Strategy Exam
poison pill
defensive provision that kicks in if a buyer reaches a certain level of share ownership without top management approval (ex: allow existing shareholders to buy additional shares at a discount); becoming rarer
global strategy
part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world
Dominant business
pursues at least one other business activity 70-95% of revenues comes from single business
Managers should focus on a ____________ that allows for the successful management of strategic alliances and M&As
relational capability
Opportunism
self-interest seeking with guile (cunning or sly intelligence); Backward vertical integration is often undertaken to overcome this threat and secure raw materials
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 highly diversified firms is valued at MORE than the sum of their individual business units
Alternatives to vertical integration
taper integration, strategic outsourcing
Liability of foreignness
the additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances
National culture
the collective mental and emotional "programming of the mind" that differentiates human groups
Cultural distance
the cultural disparity between the internationally expanding firm's home country and target country
Multidomestic SP Downsides
- Costly and inefficient bc requires the duplication of key business functions across multiple countries - Each country unit tends to be highly autonomous, making the MNE unable to reap economies of scale or learning across regions - Risk of IP appropriation increases
4 Strategic Positions
- International - Multidomestic - Global standardization - Transnational
Related Diversification
- Less than 70% of its revenue comes from a single business activity and obtains revenues from other lines of business linked to the primary business activity - Benefits from economies of scale and scope; can pool and share resources
China
- Manufacturing powerhouse because of lower labor costs and efficient infrastructure - Cost differential for both low-skilled and high-skilled workers - Wages been rising much more rapidly
Dimensions of Culture
- Power distance - Individualism - Masculinity-femininity - Uncertainty avoidance - Long-term orientation - Indulgence
Why do mergers happen so often?
- Principal-agent problems - Desir to overcome competitive disadvantage - Superior acquisition and integration capabilities
Popular Business Models
- Razor-razorblades - Subscription - Pay as you go - Freemium - Wholesale - Agency - Bundling
Types of corporate diversification
- Single business diversification - Dominant business - Related Diversification - Unrelated Diversification: The Conglomerate
Favorable effects of HI on P5F
- Strengthening bargaining power vs suppliers and buyers - Reducing the threat of entry ad reducing rivalry among existing firms - FTC usually has to approve any large merger
India
- Strong CA in IT, especially in business process outsourcing (BPO) - Deep core competency in IT because of lower-cost labor and an abundance of well-educated, english speaking young people
Benefits of Strategic Alliances with Strong Partners
- Stronger competitive position - Enter new markets - Hedge against uncertainty - Learn new capabilities
Competing globally benefits
- access new markets - access lower cost inputs - develop new competencies
Taper integration benefits
- exposes in-house suppliers and distributors to market competition so that performance comparisons are possible - Enhances flexibility - Paves the path for innovation
Competing globally drawbacks
- liability of foreignness - loss of reputation - loss of intellectual property
Questions to determine the degree to which certain conditions apply
- relevancy: how relevant are the firm's existing internal resources to solving the resource gap? - tradability: how tradable are the targeted resources that may be available externally? - closeness: how close do you need to be to your external resource partner? - integration: how well can you integrate the targeted firm, if you determine you need to acquire the resource partner?
Risks of vertical integration
-increasing costs -reducing quality -reducing flexibility -increasing potential for legal repercussions
Benefits of Vertical Integration
-lowering costs -improving quality -facilitating scheduling and planning -facilitating investments in specialized assets -securing critical supplies and distribution channels
Benefits of horizontal integration
-reduction in competitive industry -lower costs -increased differentiation
Why Do Firms Acquire Other Firms?
-to access new markets and distribution channels -to access new capabilities or competencies -to preempt rivals
Administrative and Political Distance
Captured in factors such as the absence or presence of shared monetary or political associations, political hostilities, and weak/strong legal and financial institutions
Long-tail concept
a business model innovation in which companies can obtain a larger part of their revenues by selling small number of units from among almost unlimited choices
Why firms need to grow
1. increase profits 2. lower costs 3. increase market power 4. reduce risk 5. motivate management
Economies of scope
a company diversifies its product offerings to reduce per-unit costs and increase efficiency
Economies of scale
a company increases its production volume to reduce per-unit costs and increase efficiency
Pareto principle
80% of effects come from 20% of the causes
Conglomerate
A company that combines 2 or more strategic business units under one overarching corporation and follows an unrelated diversification strategy
CAGE Distance Framework
A decision framework based on the relative distance between home and a foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance
Taper integration
A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies and/or is forwardly integrated but also relies on outside-market firms for some of its distribution (Ex: both apple and Nike own retail outlets but also use other retailers)
Global standardization Strategic Position
Attempt to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost; High pressure for cost reductions, low pressure for local responsiveness
Multidomestic Strategic Position
Attempts to maximize local responsiveness, hoping that local customers will perceive their products or services as local
Ultra-low cost BM
Basic service provided at a low cost and extra items sold at premium (Goal is to drive down costs)
Internal Capital Markets
Can be a source of value creation in a diversification strategy if the conglomerate's headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets
Geographic Distance
Country's physical size, the within-country distances to their borders, topography and time zones, and whether the countries are contiguous to one another or have access to waterways and the ocean
Multinational enterprise (MNE)
a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least 2 countries (the engine behind globalization)
Vertical value chain
Each stage of the chain represents a distinct industry in which a number of different firms are competing
Globalization has decreased living standards
False
Export-led growth leads to higher standard of living in home countries
False (Often results in weaker demand in home countries, thus a lower standard of living)
Types of Vertical integration
Full, backward vertical, forward vertical
Razor-razor blades BM
Initial product is sold at a loss or given away to drive demand of complementary goods (Makes money on replacement part needed)
Unrelated Diversification: The Conglomerate
Less than 70% of its revenue comes from a single business and there are few, if any, linkages among businesses
Agency
Producer relies on an agent/retailer to sell the product at a predetermined percentage commission (Producer sometimes controls the retail price)
Adverse selection
Occurs when information asymmetry increases the likelihood of selecting inferior alternatives; Refers to a situation in which agents misrepresent their ability to do the job ("Free rider problem" <= opportunistic employees taking advantage of others' efforts)
Principal-agent problems
Some managers have incentives to grow their firms through acquisitions in order to build a larger empire which is positively correlated with prestige, power, and pay (Not in best interest of shareholders)
Export-led growth can help turn poor countries into rich ones
True
Export-led growth create imbalances in world trade which can spill over into financial markets
True
Most M&As do not create competitive advantage
True (Many mergers destroy shareholder value because the anticipated synergies never materialize, If shareholder value was created, that generally goes to the shareholders of the target firm because acquirers often pay a premium when buying the target company)
Agency Theory
a theory that views the firm as a nexus of legal contracts (Conflicts that arise are to be addressed in the legal realm)
Cost-responsiveness framework
Strategy framework that juxtaposes the pressures an MNE faces for cost reductions and local responsiveness to derive four different strategies to gain and sustain competitive advantage when competing globally
International Strategic Position
Strategy in which a company sells the same products/services in domestic markets and foreign markets; Frequently the first step companies take when they begin to conduct business abroad
Transnational Strategic Position
Strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable); High pressure for cost reductions, high pressure for local responsiveness
Economic Distance
Wealth and per capita income are the most important determinants (Wealthy countries engage in relatively more cross-border trade than poorer countries)
Loss of intellectual property
When required to partner with an international host firm, companies may find their intellectual property to be siphoned off and reverse engineered
Loss of reputation
Where local governments are corrupt and unwilling or unable to enforce minimum safety standards; directly concerns creating shared value (CSV)
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
Core competence-market matrix
a framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets Provides guidance to executives on how to diversify to achieve continued growth
Crowdsourcing
a process in which a group of people voluntarily perform tasks that were traditionally completed by a firm's employees
Leveraged buyout (LBO)
a single investor or group buys the outstanding shares of a public company to take it private; bought with the help of borrowed money (leveraged against the company's assets); changes ownership structure of a company from public to private, with the hopes of restructuring internally to take it public again
Full integration
allows firms to reap economies of scale and scope, lowering costs; also means the company competes in a number of different industries along the entire vertical value chain
Location economies
benefits from locating value chain activities in optimal geographies for a specific activity
greenfield operations
building new, fully owned plants and facilities from scratch
To go beyond minimum acceptable standard, firms have...
codes of conduct
Motivation to develop new competencies is particularly strong for firms that base their competitive advantage on a differentiation strategy to be a part of...
communities of learning
Business strategy
concerns the question of how to compete in a SINGLE PRODUCT MARKET; for competitive advantage firms can either: - Increase differentiation while containing costs - Lower costs while maintaining differentiation
Spinout
describes the separation of a division to form a new, stand-alone corporation; allows it to make its own strategic decision without inference from the conglomerate headquarters, including raising its capital through debt/equity on a stock exchange
Rich country to poor country trade allows rich countries to benefit from...
economic arbitrage
Related constrained diversification
executives engage in a new business opportunity only when they can leverage their existing competencies and resources
By making investments in the value chain activities abroad, MNEs engage in...
foreign direct investment
Moral Hazard
having more information or power can lead to behavior that's riskier or less responsible because the consequences fall on someone else
Hold-up problem
highlights the risk that arises when one party can exploit its position to extract more value from an agreement after the other party has already made investments or commitments
Once shares fall low enough, the firm may become a target for a...
hostile takeover (if successful, owner is likely to replace management and BOD to create more value for shareholders)
Greater cultural distance can increase the cost and uncertainty of conducting business abroad =>
increases liability of foreignness
An industry-wide trend toward horizontal integration leads to...
industry consolidation
Build-borrow-buy framework
internal (build), alliance (borrow), acquire new resources, capabilities, competencies (buy)
Strategic Outsourcing
involves moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain (Reduces the firm's level of vertical integration)
Single business diversification
low level of diversification 95% of revenues comes from 1 business, the other 5% is not yet significant to the firm's success
Forward vertical integration
moving ownership of activities closer to the end customer
Backward vertical integration
moving ownership of activities upstream to the originating inputs of the value chain (Ex: HTC upgrading its capabilities from manufacturing to also designing)
Physical-asset specificity
occurs when assets whose physical and engineering properties are designed to satisfy a particular customer
Human-asset specificity
occurs when investments made in human capital to acquire unique knowledge and skills are not transferable to a different employer
Vertical market failure
occurs when transactions within the industry value chain are too risky, and alternatives to integration are too costly or difficult to administer (when a company vertically integrates 2 or more steps away from its core competency, it fails ⅔ of the time)
Corporate strategy
the decisions leaders make and the goal-directed actions they take for competitive advantage in several industries and markets simultaneously; tells firms where to compete, and determines the boundaries of the firm along 3 dimensions (vertical integration, horizontal diversification, geographic scope)
Vertical Integration
the firm's ownership of the inputs needed for production or of the channels through which it distributes its outputs
Merger
the joining of 2 independent companies to form a combined entity
Globalization
the process of closer integration and exchange between different countries, businesses, and people worldwide (allows companies to source supplies at lower costs, to learn new competencies, and further differentiate products)
Horizontal integration
the process of merging with a competitor at the same stage of the industry value chain (Should go ahead with merger if the target firm is more valuable inside the acquiring firm than as a continued standalone company)
Restructuring
the process of reorganizing and divesting business units and activities to refocus a company to leverage its core competencies more fully - Allows companies to spin out underperforming units - Enables higher-performing units to become more nimble and pursue future growth opportunities while being no longer constrained by a larger conglomerate structure Often high-performing units end up subsidizing lower-performing units, therefore leaving fewer resources to be invested in future growth
Acquisition
the purchase or takeover of one company by another
Industry value chain
the transformation of raw materials into finished goods and services along distinct vertical stages
Specialized Assets
units with high opportunity cost; these assets have significantly more value in their intended use than in their next-best use; three types (site specificity, physical-asset specificity, human-asset specificity); investing in these has high opportunity cost because threat of opportunism
Horizontal diversification
what range of products/services should the company offer?
Reverse takeover
when a smaller, public company acquires a larger private company (Allows the larger firm to list on the public stock market without having to IPO)
Hostile takeover
when a target firm does not want to be acquired
Site specificity
when assets are required to be jointly located in the same specific place (co-locating) (Ex: equipment necessary for mining bauxite and smelting aluminum from it)
Related linked diversification
when less than 70% of its revenues come from a single business and some other activities share linkages to the main business focus while others do not Entails 2 types of costs: 1. Coordination cost: function of number, size, and types of businesses that are linked 2. Influence costs: occur due to political maneuvering by managers to influence capital and resource allocation and the resulting inefficiencies stemming from suboptimal allocation of scarce resources
Polycentric innovation strategy
where MNEs draw on multiple, equally important innovation hubs throughout the world
Geographic scope
where should the company compete geographically in terms of regional, national and international markets?
