Management 4970 Chapters 5-7 Exam 2

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how comparable the firm's tangible and intangible resources are to a competitor's in terms of both types and amounts.

Firms with similar types and amounts of resources are likely to: -have similar strengths and weaknesses.-use similar strategies.•Assessing resource similarity is difficult if critical resources are intangible, rather than tangible.
Drivers of Competitive Behavior:Awareness is: the extent to which competitors recognize the degree of their mutual interdependence that results from: •market commonality•resource similarityDrivers of Competitive Behavior:Motivation: Motivation concerns:-the firm's incentive to take action or to respond to a competitor's attack-relates to perceived gains and lossesDrivers of Competitive BehaviorAbility: Ability relates to:-each firm's resources-the flexibility that these resources provide•Without available resources the firm lacks the ability to:-attack a competitor-respond to the competitor's actionsDrivers of Competitive BehaviorBehavior: A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets.•Given the strong competition under market commonality, it is likely that the attacked firm will respond to its competitor's action in an effort to protect its position in one or more markets.Drivers of Competitive Behavior:Resource Dissimilarity: The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage.•When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response.Competitive ActionA strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position.Competitive ResponseA strategic or tactical action the firm takes to counter the effects of a competitor's competitive action.Strategic Action (or Response)A market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse.Tactical Action (or response)A market-based move that is taken to fine-tune a strategy:•Usually involves fewer resources•Is relatively easy to implement and reverseFactors that affect likelihood of responseFirms study three other factors to predict how a competitor is likely to respond to competitive actions:1.Type of competitive action2.Actor's reputation3.Market dependenceCompetitive Dynamics Vs RivalryCompetitive Rivalry (Individual firms)-Market commonality and resource similarity-Awareness, motivation and ability-First mover incentives, size and quality Competitive Dynamics (All firms)-Market speed (slow-cycle, fast-cycle, and standard-cycle-Effects of market speed on actions and responses of all competitors in the marketSlow-Cycle MarketsCompetitive advantages are shielded from imitation for long periods of time and imitation is costly.•Competitive advantages are sustainable in slow-cycle markets.•All firms concentrate on competitive actions and responses to protect, maintain and extend proprietary competitive advantage.End of Chapter 5Corporate-Level strategy's ValueThe degree to which the businesses in the portfolio are worth more under the management of the firm than they would be under other ownership.- What businesses should the firm be in?- How should the corporate office manage the group of businesses?Two Strategy levelsBusiness-level Strategy (Competitive)- Each business unit in a diversified firm chooses a business-level strategy as its means of competing in its individual product markets. Corporate-level Strategy (Companywide)- Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets.The role of DiversificationDiversification strategies play a major role in the behavior of large firms.• Product diversification concerns:- Which industries and markets the firm should compete in.- How managers buy, create and sell different businesses to match skills and strengths with opportunities presented to the firm.Levels of diversification: Low levelDominant Business- Between 70% and 95% of revenuecomes from a single business• Single Business- 95% or more revenuecomes from a single businessModerate to HighRelated Constrained- Less than 70% of revenue comes from a single business and all businesses share product, technological and distribution linkages.Related Linked (mixed related and unrelated- Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses.Very High Levels: Unrelated DiversificationLess than 70% of revenue comes from the dominant business, and there are no common links between businesses.Related DiversificationFirms create value by building upon or extending:- resources- capabilities- core competencies• Economies of Scope- Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses.Economies of ScopeValue is created from economies of scope through:- operational relatedness in sharing activities.- corporate relatedness in transferring skills or corporate core competencies among units.• The difference between sharing activities and transferring competencies is based on how the resources are jointly used to create economies of scope.Sharing Activites: Operational RelatednessCreated by sharing either a primary activity such as inventory delivery systems, or a support activity such as purchasing.- Activity sharing requires sharing strategic control over business units.- Activity sharing may create risk because business-unit ties create links between outcomes.Transferring Corporate CompetenciesCorporate Relatedness- Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise.Corporate Relatedness creates value in two wayseliminates resource duplication in the need to allocate resources for a second unit to develop a competence that already exists in another unit.- provides intangible resources (resource intangibility) that are difficult for competitors to understand and imitate.• A transferred intangible resource gives the unit receiving it an immediate competitive advantage over its rivals.Market PowerMarket power exists when a firm can:- sell its products above the existing competitive level and/or - reduce the costs of its primary and support activities below the competitive level.Multipoint CompetitionTwo or more diversified firms simultaneously compete in the same product areas or geographic markets.Vertical IntegrationBackward integration —a firm produces its own inputs.- Forward integration —a firm operates its own distribution system for delivering its outputs.Related Diversification: ComplexitySimultaneous Operational Relatedness and Corporate Relatedness- Involves managing two sources of knowledge simultaneously• Operational forms of economies of scope• Corporate forms of economies of scope- Many such efforts often fail because of implementation difficulties.Unrelated DiversificationFinancial Economies:- are cost savings realized through improved allocations of financial resources.• Based on investments inside or outside the firm- create value through two types of financial economies:• Efficient internal capital allocations• Purchase of other corporations and the restructuring their assetsUnrelated Diversification (continued)Efficient Internal Capital Market Allocation- Corporate office distributes capital to business divisions to create value for overall company.• Corporate office gains access to information about those businesses' actual and prospective performance.- Conglomerate life cycles are fairly short life cycle because financial economies are more easily duplicated by competitors than are gains from operational and corporate relatedness.- GE Capital is a good example of thisUnrelated Diversification: RestructuringRestructuring creates financial economies- A firm creates value by buying and selling other firms' assets in the external market.• Resource allocation decisions may become complex, so success often requires:- focus on mature, low-technology businesses.- focus on businesses not reliant on a client orientation.External incentives to DiversifyAnti-trust legislation: •Antitrust laws in 1960s and 1970s discouraged mergers that created increased market power (vertical or horizontal integration.•Mergers in the 1960s and 1970s thus tended to be unrelated.•Relaxation of antitrust enforcement results in more and larger horizontal mergers.•Early 2000: antitrust concerns seem to be emerging and mergers are now more closely scrutinized.Tax LawsHigh tax rates on dividends cause a corporate shift from dividends to buying and building companies in high-performance industries.•1986 Tax Reform Act-Reduced individual ordinary income tax rate from 50 to 28 percent.-Treated capital gains as ordinary income. -Created incentive for shareholders to prefer dividends to acquisition investments.Internal Incentives to DiversifyLow Performance: High performance eliminates the need for greater diversification.•Low performance acts as incentive for diversification.•Firms plagued by poor performance often take higher risks (diversification is risky).Internal incentives to DiversifyUncertain Future cash flows: Diversification may be defensive strategy if:-product line matures.-product line is threatened.-firm is small and is in mature or maturing industry.Internal Incentives to DiversifySynergy and Firm Risk Reduction: Synergy exists when the value created by businesses working together exceeds the value created by them working independently.•But synergy creates joint interdependence between business units.•A firm may become risk averse and constrain its level of activity sharing.•A firm may reduce level of technological change by operating in more certain environments.Resources & DiversificationA firm must have both:- Incentives to diversify- The resources required to create value through diversification—cash and tangible resources (e.g., plant and equipment)• Value creation is determined more by appropriate use of resources than by incentives to diversify.• Strategic competitiveness is improved when the level of diversification is appropriate for the level of available resources.Value-Reducing Diversification: Managerial Motives to DiversifyManagerial motives to diversify- Managerial risk reduction- Desire for increased compensation- Build personal performance reputation• Effects of inadequate internal firm governance- Diversification fails to earn even average returns- Threat of hostile takeover- Self-interest actions of entrenched managementEnd of Chapter 6MergerTwo firms agree to integrate their operations on a relatively co-equal basis.AcquisitionOne firm buys a controlling, or 100%, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.TakeoverAn acquisition in which the target firm did not solicit the acquiring firm's bid for outright ownership.Acqusitions: Increased Market Poweractors increase market power when:- there is the ability to sell goods or services above competitive levels.- costs of primary or support activities are below those of competitors.- a firm's size, resources and capabilities gives it a superior ability to compete.• Acquisitions intended to increase market power are subject to:- regulatory review- analysis by financial marketsAcquisitions: Increased Market PowerMarket power is increased by:- horizontal acquisitions of other firms in the same industry.- vertical acquisitions of suppliers or distributors of the acquiring firm.- related acquisitions of firms in related industries.Market Power Acquisitions: Horizontal AcquisitionsAcquisition of a firm in the same industry in which the acquiring firm competes increases a firm's market power by exploiting:-Cost-based synergies-Revenue-based synergies•Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics.Vertical AcquisitionsAcquisition of a supplier or distributor of one or more of the firm's goods or services-increases a firm's market power by controlling additional parts of the value chain.Related AcquisitionsAcquisition of a firm in a highly related industry-because of the difficulty in attaining synergy, related acquisitions are often difficult to implement.Overcoming Entry Barriers: Entry Barriersactors associated with the market or with the firms operating in it that increase the expense and difficulty for new firms in gaining immediate market access.• Economies of scale• Differentiated productsOvercoming Entry Barriers: Cross Border AcquisitionsAcquisitions made between firms with headquarters in different countries:• are often made to overcome entry barriers.• can be difficult to negotiate and operate because of the differences in foreign cultures.Cost of New-Product development and increased speed to marketInternal development of new products is often perceived as a high-risk activity.- Acquisitions allow a firm to gain access to new and current products that are new to the firm.- Returns are more predictable because of the acquired firms' past experience with its products.Lower risk compared to developing new productsAn acquisition's outcomes can be estimated more easily and accurately than the outcomes of an internal product development process.- Managers may view acquisitions as lowering risk associated with internal ventures and R&D investments.- Acquisitions may discourage or suppress innovation.Increased DiversificationUsing acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses.• Both relateddiversification and unrelateddiversification strategies can be implemented through acquisitions.• The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful.Learning and developing new CapabilitiesAn acquiring firm can gain capabilities that the firm does not currently possess:- special technological capability- a broader knowledge base- reduced inertia• Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base.Reshaping the firm's competitive scopeAn acquisition can:- reduce the negative effect of an intense rivalry on a firm's financial performance.- reduce a firm's dependence on one or more products or markets.• Reducing a firm's dependence on specific markets alters the firm's competitive scope.Problems in achieving Acquisitions success-Too Large -integration difficulties -inadequate target evaluation -Extraordinary debt -inability to achieve synergy -too much diversification -mangers overly focused on acquisitionsProblems in achieving acquisition success: Integration dificultiesIntegration challenges include:- melding two disparate corporate cultures.- linking different financial and control systems.- building effective working relationships (particularly when management styles differ).- resolving problems regarding the status of the newly acquired firm's executives.- loss of key personnel weakens the acquired firm's capabilities and reduces its value.Inadequate Evaluation of TargetDue Diligence- The process of evaluating a target firm for acquisition.• Ineffective due diligence may result in paying an excessive premium for the target company.• Evaluation requires examining:- financing of the intended transaction.- differences in culture between the firms.- tax consequences of the transaction.- actions necessary to meld the two workforces.Large or extraordinary DebtHigh debt (e.g., junk bonds) can:- increase the likelihood of bankruptcy.- lead to a downgrade of the firm's credit rating.- preclude investment in activities that contribute to the firm's long-term success such as:• research and development• human resource training• marketingInability to Achieve synergySynergy- When assets are worth more when used in conjunction with each other than when they are used separately.• Firms experience transaction costs when they use acquisition strategies to create synergy.• Firms tend to underestimate indirect costs when evaluating a potential acquisition.Inability to achieve synergy(continued)Private synergy- When the combination and integration of the acquiring and acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating either firm's assets with another firm.• Advantage: it is difficult for competitors to understand and imitate.• Disadvantage: it is also difficult to create.Too much diversificationDiversified firms must process more information of greater diversity.- Increased operational scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units' performances.- Strategic focus shifts to short-term performance.- Acquisitions may become substitutes for innovationManagers overly focused on AcquisitionsManagers invest substantial time and energy in acquisition strategies in:- searching for viable acquisition candidates.- completing effective due-diligence processes.- preparing for negotiations.- managing the integration process after the acquisition is completed.Managers of Target FirmsManagers in target firms:- may begin to operate in a state of virtual suspended animation during an acquisition.- may become hesitant to make decisions with long-term consequences until negotiations have been completed.- may develop a short-term operating perspective and a greater aversion to risk.Acquiring Firm becomes too largeAdditional costs of controls may exceed the benefits of the economies of scale and additional market power.• Larger size may lead to more bureaucratic controls.• Formalized controls often lead to relatively rigid and standardized managerial behavior.• The firm may produce less innovation.Effective Acquisiton StrategiesComplementary Assets /ResourcesBuying firms with assets that meet current needs to build competitiveness.FriendlyAcquisitionsFriendly deals make integration go more smoothly.Careful Selection ProcessDeliberate evaluation and negotiations are more likely to lead to easy integration and building synergies.Maintain Financial SlackProvide enough additional financial resources so that profitable projects would not be foregone.Attributes of Effective AcquisitionsAttributesResultsLow-to-Moderate DebtMerged firm maintains financial flexibilityFlexibilityHas experience at managing change and is flexible and adaptableSustained Emphasis on Innovation Continue to invest in R&D as part of the firm's overall strategyRestructuringA strategy through which a firm changes its set of businesses or financial structure.- Failure of an acquisition strategy often precedes a restructuring strategy.- Restructuring may occur because of changes in the external or internal environments.• Restructuring strategies- Downsizing- Downscoping- Leveraged buyoutsRestruturing: DownsizingA reduction in the number of a firm's employees and sometimes in the number of its operating units.- May or may not change the composition of businesses in the firm's portfolio.• Typical reasons for downsizing:- Expectation of improved profitability from cost reductions- Desire or necessity for more efficient operationsRestructuring: DownscopingA divestiture, spin-off or other means of eliminating businesses unrelated to a firm's core businesses.• A set of actions that causes a firm to strategically refocus on its core businesses.- May be accompanied by downsizing, but not the elimination of key employees from its primary businesses.- Results in a smaller firm that can be more effectively managed by the top management team.Restructuring: Leveraged Buyout(LBO)A restructuring strategy whereby a party buys all of a firm's assets in order to take the firm private.- Significant amounts of debt may be incurred to finance the buyout, followed by an immediate sale of non-core assets to pare down debt.• Can correct for managerial mistakes- Managers making decisions that serve their own interests rather than those of shareholders• Can facilitate entrepreneurial efforts and strategic growthEnd of Chapter 7.