Strategic Management Final Exam

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Chapter 9

Corporate Strategy: Acquisitions, Alliances and Networks

Merger

Two independent companies form a combined entity

(tend to be friendly) Ex) Disney merged with Pixar

Acquisition

Purchase or takeover of one company by another

Hostile takeover (when a firms does not want to be acquired)

Ex) Vodaphone takeover of german based Mannesmann

Horizontal Integration

Process of acquiring and merging with competitors, leading to industry consolidation

Type of corporate strategy designed to improve a firms strategic position

Ex) Music industry --> Live Nation bought Ticketmaster

4 Main benefits of Horizontal integration

1. Reduction of competitive intensity
2. Lower Costs
3. Increased differentiation
4. Access to new markets and distribution channels

Reduction in competitive intensity

Excess capacity is taken out of the market and competition decreases

oligopolistic industry structure, focus is on non-price competition --> greater chance for profitability

How it affects 5 Forces Model:

Strengthening bargaing power with suppliers & buyers

Reduce the threat of entry, rivalry among firms

Lower Costs

Horizontal integration is used to lower costs through ECONOMIES OF SCALE

Enhance economic value creation, enhance performance

Industries that have high fixed costs, achieving economies of scale through large output is critical in lowering costs

Ex) Pharmaceutical companies

Increased Differentiation

Strengthen competitive positions by increasing differentiation of their product and service offerings

Fill gaps in firms product offering by leveraging the combined entity core competencies

Access to new markets and distribution channels

Gain access to new markets and distribution channels both US and Globally

Do mergers & acquisitions create competitive advantage?

In most cases they do not. Destroy shareholder value because the anticipated synergies never materialize

3 Reasons why we see so many M&A's

1. Desire to overcome competitive disadvantage
2. Superior acquisition and integration capability
3. Principal-agent problems

Desire to overcome competitive disadvantages

May put the organization on the road to gaining a competitive advantage

Ex) Adidas acquiring Reebook achieved economies of scale and scope that were unachievable before

Superior acquisition & integration capability

Firms that are able to identify, acquire, and integrate target companies to strengthen their competitive positions

If it is valuable, rare, difficult to imitate, a superior acquisition & integration can lead to competitive advantage

Ex) Cisco Systems

Principal-Agent Problems

Incentive to grow firms through acquisitions but not for shareholder value.

Power, Prestige, Pay, Perks, Larger organization, job security

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

Strategic Alliances

Arrangement between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage

Why do firms enter strategic alliances

1. Strengthen competitive position

2. Enter new markets

3. Hedge against uncertainty

4. Access critical complementary assets

5. Learn new capabilities

Strengthen competitive position

Change industry structure in their favor

Enter New Markets

Enter new markets in terms of geography or products or services

Hedge against uncertainty

Limit exposure to uncertainty in the market

Ex) In wake of biotech revolution, Pfizer entered into strategic alliances with biotech start-ups

Access critical complementary assest

Successful commercialization of a new product or service often requires complementary assets such as marketing, manufacturing, and after sale service

help value chain, licensing agreements

Learn new capabilities

desire to learn new capabilities from partners

when competitors form strategic alliances: it creates learning races

situations in which both partners are motivated to form alliance for leraning, but the rate at which firms learn may vary, the firm that accomplishes goal quicker has incentive to exit and reduce knowledge sharing

3 ways to govern strategic alliances

1. non-equity alliance
2. equity alliance
3. joint-venture

Non equity alliances

Partnership based on CONTRACTS between firms. In this alliance, firms tend to share EXPLICIT KNOWLEDGE (patents, facts sheets, publications) about process or product

Most common: supply agreements, licensing agreements, distribution agreements

Equity Alliance

Partnership when one partner takes partial ownership in the other partner


Share TATIC KNOWLEDGE, knowledge can not be codified.

Concerns knowing how to do ask task and can be acquired only through active participation in that task

Corporate Venture Capital falls under Equity Alliance: concerns equity investments by established in entrepreneurial. Positive impact for value creation for investing

Joint Venture

Standalone organization created and jointly owned by two or more parent companies

Ex) HULU owned by NBC, Long term commitments

exchange of both explicit and tacit knowledge through interaction of personnel is typical

Alliance Management Capability (3)

Firms ability to effectively manage 3 alliance related taks concurrently

1. Partner selection and alliance information

2. Alliance design and governance

3. Post formation alliance management

CHAPTER 8

Vertical Integration & Diversification

Corporate-Level Strategy

Involves decisions that senior management makes and the actions it takes to gain a competitive advantage in several industries and markets simultaneously (where to compete).

Clarify specific product and geographic market

Scope of the firm

Corporate Strategy: determines the boundaries of firm along with 3 dimensions:

1. Industry value chain
2. Products and services
3. Geography

To determine these 3 boundaries you need?

1. In what stages of the value chain will you compete? -->

Vertical Integration

2. What range of products & services should you offer? -->

Horizontal integration or diversification

3. Where in the world to compete? --> Global strategy

Economies of Scale

Average cost per unit decreases as output increases

Ex) Inbev global brewer

Economies of Scope

Factors that make it cheaper to produce a range of products together than to produce each one of them on its own. Such economies can come from businesses sharing centralised functions, such as finance or marketing. Or they can come from interrelationships elsewhere in the business process, such as cross-selling one product alongside another, or using the outputs of one business as the inputs of another.
Ex) Amazon core competency is Superior IT systems

Transaction cost ecomies theory

explains and predicts the scope of the firm. Help managers decide what activities to keep in house vs what to obtain on the external market

Transaction Cost

all costs associated with an economic exchange.

When companies transact in open market, incur cost of searching for economic agent (company or person) with whom to contract, negotiate, monitor or enforce

Administrative costs

Essentially a transaction cost within the firm. Cost pertaining to recruiting, retaining employees, salaries, benefits setting up business,

Administrative costs

When to make or when to buy?

When costs of pursing activity in-house are less than cost of transaction for that activity in the market (Inhouse < Market), then firm should VERTICALLY INTEGRATE.

EX. Microsoft hires programmers to write code in house

Alternatives to make or buy

1. Short term contracts
2. Strategic Alliances
3.Equity Alliances
4. Joint Ventures

Short term contracts

Firm sends out RFP, generally less than year.

Benefit: longer planning period that individual market transactions

Weakness: Firm accepting RFP, has no incentive to make any purchases on investments

Strategic allliances

Voluntary arrangement between firs that involve knowledge sharing, resources, capabilities with intent of developing processes, products with them.

Long Term Contract

Overcome incentive investment.

Ex) Licensing, Franchising

Equity Alliance

At least one partner has ownership in the other partner

Joint Venture

When two or more partners create and jointly own new organization

Vertical Integration

The firms ownership of its production of needed inputs by which it distributes outputs

When a company expands its business into areas that are at different points on the same production path, such as when a manufacturer owns its supplier and/or distributor. Vertical integration can help companies reduce costs and improve efficiency by decreasing transportationexpenses and reducing turnaround time, among other advantages. However, sometimes it is more effective for a company to rely on the expertise and economies of scale of other vendors rather than be vertically integrated.

Can be measure by firms value added: what percentage of sales is generated within firms boundaries

Types of vertical integration

1. Fully vertically integrated
2. Backward Vertical integration
3. Forward vertical integration

Fully Vertical Integration

All activities are conducted within boundaries of rim

Ex) Landscaping Company --> Own forests, grows/cuts timber, mills, manufactures paper, distributes them to retail outlets

Vertically disintegrated-> Firms focuses on one or limited few stages of industry value chain

Backward vertical integration

changes in industry value chain that involve moving ownership of activities upstream to originating (inputs) point of value

Forward Vertical Integration

changes in industry value chain that involve moving ownership of activities close to end (customer) point of the value chain

What is diversification

Increase in the variety of prodcuts or markets in which to compete

Types of diversification (3)

Product diversification: active in several different product markets

Geographic diversification: active in several different countries

Product-Market Diversification: pursues both product and geographic diversification

Types of corporate diversification strategies

1. Related diversification strategy
2. Unrelated diversification strategy

Related diversification strategy

Firm derives less than 70% of revenue from single business actives but obtains revenues from other lines of business linked to primary activities. Rational to benefit from economies of scale and scope

Constrained: only able leverage existing core competencies & resources. Alternative business activities are limited by the fact they need common resources

Ex) Exxon moving into natural gas

Linked: consider new business activities that share limited number of linkages

Ex) Disney, Amazon

Unrelated Diversification strategy

when less than 70 percent of revenues come from single business and few linkages among business

Ex) GE, Each of GE divisons (Tv show, Jet engines, Appliances) has their own CEO.

Core Competencies Matrix

1. Leverage existing core competencies to improve current market position

2. Build new core competencies to protect and extend current market position

3. Redeploy and recombine existing core competencies to compete in markets of the future

4. build new core competencies to create and competent in markets of the future

Factors for diversification enhancing firm performance

1. Provide economies of scale and reduce costs

2. Exploit economies of scope and thus increase value

3. Reduce costs and increase value

Chapter 10

Global Strategy: Competing around the world

3 Main reasons firms expand abroad

1. Gain access to larger market share

2. gain access to low cost input factors

3. Develop new competencies

Location economies

Benefits from locating value chain actives in the worlds optimal geographic for a specific activity

Costs of doing business abroad

Liability of foreignness: additional costs of doing business in unfamiliar cultural and economic environment

Economic Issues (2): , rising wage (and other costs) are likely to negate any benefits of access to low-cost input factors. Second, as the standard of living rises in emerging economies, MNEs are hoping that increased purchasing power will enable workers to purchase the products they used to make for export only.

Intellectual property exposure

Deciding which country to enter (factors)

Aside from developing competencies, market size, cost of input factors) main factors are : National Instituions and National Culture

1. National Instituions- have strong legal and ethical pillars as well as economic institutions

Formal- Political & Legal (PESTEL)
Informal- Social (PESTEL)

2. National culture is the collective mental and emotion "programming on the mind" that differentiates human groups. The four dimensions of culture are (
1) power distance,
(2) individualism
(3) masculinity-femininity
(4) uncertainty avoidance.

A fifth cultural dimension is long-term orientation.

Power Distance

deals with inequality among people in terms of physical and intellectual capabilities, and how those methods translate into power distributions within organization

Individualism

focuses on the relationship between individuals in a society, particularly the relationship between individual and collective pursuits.

masculinity-femininity

focuses on the relationship between genders and its relation to an individual's role at work and in society.

uncertainty avoidance

focuses on societal differences in tolerance toward ambiguity and uncertainty.

globalization hypothesis

assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous.

4 Different strategies MNE can pursue when competing globally

1. International Strategy

2. Localization strategy

3. Global-Standardization strategy

4. Transnational

International

involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets.

It is advantageous when the MNE faces low pressures for both local responsiveness and cost reductions.

Main strategy DIFFERENTIATION

Harley Davidson- owners in america like the sound of their harley just as much as a polish guy

Localization

Strategy pursed by MNEs that attempts to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies.

The strategy arises out of the combination of high pressures for local responsiveness and low pressures for cost
reductions. It is also called a multi-domestic strategy.

Main Strategy: Differentiation

Ex) Mcdonalds

Global-Standardization

attempting to reap significant economies of scale and local economies by pursing a global division of labor based on where best-of-class capabilities reside at the lowest cost.

High cost pressure and low localization

Lenovo -> R&D Japan, Sell in Mexico

Main Strategy: PRICE

Transnational

strategy that attempts to combine the benefits of a localization strategy (high local-responsiveness) with those of global-standardization strategy (lowest cost position attainable). It is sometimes called glocalization.

Ex) Coke

Main Strategy: Price & Differentiation

Death of Distance Hypothesis

assumption that geographic location alone should not lead to firm-level competitive advantage because firms are now, more than ever, able to source inputs globally.

Porter National Competitive Advantage Framework

Consisting of four interrelated factors to explain national competitive advantage:

(1) factor conditions
(2) demand conditions
(3) competitive intensity in a focal industry
(4) related and supporting industries/complementors.

Factor Conditions

Describe a country's endowments in terms of natural, human, and other resources including capital markets, a supportive institutional framework, research universities, and public infrastructure (airports, roads, schools, health care system). Natural resources are often not needed to generate world-leading companies, since competitive advantage is often based on human capital and know-how.

Demand Conditions

the specific characteristics of demand in a firm's domestic market. A home market made up of sophisticated customers who hold companies to a high standard of value creation and cost containment contributes to national competitive advantage. Moreover, demanding customers may also clue firms in to the latest developments in specific fields and may push firms to move research from basic findings to commercial applications for the marketplace.

Competitive intensity in a focal industry

Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition.

Related and supporting industries

Leadership in related and supporting industries can also foster world-class competitors in downstream industries. The availability of top-notch complements further strengthens national competitive advantage.

CHAPTER 11

Organizational Design, Structure, Culture

Organizational Structure

Key building block of organizational design that determines how the work efforts of individuals and teams are orchestrated and how resources are distributed

Specialization

Is an element of organizational structure that describes the degree to which a task is divided into separate jobs - that is, the division of labor.

Larger firms tend to have a high degree of specialization; smaller ventures tend to have a low degree of specialization.

Formalization

element of organizational structure that captures the extent to which employee behaviors controlled by explicit and codified rules and procedures.

A high degree of formalization can slow decision making, reduce creativity and innovation, and hinder customer service.

Organic Organization

characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making.

They tend to be correlated with the following: a fluid and flexible information flow among employees in both horizontal and vertical directions; faster decision making; and higher employee motivation, retention, satisfaction, and creativity. Organic organizations also typically exhibit a higher rate of entrepreneurial behaviors and innovation. Organic structures allow firms to foster R&D and/or marketing, for example, as a core competency.

Thus, firms that pursue a differentiation strategy at the business level frequently employ an organic structure. Organic organizational frequently use virtual teams that collaborate through electronic communications.

Mechanistic Organization

characterized by a high degree of specialization and formalization, and a tall hierarchy that relies on centralized decision making.

To gain and sustain competitive advantage, not only must structure follow strategy, but also the chosen organizational form must match the firm's business strategy.

simple structure

Generally is used by small firms with low organizational complexity.

In such firms, the founders tend to make all the important strategic decisions and run the day-to-day operations. Simple structures are flat hierarchies operated in a decentralized fashion. Thy exhibit a low degree of formalization and specialization.

functional structure

which groups employees into distinct functional areas based on domain expertise. A functional structure allows for a higher degree of specialization and thus deeper domain expertise than a simple structure.

Higher specialization also allows for a greater division of labor, which is linked to higher productivity. A functional structure allows for an efficient top-down and bottom-up communication chain between the CEO and the functional departments, and thus relies on a relatively flat structure

multidivisional structure (or M-form)

Consists of several distinct strategic business units (SBUs), e ach with its own profit-and-loss (P&L) responsibility. Each SBU is operated more or less independently from one another. Corporations may use SBUs to organize around different businesses and product lines or around different geographic regions.

matrix structure

is an organizational structure that combines the functional structure with the M-form. The firm is organized according to SBUs, but also has a second dimension of organizational structure.

global matrix structure

is used when firms pursue a transnational strategy, in which the firm combines the benefits of a localization strategy (high local responsiveness) with those of a global standardization strategy (lowest cost position attainable). The geographic divisions are charged with local responsiveness and learning. Each SBU is charged with diving down costs through economies of scale and other efficiencies. It also allows the firm to feed local learning back to different SBUs and thus to diffuse it throughout the organization.

network structure

allows the firm to connect centers of excellence whatever their global location. The firm thus benefits from communities of practice, which store important organizational learning and expertise.

international strategy

company leverages its home-based core competency by moving into foreign markets. An international strategy is advantageous when the company faces low pressure for both local responsiveness and cost reductions. Companies pursue an international strategy through a differentiation strategy at the business level. The best match for an international strategy is a functional organizational structure, which allows the company to leverage its core competency more effectively.

Organizational Culture

culture describes the collectively shared VALUES and NORMS of an organization's members.

Values define what is considered important.

Norms define appropriate employee attitudes and behaviors.

• Employees learn about an organization's culture through socialization. Strong culture emerge when the company's core values are widely shared among the firm's employees and when the norms have been internalized.
• Although more or less visible, corporate culture finds its expression in artifacts, which include elements like the design and layout of physical space, symbols, vocabulary, what stories are told, what events are celebrated and highlighted, and how they are celebrated.

Chapter 12

...

4 characteristics that make public company attractive

1. Limited Liability for Investors

2. Transferability of investors intererts

3. Legal Personality

4. Separation of owner and control

Stakeholder strategy

an integrative approach to connect corporate governance, business ethics, and strategic leadership.

Stakeholder theory

theoretical framework concerned with how various stakeholders create and trade value; its main thesis is that effective management of the web of exchange relationships among stakeholders can help the firm achieve its goals and improve its chances of gaining and sustaining competitive advantage.

Corporate governance

concerns the mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally.

It addresses the principal-agent problem, which can occur any time an agent performs activities on behalf of a principal. The risk of opportunism on behalf of the agents is exacerbated by information asymmetry: the agents are generally better informed than the principles.

Agency theory

theory that views the firm as a nexus of legal contracts.

In principal-agent relationships, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job.

Moral hazard describes the difficulty of the principal to ascertain whether the agent has really put forth a best effort. In this situation, the agent is able to do the work, but may decide not to do so.

Groupthink

is a situation in which opinions coalesce around a leader without individuals critically challenging and evaluating that leader's opinions and assumptions.

5 Level Pyramid

o The Level-1 manager is a highly capable individual who makes productive contributions though motivation, talent, knowledge, and skills.

o The Level-2 manager masters the skills required at Level 1, but is also a contributing team member who works effectively with others in order to achieve synergies and team objectives.

o The Level-3 manager is a well-rounded and competent manager, a highly capable individual who is an effective team player and organizes resources effectively to achieved predetermined goals. He or she "does things right."

o At Level 4, the effective manager from Level 3 turns into a leader who determines what the right decisions are. The Level-4 leader presents and effectively communicates a compelling vision and mission to guide the firm toward superior performance. He or she "does the right things."

o At Level 5, the manager reaches a leadership pinnacle, turning into a strategic leader. An effective strategic leader is an executive who builds enduring greatness into the organization he or she leads. Their ambition is first and foremost for the institution, not themselves. The greatness of a strategic leader can truly be judged only if their organizations are able to sustain a competitive advantage in the years after the successful executive has departed from the organization.

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