Study Guide Ch. 8 to 13 reduced.txt

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Study Guide Ch. 8 to 13 reduced.txt
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  1. Implications of trend toward globalization:
    • 1. Industries becoming global in scope- industry boundaries no longer stop at national borders.
    • 2. Shift from national to global markets has intensified competition.
    • 3. Steady decline in barriers to cross-border trade & investment.
  2. Factor Endowments-
    cost/quality of factors of production influence costs and capabilities
  3. Local Demand Conditions-
    demanding and sophisticated customers shape competitiveness
  4. Competitiveness of Related & Supporting Industries-
    spillover benefits
  5. Intensity of Rivalry-
    capabilities honed for competitive advantage
  6. We can infer:
    • 1. Companies from a given nation are likely to succeed in industries with four favorable attributes.
    • 2. Attributes form a mutually reinforcing system
  7. Increasing Profitability Through Global Expansion
    • 1. Expand markets by leveraging products developed at home & sold internationally
    • 2. Economies from global volume- economies of scale
    • 3. Location economies- economic benefits from performing value creation in optimal location
    • 4. Leveraging skills of global subsidiaries- applied elsewhere
    • Must also consider transportation costs, trade barriers, as well as political and economic risks
  8. Pressures for Cost Reductions Greatest in industries producing commodity-type products
    • Characteristics
    • 1. Differentiation on non-price factors is difficult 4. Persistent excess capacity
    • 2. Competitors are based in low-cost locations 5. Liberalization of world trade & investment
    • 3. Consumers are powerful & face low switching costs
  9. Pressures for Local Responsiveness
    • Characteristics = Differences In:
    • 1. Customer tastes & preferences
    • 2. Infrastructure & traditional practices
    • 3. Distribution channels
    • 4. Host government demands
  10. Choosing a Global Strategy
    • 1) Standard Globalization - Reaping cost reductions from economies of scale & location
    • 2) Localization- Customizing goods & services to match tastes & preferences in different markets
    • 3) Transnational- business model that simultaneously:
    • Achieves low costs
    • Differentiates across markets where necessary
    • Fosters a flow of skills between subsidiaries
    • 4) International- multinational companies sell products serving universal needs (minimal need to differentiate) & don't face significant competitors (low cost pressure).
  11. Choice of Entry Mode
    • 1. Exporting- most firms use to begin expansion but later switch to another mode.
    • 2. Licensing- licensee buys rights to produce product & puts up most of overseas capital.
    • 3. Franchising- franchiser sells intangible property & insists franchisee follow its rules.
    • 4. Joint Ventures- typically a 50/50 venture & favored mode for entering new market
    • 5. Wholly-Owned Subsidiaries- parent company owns 100% of subsidiary�s stock
  12. Choosing an Entry Strategy--
    Distinctive Competencies & Entry Mode
    • 1. Technological know-how- wholly-owned subsidiary preferred over licensing & joint ventures to minimize risk of losing control.
    • 2. Management know-how- franchising, joint ventures, or subsidiaries preferred as risk is low of losing management know-how.
  13. Choosing an Entry Strategy--
    Pressures for Cost Reduction & Entry Mode
    1. Export finished goods from wholly-owned subsidiary

    2. Marketing subsidiaries oversee distribution- tight control over local operations allows company to use profits generated in one market to improve position in other markets.
  14. Global Strategic Alliances- Advantages
    • 1. Facilitate entry
    • 2. Share fixed costs & associated risks to gain technology & market access
    • 3. Bring together complementary skills & assets
    • 4. Set technological standards for an industry
  15. Global Strategic Alliances- Disadvantages
    1. Give competitors low-cost route to gain technology and market access
  16. Making Strategic Alliances Work
    • 1. Partner selection
    • Helps achieve strategic goals (including learning)
    • Shares vision of alliance
    • Less likely to exploit alliance to own ends

    • 2. Alliance structure
    • Risk of giving too much away at acceptable level
    • Guard against opportunism by partner

    • 3. Manner in which alliance is managed
    • Sensitivity to cultural differences
    • Build relationship with interpersonal relationships
  17. Corporate-Level Strategy is used to identify:
    • 1. Businesses/industries firm should be in
    • 2. Value creation activities firm should perform
    • 3. Methods to enter/exit businesses/industries to maximize long-run profitability
  18. Multi-Business Company Should Construct:
    • 1) Business model & strategies for each business unit/division in every industry it competes
    • 2) Higher-level model- justifies entry into different businesses & industries
  19. Repositioning & Redefining a Business Model
    • 1. Horizontal Integration- acquiring/merging with industry competitors
    • 2. Vertical Integration- expanding operations backward into input production or forward into extended product distribution
    • 3. Strategic Outsourcing- letting some value creation activities within businesses be performed by another firm
  20. Horizontal Integration: (Single-Industry Strategy)
    • A. Focus resources- resources devoted to competing successfully in one area
    • - �Stick to the knitting�- company stays focused on what it does best
  21. Benefits of Horizontal Integration
    • 1. Lowers cost structure
    • 2. Increases product differentiation
    • 3. Replicates business model
    • 4. Reduces industry rivalry (e.g. product bundling, cross selling) 5. Increases bargaining power
  22. Problems with Horizontal Integration
    Some mergers/acquisitions DESTROY value
    • o Implementing horizontal integration is difficult
    • Problems with merging different company cultures
    • High management turnover if acquisition is hostile
    • Managers tend to overestimate benefits of merger
    • Managers tend to underestimate problems in merging
  23. Merger may be blocked by the Federal Trade Commission if perceived to:
    • 1. Create dominant competitor
    • 2. Create too much industry consolidation
    • 3. Have potential for future abuse of market power
  24. Vertical Integration: (Entering New Industries)
    Backward Vertical
    Forward Vertical
    Backward Vertical- expansion into the industry that produces inputs to the company

    Forward Vertical- expansion into the industry that uses, distributes, or sells the company�s products
  25. Increasing Profitability Through Vertical Integration
    • 1. Facilitates investments in specialized assets- lowers cost structure or better differentiation.
    • 2. Enhances product quality- strengthens its differentiation advantage through either forward or backward integration
    • 3. Improved scheduling
    • Easier & more cost-effective to plan, transfer of product in value-added chain
    • Enables company to respond better to changes in demand
  26. Problems with Vertical Integration
    • o Increased Cost Structure
    • Company-owned suppliers develop higher cost structure than independent suppliers
    • Bureaucratic costs of solving transaction difficulties

    • o Technological Change
    • May lock into old/inefficient technology
    • Prevent company from changing to new technology that could strengthen business model

    • o Unpredictable Demand - final product
    • o Creates risk in vertical integration investments
  27. Vertical Integration Limits
    • 1. Company-owned suppliers lack incentive to reduce costs
    • 2. Changing demand/technology reduces ability to be competitive
  28. Alternatives to Vertical Integration: Cooperative Relationships
    • 1. Short-term contracts/competitive bidding- lack of commitment to supplier but motivates lower price
    • 2. Strategic alliances/long-term contracting
    • A. Enables creation of stable long-term relationship
    • B. Becomes a substitute for vertical integration
    • C. Avoids problems of managing additional company
  29. Building long-term cooperative relationships
    • 1. Hostage taking � creating mutual dependency to ensure meeting of contractual agreement
    • 2. Credible commitments � believable promise/pledge
    • 3. Maintaining market discipline
    • - Periodic contract renegotiation, parallel sourcing
  30. Strategic Outsourcing
    Allows one or more of the company's value-chain activities/functions to be performed by independent specialized companies to focus all skills/knowledge on one activity

    • 1. Focus on fewer value-creation activities
    • 2. Goal to outsource noncore/nonstrategic activities
    • 3. Virtual Corporation- companies that pursue extensive strategic outsourcing
  31. Benefits of Outsourcing
    • 1. Lower cost structure- specialist cost is less than performing activity internally
    • 2. Enhanced differentiation- quality of activity performed by specialist is greater than if activity were performed by the company
    • 3. Focus on the core business
    • � Distractions are removed
    • � Company can focus attention/resources on activities important for value creation/competitive advantage
  32. Risks of Outsourcing
    • 1. Holdup � company becomes too dependent on specialist provider (can raise price)
    • 2. Loss of information � company loses important customer contact or competitive information
  33. Diversified Company
    makes and sells products in two or more different or distinct industries
  34. Free Cash Flow
    cash in excess of that required to fund investments in the company;s existing industry...
  35. Why Diversify?
    When generating free cash flow with resources in excess of those needed to maintain competitive advantage
  36. Corporate-Level Strategy
    Perform value creation functions at lower cost or in ways allowing differentiation & premium price

    • Used to identify:
    • 1. Businesses/industries in which company should compete
    • 2. Value creation activities the company should perform in those businesses
    • 3. Method to enter or leave businesses or industries in order to maximize its long-run profitability
  37. Types of Diversification and Methods to implement diversification strategy:
    • Types
    • 1. Related diversification
    • 2. Unrelated diversification

    • Methods to implement diversification strategy
    • 1. Internal new ventures
    • 2. Acquisitions
    • 3. Joint Ventures
  38. Leveraging Competencies
    Taking a distinctive competency developed by a business in one industry and using it to create a NEW business unit in a different industry
  39. Sharing resources and capabilities
    across two or more business units in different industries to realize economies of scope
  40. Economies of scope
    arise when business units effectively pool, share, & utilize expensive resources or capabilities = possible only when significant commonalities between one or more value-chain functions.
  41. Product Bundling
    Customers reduce the number of suppliers for time & cost savings

    Differentiate products/expand product lines to satisfy customers needs for a package of related products

    Examples: Telecom (e.g. voice, internet), Medical equipment (e.g. MRI, X-ray)
  42. Types of Diversification
    Related - entry into new business in different industry:
    • 1. Related to company's existing business/activities
    • 2. Has commonalities between one or more components of each activity's value chain

    Based on transferring/leveraging competencies, sharing resources, & bundling products
  43. Unrelated - entry into industries with no connection (activities or industries)
    Based on only general organizational competencies to increase profitability of all business units
  44. Disadvantages/Limits of Diversification
    • 1. Changes in Industry/Company
    • A. Unpredictable future (cost savings do not materialize because of low demand in one industry)
    • B. Willing to divest business units (can be messy if related diversification)

    • 2. Diversification for the Wrong Reasons
    • A. Clear vision of how value will be created.
    • B. Extensive diversification can reduce profitability.

    • 3. Bureaucratic Costs of Diversification
    • A. Costs increase with the number of business units
    • B. Extensive coordination is required to gain benefits.
  45. Choosing Strategy
    • - Depends on comparison of benefits of each strategy versus cost of pursuing it
    • - May pursue both strategies simultaneously
  46. Choosing a strategy- Related
    • Related
    • 1. Competencies can be applied across a greater number of industries
    • 2. Superior capabilities to control bureaucratic costs
  47. Choosing a strategy- Unrelated
    • Unrelated
    • 1. Functional competencies have few uses across industries
    • 2. Organizational design skills to build competencies
  48. Internal New Ventures
    - Process of transferring/creating new business unit/division in new industry
  49. Pitfalls:
    • ? Scale of Entry
    • ? Commercialization of technology vs. customer needs
    • ? Poor Implementation � other priorities
  50. Successful Internal New Venturing
    • 1. Place funding for research in the hands of business unit managers
    • 2. Effective use of R & D competency
    • 3. Foster close links between R & D and marketing
    • 4. Large-scale entry leads to greater long-term profits
  51. Attractions of Acquisitions
    • 1. Access distinctive competencies
    • 2. Perceived as less risky than internal new ventures
    • 3. Need to move quickly
    • 4. Enter new industry protected by high barriers to entry
  52. Acquisition Pitfalls
    • 1. Integrating the acquired company
    • 2. Expense of acquisitions
    • 3. Overestimating economic benefits
    • 4. Inadequate preacquisition screening
    • 5. Overreliance = lose focus on the rest of the business
  53. Guidelines for Successful Acquisition
    • 1. Identification and screening
    • 2. Integration (focus on goal, eliminate duplication)
    • 3. Bidding strategy (avoid war)
    • 4. Learn from experience
  54. Joint Ventures Attractions:
    • Attractions:
    • 1. Avoid risks/costs of building new operation
    • 2. Sharing complementary skills/assets
  55. Joint Venture Pitfalls:
    • 1. Share profits if successful
    • 2. Risk of giving know-how away to joint venture partner
    • 3. Venture partners must share control -conflicts can cause failure
  56. Stakeholders and Corporate Performance (2 types)
    • Stakeholders: Individuals/groups with an interest/claim/or stake in the firm
    • 1. Internal (e.g., employees, stockholders) 2. External (e.g., customers, creditors, suppliers)
  57. Stakeholder Impact Analysis
    • 1. Stakeholders
    • 2. Stakeholders interests/concerns
    • 3. Claims stakeholders likely to make
    • 4. Most important Stakeholders
    • 5. Resulting strategic challenges
  58. Unique Role of Stockholders
    • 1. Company's legal owners and providers of risk capital used to operate a business
    • 2. Maximizing long-run profitability & profit growth = satisfying claims of most stakeholders
  59. Profitability, Profit Growth, and Stakeholder Claims

    To grow profits, companies must be doing one or more of the following:
    • 1. Participating in growing markets
    • 2. Taking market share away from competitors
    • 3. Consolidating via horizontal integration
    • 4. Developing new markets
  60. Principal-Agent Relationship - Principal gives authority to Agent
    Agency Theory: Agency relationship - delegate decision-making authority over resources

    • Agency Problems:
    • 1. Agents/principals have different goals 4. Difficult for principals to measure performance
    • 2. Agent�s goals not in the best interests of principals
    • 3. Agents take advantage of information asymmetries to maximize interests at expense of principal
  61. Challenge for Principals
    • 1. Shape behavior of agents to act in accordance with goals set by principals
    • 2. Reduce information asymmetry between agents & principals
    • 3. Develop mechanisms for reducing agents� actions that are inconsistent with the goals of principals
  62. Use Governance Mechanisms to deal with these challenges
    • * Governance mechanisms limit agency problem by aligning incentives between agents & principals - monitor/control.
    • * Mechanisms include:
    • 1. Board of Directors � monitor
    • 2. Financial Statements & Auditors � monitor
    • 3. Stock-Based Compensation - incentive
    • 4. Takeover Constraint - incentive
  63. Governance Mechanisms Inside the Company
    Internal agency problems can be reduced by:
    • 1. Strategic Control Systems
    • A. Establish standards for performance
    • B. Create systems- measure & monitor performance
    • C. Compare actual against targets
    • D. Evaluate results- take corrective actions

    2. Employee Incentives (e.g. Stock options, Compensation tied to attainment of superior efficiency, quality, innovation, and responsiveness to customers)
  64. Roots of Unethical Behavior
    • 1. Personal ethics code- profound influence on behavior
    • 2. Don�t realize behaving unethically- failing to ask right questions � lack of information/awareness
    • 3. Organization culture- doesn�t emphasize ethics; only considers economic consequences
    • 4. Unrealistic goals- encourage/legitimize unethical behavior
    • 5. Unethical leadership- encourages/tolerates behavior that is ethically suspect
  65. Behaving Ethically
    • 1. Hire/promote people with sense of personal ethics
    • 2. Use ethics officers
    • 3. Place high value on ethical behavior in the culture
    • 4. Enforce strong corp gov processes
    • 5. Ensure leaders articulate and act ethically
    • 6. Act with moral courage- encourage
    • 7. Require that ethics be part of the decision-making process others to do so
  66. Organizational Design
    - the process of deciding how a company should create, use, and combine organizational structure, control systems, and culture to pursue a business model successfully
  67. Implementing Strategy Through Organizational Design
    • 1. Organizational Structure- assigns employees to specific value creation tasks & roles
    • 2. Control System
    • A. Incentives to motivate employees
    • B. Specific feedback on performance
    • 3. Organizational Culture- shared values, norms, beliefs, & attitudes
  68. Types of Strategic Control Systems
    • 1. Personal Control - Managers question/probe to better understand subordinates.
    • Results in potential for greater learning & competency development.
    • 2. Output Control- set appropriate performance goals for each division, department, & employee, then measure actual performance relative to goals.
    • 3. Behavior Control- establish standardization, predictability, & accuracy by creating system of rules to direct actions and/or behaviors of divisions, functions, or individuals.
  69. Implementing Differentiation
    - Design organization structure around the source of distinctive competency, differentiated products, and customer groups.
  70. Product Structure: Wide Product Line
    • * Group product line into product groups
    • * Centralize support value chain functions to lower costs
    • * Divide support functions into product-oriented teams who focus on needs of one product group.
    • * Measure performance of each product group and link rewards to performance of product group
  71. Market Structure (Focuses on the ability to meet needs of distinct and important sets of customers)
    Increase Responsiveness to Customer Groups
    • Increase Responsiveness to Customer Groups
    • * Identify needs of each customer group/market segment and group them accordingly.
    • * Make different managers responsible for developing products for each group of customers.
    • * Market structure brings managers & employees closer to specific groups of customers.
  72. Geographic Structure -
    Geographic regions may become basis for grouping organizational activities when companies expand nationally through internal expansion, horizontal integration, or mergers
  73. Expanding Nationally
    • * More responsive to needs of regional customers
    • * Can achieve lower cost structure and economies of scale
    • * Provides more coordination & control
  74. Matrix Structure
    In fast-changing, high-tech environments, competitive success depends on fast mobilization of company skills and resources to ensure product development and implementation meet customer needs

    • A. Value chain activities grouped by function and by product or project
    • B. Flat & decentralized
    • C. Promotes innovation & speed
    • D. Norms & values based on innovation & product excellence
  75. Restructuring
    • A. Streamlining hierarchy reducing levels
    • B. Downsizing workforce to lower costs
    • C. Reasons to restructure/downsize:

    • - Change in business environment - Too tall & inflexible
    • - Improve competitive advantage - Excess capacity
  76. Reengineering
    • A. Fundamental rethinking/radical redesign of business processes for large improvement
    • B. Focuses on processes not on functions
  77. Managing Corporate Strategy with Multidivisional Structure
    • 1. Division
    • � Self-contained � full set of value-chain functions
    • � May share value-chain functions with other divisions

    • 2. Corporate headquarters staff
    • � Monitor divisional activities
    • � Exercise financial control over each division
    • � Strategic responsibilities
  78. Advantages of a Multidivisional Structure
    • 1. Enhanced corporate financial control
    • � Profitability of divisions is clearly visible
    • � Corporate office is investor channeling funds to high-yield uses
    • 2. Enhanced strategic control
    • � Frees corporate managers from business-level responsibilities
    • � Corporate managers deal with wider strategic issues
    • 3. Profitable long-run growth- Overcomes organizational limit to growth
    • 4. Stronger pursuit of internal efficiency
    • � Can compare one division against another
    • � In better position to identify inefficiencies
  79. Problems in Implementing Multidivisional Structure
    • 1. Establishing divisional-corporate authority relationship
    • 2. Restrictive financial controls lead to short-run focus
    • 3. Transfer pricing
    • 4. Competition for resources
    • 5. Duplication of functional resources
  80. Unrelated Diversification
    • 1. Operates as �portfolio� of independent businesses
    • � Divisions have considerable autonomy
    • � No integration among divisions necessary
    • � Businesses bought/sold as conditions change
    • � Corporate culture meaningless

    • 2. No exchanges or linkages among divisions
    • � Easiest/cheapest strategy to manage
    • � Lowest level of bureaucratic costs3. Controls to evaluate divisional performance easily and accurately
    • � Each division evaluated by output controls, e.g. ROIC
    • � Sophisticated accounting controls
  81. Vertical Integration - requires centralized control helps the sequential flow of resources between divisions
    • 1. Bureaucratic costs are more complex & expensive than unrelated diversification
    • 2. Multidivisional structure provides controls to gain benefits from control of resource transfers
    • 3. Must find a balance between centralized/decentralized control
    • 4. Divisions must have input regarding resource transfer
    • 5. Integration is managed through a combination of corporate & divisional controls
  82. Related Diversification
    • 1. Gains derived from transfer, sharing, or leveraging across divisions
    • 2. Output control is difficult as businesses share resources
    • 3. Integration/control at divisional level required
    • 4. Incentives/rewards for cooperation necessary

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