring individual decisions (ADMC4)

Describe the types of quasi integration strategies available in lieu of vertical integration.

Quasi integration strategies · Joint ventures / strategic alliances: Avoids antitrust issues · Asset ownership: Owning assets, but contracting out the assets in other stages. E.g. Owning molds, but contracting them out to factories · Franchises: Avoids capital drain & mgmt. resources. Ability to cancel franchise if standards aren't met. · Licenses: Ideal for buying/selling tech, since usually requires complementary assets. (SDM138)

Describe the following: · Reasons for allocating costs · Cost allocation steps · Considerations for disaggregating costs, · Considerations w.r.t. cost analysis / allocation

Reasons to Allocate Costs · External reporting & taxes · Cost-based reimbursement · Decision making & control · Cost allocation can act as a tax on profit center & alter how managers invest · Externalities: Indirect costs/benefits from marginal addition of production/people (e.g. add'l cost to HR to admin one more new hire beyond just the salary). Positive could be pollution, negative could be well-educated citizens. Cost allocation steps · Define cost objects · ID/accumulate common costs · Choose method for allocating using allocation base Disaggregate based on · Materiality/growth · Cost/activity behavior & interdependencies · Competitors Considerations in cost analysis / allocation: · Grouping smaller costs together · Cost drivers: Splitting activities w.r.t. BU, shared, links, competitors. · Assigning assets by activity · Time period: Seasonality, cycle, discontinuity. (CA2 / CA3 / CA4 / ADMC7)

List some reasons why it's important to study cost variances.

Reasons to study variances: · A/Es, judge performance, · Contract bidding, evaluating alternatives, · Transfer prices within firm, · Benchmarks for decision. · Assessing random variation: The sum of the aggregate variance should be near-zero - Otherwise, it indicates that the variance is not random fluctuation. · Variances might indicate that standards are unrealistic or unreasonable, or that system is out of control. (ADMC12)

Describe some strategies to beat market odds & better strategize.

Recommendations: · Change strategy from annual to continuous · Change base case to momentum cases · Make strong bets on a few breakout than spending resources across divisions (SDM179)

Describe relative valuation and its strengths & weaknesses

Relative valuation composed of three steps: 1) Finding comparable assets. 2) Scaling variable to generate standardized prices 3) Adjusting for differences across variables for comparability Strengths: · Widely used/accepted · Less time/resource intensive than DCF · Easier to sell/defend to investors · Reflect current mood of market Weaknesses · Potential for inconsistent estimates · Market may systemically under/overvalues · Can be subject to analyst bias/manipulation · Multiples can have short shelf lives since change over time. (DoV7)

Describe responsibility accounting & types of responsibility centers.

Responsibility accounting: · Divide divisions into subunits w/decision rights & responsibility. Each has unique performance measurement / reward. Types include, Cost center: · Measure: Efficiency, output, & quality. Optimized budget & total output constraints. · Manager Performance: Cost function / output / quality understanding, specific knowledge of optimal input mix Profit center: · Collection of cost centers w/decision rights around input, product & selling. · Effective most when costly to transfer knowledge. · Performance evaluated using A/E profits. · Difficulty from transfer pricing & OH allocation. Investment centers: · Collection of profit centers w/specific knowledge. Decision rights around ROI. · Constraints from product quality & market rules. · Performance measured by net income, ROI & residual income. (ADMC5)

Describe considerations with respect to scaling variables.

Scaling variable: If we scale, the variables we choose must be relative to entire firm: Earnings variables relative to entire firm include EBITDA, EBIT (Op. Inc), or EBIbAT (after-tax op. inc). If parent only (unconsolidated), exclude minority/majority holdings. If consolidated, add proportionate debt & cash BV variables: Focus on BV of capital, but may make adjustments for holdings in other companies. See table. Revenues: P/Sales inconsistent - use EV/total revenues. Subtract minority holdings from MV equity to get EV. If majority holdings fully consolidated, add back MV of minority interest to EV to get composite value of firm & then scale to total revenues of firm (which include revenues of subsidiary. Activity variables: Use EV in activity variables. E.g. EV / subscribers. (DoV9)

Describe the pros/cons of using regression when controlling for differences across companies using relative valuation.

Sector regressions, Pros: · Inform about strength of variable relationships · Can be adjusted for nonlinearity · Can be extended to multiple regression & cross effects. Cons: · Using regression requires careful definition of sector (too few/many samples) · Narrowing our choice of fundamentals used for explanatory (independent) variables. Market regression is less restrictive w.r.t. comparable companies with similar risk (beta), growth, & CF (payout). Still uses market data & provides meaningful comparisons marketwide (including if our firm is over/undervalued relative to other firms in market). (DoV7)

Segments of general environment.

Shortcut: PESTELI-GD · Demographic, economic, political/legal, sociocultural, technology, global, physical (SM2)

Describe the following w.r.t. Standard Costs: · Standards · Target costing · Risk reduction

Standard Costs Standards: · Set at BOY. Changing standards incentivizes less control. · Tighter standards focus on decision control, loose standards focuses on decision mgmt. No universal practice to set. · Those w/control over variance thresholds usually have ratification rights over standards. · Standard costs derived from bottom up (engineer --> review --> revise/repeat). Target costing derived from top-down: Target cost = target price - target profit · Then costs looked at by subcomponent & those are targets for reducing costs. Once product is designed, opportunity to reduce cost is gone. Risk reduction: · Use of standard costs & booking to variance accounts removes uncontrollable factors from downstream users --> Salaries are less for not having to bear this risk. (ADMC12)

Discuss how standard costs and variances are used in conjunction with performance evaluation.

Standard costs & variances help control costs & undesirable incentives when used with performance evaluation: Incentives for higher inventories: · Lower costs, better accounting earnings, and favorable cost variances. · Ignores opportunity CoC w/raw materials in inventory. · Mitigate by charging for inventory holding costs (e.g., firm CoC in addition to warehousing/handling costs). But these have to be backed out for accounting. · Negative Externalities: · Purchasing managers can buy substandard materials to impose additional work on downstream production. · Offset by standards & specs around purchasing, and tying purchasing manager to variances around rework and/or raw materials quantity · Cooperation can be discouraged when individuals' evaluated based on variances: · Can encourage shirking. · Mitigated by variances for team or department, and evaluating individual & group accomplishments. · Mutual monitoring of managers (e.g. purchasing & production managers monitor each other) · Satisficing: · Only rewarding the standard disincentivizes managers to go further. · Compensation schemes should incentivize better performance. (ADMC12)

Describe the vertical restructuring framework.

Steps in applying vertical restructuring framework: ID/disaggregate stages of chain. ID participants at each stage: · Market size · Participants · Pre/post investment phases · Types of transactions · Subtle ownership connections Static analysis: · Asset specificity, · Bilateral monopoly / oligopoly, · Transaction frequency · Economic surplus available · Market power asymmetry. Dynamic analysis: Predict changes: · Asset specificity · Number of buyers/sellers · Transaction frequency · Behavior of buyers & sellers · Power asymmetry · Industry structure Develop VI Strategy · Develop/assess criteria for optimal vertical strategy looks like · Evaluate if changes in structure are needed to support · Beware of "gut" or "feel" of decision-makers and attack faulty logic Vertical restructuring framework (see graph/chart) · Is the adjacent stage in an attractive industry or possess a skills match? · If the stage is subject to VMF and quasi integration won't work, remain partially integrated. · If the stage is subject to VMF & can't defend/exploit market power, exit the stage. · If the stage is subject to VMF but can defend/exploit market power, remain integrated (SDM138)

Describe strategic alliances, the reasons for them, & the types.

Strategic alliance: Cooperate w/resources & capabilities for comp. advantage. · Joint venture: Indep. LID created for comp. adv. w/shared resources. Good during uncertainty. · Equity Strategic Alliance: Each owns % of LID, combine some resources/capabilities · Non-equity Strategic Alliance: No new LID/equity. Informal sharing resources / capabilities. Not good for complex projects Reasons for Strategic Alliances · Create value can't create alone, enter new markets · Lack resources / capabilities for objectives, e.g. small businesses · Unique competitive conditions for different types of markets (SM9)

Characterize business-level strategy in the following ways: · Key concerns · Dimensions of customer relationships · Market segmentation

Strategy Focus for LT Performance: Above average returns, competitiveness, vision/mission, allocate resources, align w/environment. Exploit CC, understand customers, needs, ways to satisfy. Customer interaction focus, but dif. w/more customer knowledge. Dimensions of Customer Relationships: Reaching/accessing customers, richness (2-way flow, learning about customer), affiliation (interaction, viewing their perspective). Consider who/what/how (which customers, what needs, how to satisfy w/CC), cost elasticity, CC use/upgrading, innovation Market Segmentation: ID groups & needs. Types market segmentation include, · Consumer markets: Demographics, socioeconomic, geographic, psychological, consumption patterns, perceptual factors · Industrial markets: End-use segments, product segments, Geographic segments, Common buying factor segments) (SM4)

Describe temporary vs. permanent write-offs w.r.t. expenses.

Temporary changes in costs (due to demand) can be offset with one-time write-off Permanent changes can be offset with changes to plant, property, equipment, etc. (e.g. reducing depreciation schedule). Mgmt. reluctant to permanent write-offs since may signal to competitors about their sales & capacity, or may signal that they overinvested in capacity (hurts their careers) (ADMC9)

Define the following terms: - Cost allocation - Cost object - Allocation base

Terms: · Cost allocation: Assign individual/common costs to cost object · Cost object: Production, process, department, program wish to cost · Allocation base: Measure of activity w/common costs & cost objects (ADMC7)

Describe the impact of cost drivers on differentiation.

The cost of differentiation: Reflects cost drivers of value activities. Relationship between uniqueness & cost drivers: (1) Uniqueness drivers impacts cost drivers (2) Cost drivers can affect cost of being unique If making activity unique lowers costs, then (1) firm hasn't exploited all opportunities to lower costs, (2) uniqueness formerly judged undesirable, or (3) significant innovation occurred that competitors haven't exploited yet (CA2 / CA3 / CA4)

Define the following terms: - Three types of innovation firms engage in. - Entrepreneur - Entrepreneurial Opportunities - Entrepreneurial Mindset - International Entrepreneurs

Three types firms engage in: - Invention: new product/process. Measured in technical ways. - Innovation: Bring something to use. Measured in commercial ways/metrics - Imitation: Adoption of similar innovation from different firm Entrepreneurs: Exploit market imperfections for comp. advantage. Individuals, teams, organizations. Highly motivated, passionate, self-confident, optimistic, emotional about product, strong social skills, planners Entrepreneurial Opportunities: Chance to develop new product or sell existing product in new market. Exploit conditions to satisfy need in market. "Creative destruction" of existing goods/services. Entrepreneurial mindset: ID opportunities w/potential for innovation leading to competitive advantage. Requires absorptive capacity to learn & link old info to new. International Entrepreneurs: Opportunities outside domestic. Internationalization leads to increased performance. How entrepreneurs differ in countries (culture, amt. invested, experience, gained/sustained comp. adv.) (SM13)

Describe three OH cost pools in absorption cost systems.

Three ways to allocate costs under absorption cost systems (depends on firm) · Plantwide: Good if using homogenous process (e.g. one product). Not if produces heterogenous products · Individual cost accounts for individual cost items: Good for understanding cost drivers · OH rates by department: Increased bookkeeping costs if large firm (ADMC9)

Describe the three-legged stool analogy w.r.t. to a firm.

Three-legged stool (org. architecture structure): Firm incurs costs to do what market already does more efficiently: · Measure performance · Reward/punish performance · Partition decision rights to highest valued use One leg falls, they all fall (e.g., using objective vs. subjective measures, or financial vs. nonfinancial measures) (ADMC4)

Describe some reasons/drivers to vertically integrate.

Valid Reasons to integrate: · Vertical market failure: Few buyers/sellers, excessive haggling / manipulation, +costs/risks. · Frequent transaction costs: Negotiating, exploiting monopoly status, etc. (opportunism, bounded rationality) · Exploit market power in adjacent stage: Barriers to entry, greater returns, leverage price insensitive markets, develop/enter new markets or backfill for firms exiting. · Asset specificity types: Site specificity (assets kept close by, e.g. mines), technical specificity (tech w/low alt. value, only used by one/both parties), human capital specificity (skills specific to customer relationship) · Increased switching costs from asset specificity (close relationships between two things), capital intensity, asset durability. · Economic surplus available in adjacent & fragmented markets (SDM138)

Describe the generic value chain.

Value Chain: Source of capabilities/CC leading to competitive advantage. - Primary activities: Physical creation, sale & transfer of product. In/outbound logistics, operations, marketing/sales, service. - Support activities: Support all VCA. HR, technology development, procurement, finance, etc. (CA2 / CA3 / CA4/SM3)

Describe the use of value multiples and Enterprise Value with and without cross holdings

Value Multiples: · Determinants of the multiple must be consistent (i.e., firm measure vs. equity measure). · Easier than equity multiples when different debt ratios. · Should include equity options issued in MV equity. · Cash may be 'non-wasting cash' · Cross holdings should have consistent proportions of cash, debt & equity if including minority or majority (>55%) holdings. Enterprise value = MV of assets = MV equity + MV debt - cash See image. (DoV9)

Define: · Value · Value added · Margin · Differentiation · Industry segmentation

Value: Willing to pay. Revenue. Value added: Price less raw materials. Ignores other inputs, cost behavior, sources of cost reduction / differentiation. Margin: Value less cost Differentiation: Premium price, loyalty, ability to sell more. Sourced from VCA, quality, breadth of activities/scope, and downstream channels. Industry segmentation: Subunits via boundaries, customers, their needs/behavior, & products. Determine segment's attractiveness, competitive scope (where/when/how to compete), strategy sustainability w.r.t. comp. adv. (CA2 / CA3 / CA4)

Describe variable costing, the incentive to overproduce from it, & other problems of variable costing.

Variable (direct) costing: · Ax+B, where B are fixed costs and A are variable costs per unit · Fixed costs are written off in the period they occur. By contrast, fixed costs are averaged over production in absorption costing, leading to those fixed costs being inventoried (artificially boosting profits from lower costs) Problems / Incentives from variable costing: 1) Incentive to overproduce: · If actual costs differ from expected at EOY, mgmt. can classify as fixed or variable according to their own discretion: If fixed cost but classified as variable, difference gets averaged over units produced and some gets inventoried. 2) Who decides which is fixed & which is variable? Puts them outside of scope of monitoring and allows them to persuade / manipulate if they know more. 3) Doesn't account for opportunity cost of capacity. 4) Unit Costs: If constraints on costs, then neither variable or fixed costs will account for costs beyond those constraints (since they're based on historical data) (ADMC10)

Definitions: · Business-level strategy · Focused Cost Leadership · Focused Differentiated Strategy · Competitive risks of focused strategy

· Business-Level Strategy (BLS): Actions/responses to competitors' activities, creating value, CC, & comp. adv.., five forces. · Focused Cost Leadership: Narrow market, lowest cost. · Focused Differentiated Strategy: Narrow market, distinctiveness. Narrower competitive scope than market. · Competitive risks of focused strategy: Too narrow segment, new entrants, customers' needs become less focused & more similar to rest of industry (SM4)

Define the following terms: - Cost allocation - Cost object - Allocation base - Absorption Cost System - Job order costing - Over (under) absorbed - Cost pool

· Cost allocation: Assign individual/common costs to cost object · Cost object: Production, process, department, program wish to cost · Allocation base: Measure of activity w/common costs & cost objects Absorption Cost System: Costs traced directly to products (difficult to do) Job order costing: · Costs traced directly to cost objects including a proportion of OH · Input measure is the allocation base (e.g. machine hours). · OH rate set beginning of year, where reported costs are average (E.g. raw materials + direct labor = total / # of units = average cost) Over (under) absorbed: Expected exceeds (falls short of) actual Cost pool: Accumulation of cost accounts. (ADMC7, ADMC9)

Describe the weaknesses of using standard costs.

· Costly to implement/operate · Rapid changes in tech & process improvement causes standards to become obsolete · Costly for managers time to investigate cost variances (only do so if material) · Can create specialized knowledge · Must be implemented carefully or will create dysfunctional behavior (e.g. too much emphasis on labor variances (ADMC12)

Describe two common mistakes made by analysts when dealing with cross-holdings in measuring value for value multiples.

· Counting equity of minority holdings but not debt & cash · Adding minority interest from the BS (which is in BV) to EV to obtain total MV of consolidated firm (DoV9)

Describe the following types of accounting measures used in controlling behavior · Net income · Return on investment · Residual income · Economic Value Added (EVA)

· Different accounting measures can produce different results or be manipulated in different ways - no performance measurement system is perfect, so use multiple measurements/systems Net income: · Pros: Considers debt financing · Cons: Doesn't consider equity financing. May incentivize overinvestment if it produces positive net income. Return on investment: Net Income / Total Assets (ROA), or Net Income NI / Total Assets Invested · Pros: Compare to market yields, recognize gain/loss · Cons: Ignores appreciation & intangibles; could lead to overinvestment (ROI lower than capital charge) or underinvestment (ROI higher than capital charge, but lower than usual ROI) Residual income: Profits - opp. CoC (weighted avg.) · Pros: Single, absolute number · Cons: May be difficult to use in comparing small & large divisions. EVA Adjusted earnings - CoC. · CoC based on total division / firm assets. · Example of adj earnings: Add back in R&D costs since LT focus · Pros: Can be tied to manager compensation to maximize firm performance. · Cons: Difficult to implement system evaluating both firm performance and employee compensation - Need employees to understand. (ADMC5)

Definitions: · Sustainable competitive advantage · Tangibles · Intangibles · Value · Social Capital · Outsorcing

· Sustainable competitive adv: Function of rate of obscelescence, availability substitutes, imitability · Tangibles: Observed/quantified, dif. to leverage beyond quantified value (e.g. borrowing, raising capital, firm resources, physical, copyrights/patents, etc.). · Intangibles: Dif. quantify/assess, greater source for capabilities & CC, can't duplicate/imitate (e.g. knowledge, reputation, HR, ideas, R&D capacity) · Value: Performance/differentiation w.r.t. cost. · Social capital: Positive relationships with customers · Outsourcing: VCA from external party. Can create job loss & uncertainty around innovation/tech (SM3)

Definitions: · Global-focusing · Competitor Analysis · Boundary-Spanning Positions · Strategic Groups

· Global-focusing: Global focus on niche markets, competencies, and resources while limiting risks (guanxi - personal relationships / good connections in China; wa - group harmony & cohesion in japan) · Competitor analysis: How firm competes. competitors' objectives, strategies, assumptions, capabilities (strengths/weaknesses). · Boundary-spanning positions: Interact w/people close to environment, e.g. customers. · Strategic groups: Firms w/similar strategies (greater similarity, greater rivalry - greater for intra vs. inter). Formed/limited by mobility, rivalry, resources. Stable membership over time. (SM2)

Challenges/Problems of M&A's

· Integration difficulties (culture, mgmt. administrative) · Poor target due diligence (strategic fit, financial audit, premium paid), · Too much debt (esp. premium) · Synergies never realized · Over-diversified (info processing, focus on financial controls - not strategic, lack of innovation), · Time lost: Mgmt. thrill w/acquisitions (searching/due diligence/negotiations/managing integration) · Too large (rigidity, unflexible) (SM7)

Reasons/benefits of M&A's

· Market Power: Can sell at higher prices or costs are lower than competitors (firm size, resource quality, market share). · Economies scale/scope: Horizontal/vertical/related acquisitions. (synergies, distrib/supp, integr. capabilities) · Entry Barriers · New product development: Lower cost/risk, increased speed to market · Diversification · Reshape Competitive Scope: Less dependence on own product · Learning / Developing New Core Competencies & Capabilities (SM7)

Describe how strategic alliances can help in slow, fast and standard cycle markets.

· Overcome entry barriers · Accelerate product development / market entry · Learning · Economies · Pooling or complementing resources · Share risk & expenses · Set new standards · Competitive responses · Maintain market stability or power (SM9)

Define the following terms: - Resources - Capabilities - Core competency

· Resources: People/things. · Capabilities: Resources, task activities. · Core competency: Unique use of resources & capabilities for comp. adv.. Criteria: Valuable (opportunities/threats), rare, costly to imitate & non-substitutable. (SM1)

Describe successful / effective acquisitions.

· Right target & premium (due diligence) · Effective/rapid integration. · Complementary assets/resources, · Friendly acq., · Financial slack (cash/debt) · Low resulting debt · Sustained R&D/innovation · Remains flexible/adaptable. (SM7)

External Environmental Analysis

· Scanning: Changes/trends · Monitoring: Meaning/emerging trends · Forecasting: How cycles/trends evolve. · Assessing: Timing/impact of changes on strategy (SM2)

Definitions: - Strategy - Vision - Mission - Competitive Advantage - Strategic Mgmt. Process - Strategic Leaders - Organizational Culture - Profit Pools

· Strategy: Actions, value, mission, comp. adv. · Vision: Enduring, desire to be/achieve, values, energizes. · Mission: Who/what/where compete. Purpose. · Competitive advantage: Value, superior returns. · Strategic mgmt. process: Int/Ext. environment. Vision/Mission. Strategy dev/implementation. · Strategic leaders: Actions, vision/mission, performance, culture. · Organizational culture: Ideals, values, norms, govern. · Profit pool: Profit available. Four steps: Boundaries, pool size, VCA size, reconcile calcs. (SM1)

Porter's Five Forces Model

· Threat of new entrants · BP of suppliers: · BP of buyers: · Substitute products/services · Intensity of competition (SM2)