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Terms in this set (27)
Acquiring or merging with industry competitors to achieve the competitive advantages that arise from a large size and scope of operations
---Acquisition: Company uses its capital resources to purchase another company.
---Merger: Agreement between two companies to pool their resources and operations and join together to better compete in a business or industry.
When a company expands its operations either backward or forward into an industry
---Backward vertical integration - Produces inputs for the company's products
---Forward vertical integration - Uses, distributes, or sells the company's products
Decision to allow one or more of a company's value-chain activities to be performed by independent, specialist companies
Advantages of the corporate lvl strategies (horizontal integration, vertical integration, strategic outsourcing)
-Lowers the cost structure
-Increases product differentiation
-Leverages a competitive advantage
-Reduces rivalry within the industry
-Increases bargaining power over suppliers and buyers
Vertical integration increases product differentiation, lowers costs, and reduces industry competition when it:
*facilitates investments in efficiency-enhancing specialized assets.
*protects product quality.
*results in improved scheduling.
-Lower cost structure
-Focus on the core business
Disadvantages of the corporate lvl strategies (horizontal integration, vertical integration, strategic outsourcing)
--Difficult to implement
--Conflict with the Federal Trade Commission (FTC)
*Increase in prices
*Abuse of market power
*Crushing potential competitors
--Increasing cost structure
--Disadvantages that arise when technology is changing fast
--Disadvantages that arise when demand is unpredictable
--Vertical disintegration: When a company decides to exit industries either forward or backward in the industry value chain to its core industry to increase profitability
*Risk that a company will become too dependent upon the specialist provider of an outsourced activity
*Building of an industry-wide resource that lowers the barriers to entry in that industry
--Loss of information and forfeited learning opportunities
§Long-term agreements between two or more companies to jointly develop new products or processes
---Substitute for vertical integration
---Avoids bureaucratic costs
---Component suppliers benefit because their business and profitability grow as the companies they supply grow.
Diversification (4th corp lvl strategy)
Ways in which profitability can be increased
---Transfer competencies between business units in different industries
---Leverage competencies to create business units in new industries
---Share resources between business units to realize synergies or economies of scope
---Use product bundling
---Utilize general organizational competencies that increase the performance
Corporate-level strategy based on the goal of establishing a business unit in a new industry related to a company's existing business units
---By some form of commonality or linkage between their value-chain functions
---Basis of multibusiness model
*Taking advantage of strong commonalities that can be modified to increase the competitive advantage
*Allowing a company to use any general organizational competency it possesses
Corporate-level strategy that uses general organizational competencies to increase the performance of all the company's business units
---Companies pursuing this are called conglomerates.
---Internal capital market: Corporate-level strategy whereby the firm's headquarters assesses the performance of business units and allocates money across them
---Benefits of an internal capital market are limited by the efficiency of the external capital market.
---Reasons for efficiency of capital markets in U.S:
*Reporting requirements mandated by the Securities and Exchange Commission (SEC)
*Large numbers of research analysts
*Extremely large and active investment community
*Strong communication systems
*Strong contract law
Free cash flow
The managers of most companies often consider diversification when they are generating FREE CASH FLOW, that is, cash in excess of that required to fund new investments in the company's current business and meet existing debt commitments.
For diversification to be value creating, a company's return on investing FREE CASH FLOW to pursue diversification opportunities, that is, its future return on invested capital (ROIC) must exceed the value shareholders would reap by returning the cash to them.
Taking a distinctive competency developed by a business unit in one industry and implanting it in a business unit operating in another industry
---Commonality: Skill or competency that when shared by two or more business units allows them to operate more effectively and create more value for customers.
---Increase profitability when they:
*lower the cost structure of one or more of a diversified company's business units.
*enable one or more of its business units to better differentiate their products.
---Distinctive competency being transferred must have real strategic value.
*Competencies should involve value-chain activities to increase profitability.
Taking a distinctive competency developed by a business unit in one industry and using it to create a new business unit in a different industry
---Basis of the model
*Company's competitive advantage in one industry being applied to create a differentiation
*Cost-based competitive advantage for a new business unit in a different industry
Providing products that are connected to each other
---Allows companies to expand their range providing customers a complete package
---Goal - Bundle products to offer customers:
*superior set of services.
---Does not always require joint ownership
*Can be achieved through market contracts
General organizational competencies
Help business units within a company perform at a higher level than it could if it operated as a separate or independent company
---Results from the skills of a company's top managers
*Organizational design capabilities
Pitfalls of Acquisitions
••Integrating the acquired company
••Overestimating economic benefits
••Expense of acquisitions
••Inadequate pre-acquisition screening
GUIDELINES FOR SUCCESS:
••Target identification and pre-acquisition screening
••Learning from experience
Choosing between related and unrelated diversification
••Company's competencies can be applied across a greater number of industries.
••Company has superior strategic capabilities that allow it to keep bureaucratic costs under close control.
••Company's top managers are skilled at raising the profitability of poorly run businesses.
••Company's managers use their strategic management competencies to:
-improve the competitive advantage of their business units.
-keep bureaucratic costs under control.
Limits/Disadvantages of diversification
--Changes in the industry or company
--Diversification for the wrong reasons
*Entry into a wrong business or at the wrong time or for the wrong reasons
--Bureaucratic costs: Costs associated with solving the transaction difficulties between business units and corporate headquarters
>Number of business units in a company's portfolio
>Degree to which coordination is required to realize the advantages of diversification
Reorganizing and divesting business units and exiting industries
--To refocus upon a company's core business and rebuild its distinctive competencies
--Investors feel these companies no longer have multibusiness models
--Complexity of the financial statements of highly diversified enterprises disguises the performance of individual business units
--Response to declining financial performance brought about by over-diversification
--Diminished advantages of vertical integration or diversification from innovations in strategic management
§Principal way companies enter new industries to pursue vertical integration and diversification
§Used by companies to move fast to establish a presence in an industry
§Less risky than internal new ventures
§Easy way to enter an industry that is protected by high barriers to entry
Stakeholders (internal & external)
STAKEHOLDERS: Individuals or groups with an interest, claim, or stake in the company
INTERNAL STAKEHOLDERS: Stockholders and employees, including executive officers, other managers, and board members
EXTERNAL STAKEHOLDERS: All other individuals and groups that have some claim on the company
Stakeholder Impact Analysis
1. Identify stakeholders along with their interests and concerns
2. Identify the probable claims of stakeholders on the organization
3. Identify important stakeholders from the organization's perspective
4. Identify the resulting strategic challenges
Stakeholder profitability and profit growth
Stockholders receive a return on investment from dividend payments and capital appreciation in the market value of a share
Ways to grow profits:
---Participating in a market that is growing
---Taking market share from competitors
---Consolidating the industry through horizontal integration
---Development of new markets through international expansion, vertical integration, or diversification
Deals with business relationship problems when decision-making authority is delegated from one person to another
Agency relationships & problems
Relationship between stockholders and senior managers:
--Stockholder - Principal
--Senior managers - Agent
Information asymmetry: Agent has more information about the resources being managed than the principal
Laws for monitoring agents:
---Codetermination law (Mitbestimmungsgesetz in German law)
---Securities and Exchange Commission (SEC)
---Generally agreed-upon accounting principles (GAAP)
On-the-job consumption: Describes the behavior of senior management's use of company funds to acquire perks
Empire building - Buying new businesses to increase the size of the company through diversification
Governance mechanisms (purpose & types)
Used by principals to:
---Align incentives with the agents
---Monitor and control agents
---Board of directors
GOVT MECHANISMS INSIDE A COMPANY:
Strategic control systems - Formal target-setting, measurement, and feedback systems
---Establish standards and targets against which performance can be measured
---Create systems for measuring and monitoring performance on a regular basis
---Compare actual performance against the established targets
---Evaluate results and take corrective action if necessary
Business Ethics & why its important
Accepted principles of right or wrong governing the conduct of businesspeople.
Managers may be confronted with ethical dilemmas, which are situations where there is no agreement over what the accepted principles of right and wrong are, or where none of the available alternatives seems ethically acceptable.
Board of Directors
The board of directors is the centerpiece of the corporate governance system. Board members are directly elected by stockholders, and under corporate law, they represent the stockholders' interests in the company. Hence, the Board can be held legally accountable for the company's actions. Its position at the apex of decision making within the company allows it to monitor corporate strategy decisions and ensure that they are consistent with stockholder interests. In addition, the board has the legal authority to hire, fire, and compensate corporate employees, including, most important, the CEO. The board is also responsible for making sure that audited financial statements of the company present a true picture of its financial situation.
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