Strategic Management Final Exam

8/2/2019 Strategic Management Final Exam

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Strategic Management Final Exam

Chapter 1What Is Strategy and the Strategic Management Process?Defining Strategy

y Strategy- theory about how to gain competitive advantageo A good strategy is one that generates such advantages

y Strategies are based on theories that firms have to gain competitive advantagesthese theories arebased on a set of assumptions and hypotheses about the way competition in the industry will likely

evolve and hoe that evolution can be exploited to earn a profit

y It is usually very difficult to predict precisely how competition will evolve and so it is rarely possible toknow for sure that a firm is choosing the right strategy

o This is why a firms strategy is almost always a theory

The Strategic Management Process

y Strategic management process- a sequential set of analyses and choices that can increase the likelihoodthat a firm will choose a good strategy

External analysis

Missionobjectives strategic choiceimplementationcompetitive advantage

Internal analysis

A Firms Mission

y The first step to the strategic management processy Mission- long-term purpose of the firm

o Defines both what a firm aspires to be in the long run and what it wants to avoid in themeantime

o Broad statement of purpose and valueso Often written in the form of mission statements

y Some missions may not affect performanceo Most mission statements incorporate many common elements:

Define the business in which the firm will operate How the firm will compete in those businesses The core values that a firm espouses

y Some missions can improve performanceo Visionary firms- firms whose mission is central to all they do

These types of firms usually have long

-term profitability

y Some missions can hurt firm performanceo Sometimes will be focused only on the personal values and priorities of the founders/top

managers


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Objectives

y Objectives- specific and measurable targets a firm can use to evaluate the extent to which it is realizingits mission

o high-quality objectives are tightly connected to elements of a firms mission and are relativelyeasy to measure and track over time

o low-quality objectives either do not exist or are not connected to elements of a firms mission,are not quantitative, and are difficult to measure or difficult to track over time

External and Internal Analysis

y occur simultaneously during the strategic management processy external analysis- identifies the critical threats and opportunities in the firms competitive environment

o examines how competition in the environment is likely to evolve and what implications thatevolution has for the threats and opportunities a firm is facing

y internal analysis- helps a firm indentify its organizational strengths and weaknesseso also helps a firm understand which of its resources and capabilities are likely to be sources of

competitive advantage and which are less likely to be sources of such advantages

o helps to identify areas within the organization that require improvement and change

Strategic Choice

y after a firm has a mission, objectives, and external and internal analysesit is ready to make its strategicchoices

o strategic choice - theory of how to gain competitive advantagey Strategic choice falls into 2 categories:

o Business-level strategies- actions firms take to gain competitive advantages in a single marketor industry

Cost-leadership and product differentiationo Corporate level strategies- actions firms take to gain competitive advantages by operating in

multiple markets or industries simultaneously

Vertical integration, diversification, strategic alliance, merger & acquisitiony The objective when making a strategic choice is to choose a strategy that:

o Supports the firms missiono Is consistent with a firms objectiveso Exploits opportunities in a firms environment with a firms strengthso Neutralizes threats in a firms environment while avoiding a firms weaknesses

Strategy Implementation

yStrategy implementation

-occurs when a firm adopts organizational policies and practices that areconsistent with its strategy

y There are 3 specific organizational policies and practices in implementing strategies:o A firms formal organizational structureo Its formal and informal management control systemso Employee compensation policies


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What is Competitive Advantage?

y Competitive advantage- when a firm is able to create more economic value than rival firmso emporary competitive advantage- lasts for a very short timeo Sustained competitive advantage- lasts for a much longer time

y Competitive parity- companies that create the same economic value as their rivalsy

Competitive disadvantage-

companies that create less economic value than their rivalso emporary- lasts a short timeo Sustained- lasts a long time

Measuring Competitive Advantage

y Not always easy to directly measurey Two approaches for measuring competitive advantage:

o Accounting performance- a measure of a firms competitive advantage calculated by usinginformation from its published profit and loss and balance sheet statements

compare with competitors in an industry this makes it possible to compare one firm to another

o Economic measures of competitive advantage- compare a firms level of return to its cost ofcapital instead of to the average level of return in the industry

Economic value- the difference between the perceived benefits gained by a customerthat purchases a firms products/services and the full economic cost of these

products/services

o Thus, the size of a firms competitive advantage is the difference between the economic value afirm is able to create and the economic value its rivals are able to create

above normal economic profita firm that is earning above its cost of capital normal economic profita firm that is earning its cost of capital below economic profita firm that is earning below its cost of capital

Emergent versus Intended Strategies

y emergent strategies- theories of how to gain competitive advantage in an industry that emerge overtime or that have been radically reshaped once they are initially implemented

y intended strategy- a strategy a firm though it was going to pursue a rational strategy

Chapter 2Evaluating a Firms External EnvironmentThe Structure-Conduct-Performance Model of Firm Performance

y Structure-conduct-performance (SCP)- theory which suggests that industry structure determines afirms conduct which in turn determines its performance

Porters 5 Forces Model

y Developed from the SCP Modely Entryhigh barriers to entry make the industry more attractive because there is a potential for greater

than normal returns

y Rivalryhigh rivalry leads to lower profitsy Buyersfew buyers (buyer power) lead to lower profitsy Suppliersfew suppliers (supplier power) lead to lower profitsy Substitutescan meet the customers same needs in different ways


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Industry Structure and Environmental Opportunities

y Fragmented- industries in which a large number of small or medium-sized firms operate and no smallset of firms has dominant market share or creates dominant technologies

o Many small competitors, no one dominant firmo Opportunity: consolidation strategy that reduces the number of firms in an industry by

exploiting economies of scale

y Emerging- newly created or newly re-created industries formed by technological innovations, change indemand, of the emergence of new customer needs

o No standard put in place, just breaking outo Opportunity: first-mover advantages- advantages that come to firms that make important

strategic and technological decisions early in the development of an industry

y Mature- an industry in which, over time, ways of doing business have become widely understood,technologies have diffused through competitors, and the rate of innovation in new products and

technologies drops

o Profits are no longer really growingo Opportunity: product refinement

emphasis on service

process innovation- a firms effort to refine and improve its current processesy Declining- an industry that has experiences an absolute decline in unit sales over a sustained period of

time

o Declining industry leaders are bailing out (exiting)o Opportunity: leadership- the firm with the largest market share in an industry

Niche- when a firm reduced its scope of operations and focuses on narrow

segments of a declining industry

Harvest- when firms engage in a long, systematic, phased withdrawal from a

declining industry, extracting as much value as possible

Divestment- selling a business with which a firm had been operating

Chapter 3Evaluating a Firms Internal CapabilitiesThe Resources-Based View of the Firm

y Resource-Based View (RBV)- a model of firm performance that focuses on the resources andcapabilities controlled by a firm as sources of competitive advantage

y answers the questions: why do some firms achieve better economic performance than others?o Resources- the tangible and intangible assets that a firm controls, which it can use to conceive

of and implement its strategies

o Capabilities- a subset of a firms resources and are defined as tangible and intangible assets thatenable a firm to take full advantage of other resources it controls (firm as a whole, not of an

individualat the collective firm level) Ex: marketing skills, teamwork, cooperation


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Critical Assumptions of the Resource-Based View

y Two critical assumptions:o Resource heterogeneity- different firms may possess different bundles of resources and

capabilities, even if they are competing in the same industry

implies that for a given business activity, some firms may be more skilled inaccomplishing this activity than others

not all resources/capabilities are alikeo resource immobility- some resource and capability differences among firms may be long lasting

because it may be very costly for firms without certain resources and capabilities to develop or

acquire them

o taken together these two assumptions make it possible to explain why some firms canoutperform other firms, even if these firms are all competing in the same industry

The Question ofOrganization

y a firms potential for competitive advantage depends on the value, rarity, and imitability of its resourcesand capabilitiesto fully realize its potential, a firm must be organized to exploit its resources andcapabilities

y whether you are aligning your firms structure (formal and informal) with resources this is importantfor sustained competitive advantage

y formal reporting structure- a description of who in the organization reports to whomy management control systems- include a range of formal and informal mechanisms to ensure that

managers are behaving in ways consistent with a firms strategies

o formal management controls- include a firms budgeting and reporting activities that keeppeople higher up in a firms organizational chart informed about the actions taken by people

lower down in a firms organizational chart

o informal management controls- include a firms culture and the willingness of employees tomonitor each others behavior

y compensation policies- the ways that firms pay employeescreate incentives for employees to behavein certain ways

Chapter 4Cost LeadershipWhat is Cost Leadership?

y Cost leadership- focuses on gaining competitive advantages by reducing its costs to below those of all itscompetitors


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Six Important sources of cost advantages for firms:

y Size differences and economies of scale- said to exist when the increase in firm size (measures in termsof volume of production) is associated with lower cost (measured in terms of average cost per unit of

production)

y Size difference and diseconomies of scale- if the volume size of production rises beyond some optimalpoint, this can actually lead to an increase in per-unit costs

o If other firms in an industry have grown beyond the optimal firm size, a smaller firm (with a levelof production closer to the optimal) may obtain a cost advantage even when all firms in the

industry are producing very similar products

o The advantage is for those who do not have diseconomies of scaley Experience differences and learning-curve economies- firms with the greatest experience in

manufacturing a product/service will have the lowest cost in an industry and thus will have a cost-based

advantagelink between cumulative volumes of production and cost

o Doing something longer than otherslearn how to do it bettery Differential low-cost access to productive inputs

o Productive inputs- any supplies used by a firm in conducting its business activitieso A firm that has a differential low cost access to these factors is likely to have a lower economic

cost compared to rivals

y Technological advantages independent of scaley Policy choices- choices that have an impact on the relative cost position of the firm

Chapter 5Product DifferentiationWhat is Product Differentiation?

y Product differentiation- a business strategy whereby firms attempt to gain competitive advantage byincreasing the perceived value of their products or services relative to the perceived value of other

firms products or services

Ways Firms can Differentiate their Products:

y Directly related to the attributes of the product or service:o Featureso Complexityo Timing of product introductiono Location

y On relationships between itself and its customers:o Customizationo Marketingo Reputation

y Linkages within or between firms:o Linkages among functions within a firmo Linkages with other firmso Product mixo Distribution channelso Service and support


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Chapter 6Vertical IntegrationWhat is Corporate Level Strategy?

y Corporate strategy is a firms theory of how to gain competitive advantage by operating in severalbusinesses simultaneously

Logic of Corporate Level Strategyy Corporate level strategy should create value:

o such that the value of the corporate whole increaseso such that businesses forming the corporate whole are worth more than they would be under

independent ownership

o that equity holders cannot create through portfolio investingy a corporate level strategy should create synergies that are not available in equity marketsy vertical integration = value chain economies

What is Vertical Integration?

y A value chain is a set of activities that must be accomplished to being a product of service from rawmaterials to the point that it can be sold to the final consumer

y Vertical integration the number of steps in the value chain that a firm accomplishes within itsboundaries

o Backward vertical integration- firm incorporates more stages of the value chain within itsboundaries and those stages bring it closer to the beginning of the value chain, that it, closer to

gaining access to raw materials

Ex: when computer companies develop their own software they are engaging in verticalintegration because these actions are close to the beginning of the value chain

o Forward vertical integration- when a firm incorporates more stages of the value chain within itsboundaries and those stages bring it closer to the end of the value chain, that is, closer to

interacting directly with final customers

Ex: when companies staff and operate their own call centers in the US because theseactivities bring them closer to the ultimate customer

Value Chain Economies

y The Logic ofValue Chain Economieso the focal firm is able to create synergy with the other firm(s)

cost reduction revenue enhancement

y the focal firm is able to capture above normal economic returns (avoid perfect competition)Value ofVertical Integration

y Market vs. Integrated Economic Exchange markets and integrated hierarchies are forms in which:o economic exchange can take placeo economic exchange should be conducted in the form that maximizes value for the focal firmo thus, firms assess which form is likely to generate more value

y Integration makes sense when the focal firm can capture more value than a market exchange provides


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Value ofVertical Integration

y Three value considerations:o Leverage capabilities- enabling the firm to exploit the VRIO resources and capabilities

This approach has 2 broad implications:y Suggests that firms should vertically integrate into those business activities

where they possess valuable, rare, and costly-to-imitate resources and

capabilitiesthis way, the firm can appropriate at least some of the profits that

using these capabilities to exploit environmental opportunities will create

y Suggests that firms should not vertically integrate into business activities wherethey do not possess the resources necessary to gain competitive advantages

o Thus, if a firm possesses valuable, rare, and costly-to-imitate resourcesin a business activity, it should vertically integrate into that activity

firm capabilities may be sources of competitive advantage in other businesses if not, then dont integrate exchange

o manage opportunism- reducing the threat of opportunism vertical integration can reduce the threat ofopportunism- exists when a firm is unfairly

exploited in an exchange

y ex: when a party to an exchange expects high level of quality in a product it ispurchasing, only to discover it has received a lower level of quality than it

expected

opportunism may be checked by internalizing (TSI)bring the exchange within theboundary of the firm

y managers can directly monitor and control this exchange that is brought withinthe boundary of a firm brings a firm closer to its ultimate suppliers (backward),

if the exchange that is brought within the boundary of a firm brings a firm closer

to its ultimate customer (forward)

internalizing must be less costly than opportunism transaction-specific investment- any investment in an exchange that has significantly

more value in the current exchange than it does in alternative exchangesy ex: the oil and the pipeline companythe pipeline company has more to lose

o exploit flexibility- enabling the firm to retain flexibility flexibility- refers to how costly it is for a firm to alter its strategic and organizational

decisions

y flexibility is high when the cost of changing strategic choices is lowy flexibility is low when the cost of changing strategic choices is highy vertically integrating is less flexible than not vertically integrating because once

a firm has integrated it has committed its organizational structure, management

controls, and its compensation policies to a particular vertically integrated way

of doing business

internalizing is usually less flexible flexibility is prized when uncertainty is highy flexibility is not always valuabley it is only valuable when the decision-making setting a firm is facing is uncertainy a decision making setting is uncertain when the future value of an exchange

cannot be known when investments in that exchange are being made

o in these situationsless vertical integration is better than more verticalintegration


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Rarity ofVertical Integration

y Integration vs. Non-Integrationo a firms integration strategy may be rare because the firm integrates or because the firm does

not integrate

o thus, the question of rareness does not depend on the number of forms observedo a firms integration strategy is rare or common with respect to the value created by the strategy

Example: Toyotas Choice Not to Integrate SuppliersImitability ofVertical Integration

y Form vs. Functiono the form,per se, is usually not costly to imitateo the value-producing function of integration may be costly to imitate, if:

the integrated firm possesses resource combinations that are the result of:y historical uniquenessy causal ambiguityy social complexity

o small numbers prevent further integrationo capital requirements are prohibitive

Imitability ofVertical Integration

y Modes of Entryo acquisition and internal development are alternative modes of entry into vertical integration

thus, one firm may acquire a supplier while a competitor could imitate that strategythrough internal development

in both cases, the boundaries of the firm would encompass the new businesso strategic alliances can be viewed as a substitute for vertical integrationwithout the costs of

ownership

Organizing Vertical Integrationsy the organizational structure that is used to implement cost leadership and product differentiation (the

functional or U-form structure) is also used to implement a vertical integration strategy

o decisions about which activities to vertically integrate into determine the range andresponsibilities of the marketing function within a functionally organized firm

o vertical integration decisions made by the firm determine the structure of a functionallyorganized firm

Management Controls

y What needs to be controlled in a vertically integrated firm?y managers efforts to achieve the desired value chain economies

o cooperation and competition among and between functionso the integration of new businesses into the existing businesso time horizon of managers


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Organizing Vertical Integrations

y Management Controlso Budgets

separating strategic and operational budgets strategic: inputs and outputs operational: outputs

o Board Committees provide oversight and direction to managers

y operations committees- typically meets monthly and usually consists of the CEOand each of the heads of the functional areas included in the firm

y executive committees- typically consists of a CEO and 2 or 3 functional seniormanagers

help ensure that strategic direction is maintainedy These mechanisms focus management attention on achieving value chain economiesOrganizing Vertical Integrations

y Compensation challenges:o Opportunism bases vertical integration and compensation policy:

This suggests that employees who make firm-specific investments in their jobs will oftenbe able to create more value for a firm than employees who do not make firm-specific

investments

y These are a type of transaction specific investmenty Firm specific investments- investments made by employees that have more

value in a particular firm than in alternative firms

Needs to create incentives for employees whose firm-specific investments could creategreat value to actually make those investments

Opportunism:y Salaryy Cash bonus: Individualy Stock grants: Individual

o Capabilities and Compensation Also acknowledge the importance of firm-specific investments in creating value for a

firm

Capabilities explanations tend to focus on firm-specific investments made by groups ofemployees

y Socially complex in natureteamwork, cooperation, culture have evolvedwithin a firmcan all increase the value of a firm significantly and are all costly-

to imitate

Leveraging Capabilities:y Cash bonus: Groupy Stock Grants: Group

o Flexibility and Compensation Compensation must have known downside risks and significant upside potential Exploiting Flexibility:

y Stock options: individualy Stock options: group


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Vertical Integration Options When Perusing International Market Opportunities

y Not vertically integrated- importing/exportingy Somewhat vertically integrated- licensing, strategic alliances, joint venturesy Vertically integrated- foreign direct investment

Summary:y Vertical integration:

o makes sense when value chain economies can be created and capturedo may allow a firm to leverage capabilitieso may be a response to the threat of opportunism and uncertaintyo as a form of exchangeper se, is not rare nor costly to imitateo is an important consideration in the decision to expand internationally (range of possibilities)o makes sense when done for the right reasons, under the right circumstanceso can be a costly mistake if done wrongo Ownership is costlyintegrates only when the benefits outweigh the costs of integration!

Chapter 7Corporate DiversificationWhat is Corporate Diversification?

y Corporate diversification- a firm implements this strategy when it operates in multiple industries ormarkets simultaneously

o Product diversification strategy- when a firm operates in multiple industries simultaneouslyo Geographic market diversificationwhen a firm operates in multiple geographic markets

simultaneously

y Product-market diversificationwhen a firm implements both of these types of diversificationsimultaneously

Logic of Corporate Level Strategy

y Corporate level strategy should create value:o such that businesses forming the corporate whole are worth more than they would be under


o that equity holders cannot create through portfolio investingy Therefore:

o a corporate level strategy must create synergieso economies of scope diversification

Integration and Diversification

y IntegrationRaw materialsSupplierfocal firmdistributioncustomer

Backward Forward

y DiversificationOther businessescurrent businessesother businesses

No links unrelated related many links


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Types of Corporate Diversification

y At a general level:o Product diversificationoperating in multiple industrieso Geographic market diversificationoperating in multiple geographic marketso Product-market diversificationoperating in multiple industries in multiple geographic markets

Types of Corporate Diversification

y At a more specific level:o Limited diversificationwhen all or most of its business activities fall within a single industry

and geographic market

single business: > 95% of sales in single business dominant business: 70% to 95% in single business

o related diversificationwhen less than 70% of a firms revenue comes from a single productmarket and its multiple lines of business are linked

related-constrained: all businesses related on most dimensions70% of firm revenuescomes from a single business, and different businesses share numerous links and

common attributes

related-linked: some businesses related on some dimensionsless than 70% of a firmsrevenues comes from a single business, and different businesses share only a few links

and common attributes or different links and common attributes

o unrelated diversification businesses are not related: less than 70% of firm revenue comes from a single

business, and there are few, if any, links or common attributes among business

Product and Geographic Diversification

y Possibilities:o single-business in one geographic areao single-business in multiple geographic areaso related-constrained in one or multiple geographic areas related-linked in one or multiplegeographic areaso unrelated in one or multiple geographic areas

y Note:o relatedness usually refers to productso seemingly unrelated products may be related on other dimensions

CompetitiveAdvantage

y If a diversification strategy meets the VRIO criteria it may create competitive advantageValue of Diversification

yEconomies of scope

-

exist in a firm when the value of the products or services it sells increases as afunction of the number of businesses that firm operates in

o the term scope refers to the range of businesses in which diversified firms operate ino for this reason, only diversified firms can exploit economies of scopeo economies of scope create value to the extent that they increase a firms revenues or decrease

its costs compared to what would be the case if these economies were not exploited


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Two criteria for Value of Diversification:

y There must be some economy of scopey The focal firm must have a cost advantage over outside equity holders in exploiting any economies of

scope

Economies of Scope

y Operationalo Sharing activitiesexploiting efficiencies of sharing business activities

Ex: Frito-Lays Tuckingo Spreading Core Competenciesexploiting competencies in other businesses

Competency must be strategically relevant Ex: orbits

y Financialo Internal capital market

premise: insiders can allocate capital across divisions more efficiently than the externalcapital market

works only if managers have better information may protect proprietary information may suffer from escalating commitment Ex: Hanson Trust, PLC

o Risk Reduction counter cyclical businesses may provide decreased overall risk However individual investors can usually do this more efficiently than a firm Ex: snow skis and water skis

o Tax advantages transfer pricing policy allows profits in one division to be offset by losses in another

division

this is especially true internationally can be used to smooth income Ex: Ireland

y Anticompetitiveo Multipoint competition

Mutual forbearance a firm chooses not to compete aggressively in one market to avoid competition in

another market

ex: American airlines and delta: Dallas and Atlantao Market Power

Using profits from one business to compete in another business Using buying power in one business to obtain advantage in another business

yManagerialism

o Maximizing management compensation an economy of scope that accrues to managers at the expense of equity holders managers of larger firms receive more compensation (larger scope = more

compensation)

therefore, managers have an incentive to acquire other firms and become ever larger even though the incentive is there, it is difficult to know if managerialism is the reason

for an acquisition


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Equity Holders and Economies of Scope

y Most economies of scope cannot be captured by equity holderso risk reduction can be captured by equity holders

y Managers should consider whether corporate diversification will generate economies of scope thatequity holders can capture

o if a corporate diversification move is unlikely to generate valuable economies of scope,managers should avoid it

Rareness of Diversification

y Diversificationper se is not rarey Underlying economies of scope maybe rare

o relationships that allow an economy of scope to be exploited may be rareo an economy of scope may be rare because it is naturally or economically limited

a soft drink bottler buys the only source of spring water available a hotel in a resort town creates a large water park, there are only enough customers to

support one park

Imitability of Diversification

y Duplication of economies of scopeo Less costly-to-duplicate

Employee compensation Tax advantages Risk reduction Shared activities may be costly depending on relationships

o Costly-to-duplicate Core competencies Internal capital allocation Multipoint competition Exploiting market power

Substitution for Diversification

y Internal developmento Start a new business under the corporate wholeo A firm may grow and develop each of its businesses separatelyo Avoids potential cross-firm integration issues

y Strategic allianceso

Find a partner with the desired complementary assetso Less costly than acquiring a firm


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International Diversification

y Three types of international risk:o Cultural/popular

product may not be accepted simply because of your country or originy Ex: resistance to McDonalds by Frances older generation

o Financial Currency exchange General economic conditions

y Ex: Asian economic crisis of the 1990so Political

Nationalization Quotas Tariffs Regulations

y Ex: Bolivia nationalized its petroleum industry in the 70sInternational Diversification

y Managing international riskso Cultural/popular

Avoidance Neutral branding (disguising country of origin)

y Ex:Haagen-Dazso Financial

Currency hedging Geographic diversification

y Spreading risk across several countrieso Political

Find a local partner Political neutrality Negotiation with governments

y Foreign governments often have an interest in direct investmenty Ex: case international in brazil

Quantifying Political Risks

y Country attributes summarize most of the important determinants of political irk for firms pursuinginternational strategies

y Firms can apply the criteria by evaluating the political and economic conditions in a country and byadding up the scores associated with the conditions

y Countries in western Europe and North America are least riskyo The least risky country in the entire world to do business with isLuxembourgfollowed bySwitzerland, Norway, Denmark, US, and Sweden

y Countries currently experiencing civil unrest and revolution are among the most riskyo The most risk country in the entire world to do business with is North Koreafollowed by

Afghanistan, Iraq, Cuba, Marshall Islands, and Zaire

y Countries in Asia range from very low risk to very high risky Countries in Africa tend to be relatively risky


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Summary

y Corporate Strategy: In what businesses should the firm operate?o an understanding of diversification helps managers answer that question

y Two criteria:o Economies of scope must existo Must create value that outside equity holders cannot create on their own

y Economies of scopeo A case of synergycombined activities generate greater value than independent activitieso may generate competitive advantage if they meet the VRIO criteria

y Firms should pursue diversification only if careful analysis shows that competitive advantage is likely!Strategy in Depth

y Diversifying to reduce a risk generally doesnt directly benefit outside equity investorsit can indirectlybenefit outside equity investors through its impact on the willingness of other stakeholders in a firm to

make firm-specific investments

o Stakeholders- groups and individuals who have an interest in how a firm performso Firm-specific investments- the value of the investments made in a particular firm are much

greater than the value of those same investments would be in other firms

o Firm-specific human capital- include understanding a particular firms culture, policies, andprocedures

y Supplies and customers can make these types of investmentso Supplierswhen they customize their products to the specific requirements of a particular

customer

o Customerscustomize their operations to fully utilize the products of a particular firmy Firm-specific investments are risky, but they are extremely important to a firm if it is going to be able to

generate economic profit

y Firm-specific investments are more likely to be valuable, rare, and costly-to imitate compared to non-firm specific investments

y Because of the riskiness involves, generally only be willing to make these investments if some of theriskiness associated with making them can be reduced

o It is usually very costly to diversify the risks that are associated with making these investmentson their ownstakeholders prefer that the firms managers help manage the risk for them

o Can do this by diversifying the portfolio of the businesses in which the firm operateso Equity holders have an indirect incentive to encourage a firm to pursue a diversification strategy

y Simply puta firms diversification strategy can be thought of as compensation for the firm-specificinvestments that a firms employees, suppliers, and customers make in a firm

o Outside equity holders have an incentive to encourage this compensation in return for access tosome of the economic profits that these firm0specific investments can generate

Chapter 8Organizing to Implement Corporate DiversificationImplementation Issues

y How information flowsy Where and by whom are decision madey How to influence the behavior of peopley How can the interests of employees be aligned with the interests of the firm?


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Organizational Structure and Implementing Corporate Diversification

y Multidivisional (M-Form)- the most common organizational structure for implementing a corporatediversification strategy

o Each business that the firm engages in is managed through a divisiono Divisions- strategic business units (SBU)o The M-form is designed to create checks and balances for managers that increase the

probability that a diversified firm will be managed in ways consistent with the interests of the

equity holders

board of directors

Senior executive

Financelegalaccounting|R &Dsaleshuman resources

Division general manager ADivision general manager BDivision general manager C

Division A Division B Division C

Roles and Responsibilities of Major Components of the M-Form Structure

y Board of directors- monitor decision making in a firm to ensure that it is consistent with the interests ofoutside equity holders

y Institutional investors- monitor decision-making to ensure that it is consistent with the interests ofmajor institutional equity investors

y Senior executives- formulate corporate strategies consistent with equity holders interests to assurestrategy implementation

o Decide the businesses in which the firm will operateo Decide how the firm should compete in those businesseso Specify the economies of scope around which the diversified firm will operateo Encourage cooperation across divisions to exploit economies of scopeo Evaluate performance of divisionso Allocate capital across divisions

y Corporate staff- provides information to the senior executive about internal and external environmentsfor strategy formulation and implementation

y Division general managers- formulate divisional strategies consistent with corporate strategies andassure strategy implementation

o Decide how the division will compete in its businesso Coordinate the decision and actions of functional managers reporting to the division general

manager to implement divisional strategy

o Compete for corporate capital allocationso Cooperate with other divisions to exploit corporate economies of scope

y Shared activity managers- support the operations of multiple divisionsT

heN

eed forO

rganizational Structurey Information processing requirements

o as organizations become larger and more complex, information processing requirements exceedindividual capacity

bounded rationality satisficinginstead of choosing the actual best mathematical outcome, chose what is

good enoughthis occurs because if information overload

o organizational structure divides information processing into manageable blocks (span of control)


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The Agency Relationship

y A trade offo M-Form Structureo Divides information processing requirements into manageable blocksdivides owners from

managers

o Interests of owners and manages may divergeThe Agency Relationship

y Managing agencyo Principals:

Individual shareholders Institutional shareholders Can have a dual role

o Monitors: Board of directors

o Agents: Senior executive Corporate staff Division general managers Shared activity managers

The Office of the President

o Chairman of the board (monitoring)o Chief Executive Office (strategy formulation)o ChiefOperating Officer (strategy implementation)

y One person:o ChairmanCEOCOO

y Two people:o Chairmano CEOCOO

Oro ChairmanCEOo COO

y Three people:o Chairmano CEOo COO

The Office of the President

yInformation Filtering

o information about the divisions businesses is filtered as it rises to the senior executive the senior executive can manage the information flow

o information flow should not exceed the bounded rationality of managers at any level in theorganization

o information should flow should be matched with decision-making authority


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Management Controls

y Evaluating divisional performance- because divisions are profit-and-loss centers, evaluating divisionalperformance should be straightforwarddivisions that are very profitable should be evaluated more

positively than divisions that are less profitable

o Measurement Accounting :

y Diversified firms use three standards of comparison when evaluating theperformance of a division:

y A hurdle rate that is common across all the different business units in a firmy A divisions budgeted level of performancey The average level of profitability of firms in a divisions industry

Economic:y Economic value added (EVA)calculated by subtracting the cost of capital

employed in a division from that divisions earnings

y EVA = adjusted acct earnings (WACC X total capital employed by a division)o Economies of Scope and the Ambiguity of Divisional Performance

It is not possible to unambiguously evaluate the performance of individual divisions in afirm

The fact that there are economies of scope in a diversified firm means that all of thebusinesses in a firm operates in are more valuable bundled together than they would be

if kept separate from one another

y Solutions:o Force businesses in a diversified firm to operate independently of each

otherunable to recognize the economies of scope that were the

justification of diversification in the first place

o The quantitative evaluation of divisional performance (accounting oreconomic) must be supplemented by the experience and judgment of

senior executives in a diversified firm

o Allocating costs and revenuesy Allocating capitala potentially valuable economy of scope, for internal capital allocation to be a

justification for diversification, the information made available to senior executives allocating capital

must be superior in amount and quality to the information available to external sources of capital in the

external capital market

o Both the quality and the quantity for the information available in an internal capital marketdepend on the organization of the diversified firm

o Managers want to look goodgeneral managers have a strong incentive to overstate theirdivisions prospects and understate its problems

o Zero-based budgeting- corporate execs create a list of all capital allocation requests fromdivisions in a firm and rank them in order of importance and fund all the projects a firm can

afford


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y Transferring intermediate productso The existence of economies of scope across multiple divisions in a diversified firm often means

that products or services produced in one division are used as inputs as products/services in a

second division

Intermediate products/services- can be transferred between and of the units in an M-form organization

This transfer is most important and problematic when it occurs between profit centerdivisions

o The transfer of intermediate products/services is managed through a transfer-pricing systemone division sells its product/service to a second division for a transfer pricethis price is set by

the firms corporate management to accomplish corporate objectives

o Setting pricesy Exchange autonomy

o buying and selling division general managers are free to negotiatetransfer price without corporate involvement

o transfer price is set equal to the selling divisions price to externalcustomers

y Mandated Full Costo Transfer price is set equal to the selling divisions actual cost of

production

o Transfer price is set equal to the selling divisions standard cost (the costof production if the selling division were operating at max efficiency)

y Mandated Market-basedo Transfer price is set equal to the market price in the selling divisions

market

y Dual pricingo Transfer price for the buying division is set equal to the selling divisions

actual or standard costs

o Transfer price for the selling division is set equal to the price to externalcustomers or to the market price in the selling divisions market

Compensation Policies

y Compensation committeeo In theory:

represents interests of owners in setting compensation of top executive team sets compensation based on performance or market

o in practice: sometimes appear to be beholden to executives compensation decisions often bear little relationship to performance

y Aligning incentiveso Research shows:

For the CEO and senior managersstock options and stock grants are tied toperformance

Cash bonus and salary are not tied to performanceo Theory predicts:

stock options and stock grants have a long time horizon cash bonus and salary have a short time horizon


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Refocusing

y Corporate level strategy may call for exiting a businesso a conglomeration discount may exist

the corporation may lack necessary skills expected economies of scope may not exist

o the corporation may need funds for core activitiesInternational Implementation

y Global strategyo Centralized hubstrategic and operational decisions are retained at corporate headquarters

Facilitates global integrationsame product everywhere you go Exploits a global product Exploits scale economies

y Multi-domestic strategyo Decentralized federation- strategic and operational decisions are delegated to divisions or

country companies

Highly autonomous units Very responsive locally

o Coordination federation- operational decisions are delegated to divisions or country companies;strategic decisions are retained at corporate headquarters

Less autonomous Some shared activities between divisions

y Transnational structure- strategic and operational decisions are delegated to those operational entitiesthat maximize responsiveness to local conditions and international integration

o Facilitates both local responsiveness and global integrationo Country managers are responsible for exploiting economies of scopeo CorporateHQ constantly scans the globe looking for best practices

Summaryy Successful implementation is a matter of:

o appropriately breaking information processing into manageable blockso aligning the interests of owners and managers

y these can be accomplished through:o organizational structureo management controlso compensation policies

Strategy in Depth

y agency relationship- whenever one party to an exchange has delegated decision making authority to asecond party

o principal- the party delegating the decision making authority (a firms outside equity holders)o agent- the party to whom the authority is delegated to (firms managers)

y agency problems- when parties in an agency relationship differ in their decision-making objectiveso managerial perquisitesinvestments that to not ass economic value to the firm but do directly

benefit managers

o managerial risk aversionmanagers are not indifferent to the riskiness of investmentopportunities


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Strategy in the Emerging Enterprise

y corporate spin-off- exists when a large, typically diversified firm divests itself of a business in which ithas historically been operating and the divested business operates as an independent entity

o a way that new firms can enter into the economyy initial public offering (IPO)- when the stock of a privately held firm, or a division of a corporation, is first

sold to the general public

y three reasons why larger diversified firms might spin off businesses they own:o the efficient management of these businesses may require very specific skills that are not

available in a diversified firm

o anticipated economies of scope between a business and the rest of the diversified firm may turnout to not be available

o in order to fund other of the firms businessesy firms are most likely to spin off businesses that are:

o unrelated to a firms corporate diversification strategyo Performing poorly compared to other businesses in the firmo Relatively small

y The greater the level of merger and acquisition activity, the more likely that a business owned by acorporation in such an industry will be spun offan indicator of the number of people interested in

purchasing the spun off business

Chapter 9Strategic AlliancesWhat is a StrategicAlliance?

y Strategic Alliance-Any cooperative effort between two or more independent organizations to develop,manufacture, or sell products or services

o Three types ofAlliances Non-equity alliance- cooperation between firms is managed directly through contracts,

without cross-equity holdings or an independent firm being created

y Contractso Licensing- one firm allows others to use its brand name to sell productso Supply- one firm agrees to supply to otherso distribution agreements- one firm agrees to distribute the products of

others

Equity alliance- cooperative contracts are supplemented by equity investments by onepartner in the other partnersometimes these investments are reciprocated

y Cross equity holdingsy Partners own stakes in each other

Joint venture- cooperating firms form an independent firm in which they invest. Profitsfrom this independent firm compensate partners for this investment

y Joint equity holdingsy Independent firm is created and owned by the partners


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Motivation for Alliances

y Create economic value by:o accessing complementary resources and capabilitieso leveraging existing resources and capabilities

y An alliance is an organizational form of exchange that:o should produce a gain from trade due to some comparative or absolute advantage

y Implication: Choose partners that are better at something than you are (complementary resources)How Strategic Alliances Create Value

y Improve current operations:o Exploiting economies of scale

partner brings increased market share and/or manufacturing capacityo learning from partners

a partner brings technology and/or market knowledgeo risk and cost sharing

a partner bears a portion of the risk and/or cost of the alliancey Shaping the competitive environment

o Facilitating technology standards partners may agree on a standard and avoid a market battle for the standard network industries- industries where single technical standards and increasing returns

to scale tend to dominate, competition in these industries tends to focus on which of

several competing standards will be chosen

y increasing returns to scale- in network industries, the value of a product/serviceincreases as the number of people using it increases

o facilitating tacit collusion partners may communicate within an alliance in subtle, legal ways whereas the same

communication between competitors outside an alliance would be illegal

y Facilitating entry and exito Low-cost entry into new industries

a partner provides instant access and legitimacyo Low-cost exit from industries

a partner is an informed buyero Managing uncertainty

alliances may serve as real options- option that a firm buys under uncertain conditionsto retain the ability to move quickly into a market if valuable opps present themselves

o Low-cost entry into new geographic markets partners provide local market knowledge, access, and legitimacy with governments and

customers

Challenges toV

alue Creation andA

llocationy Incentives to Misappropriate Value (Cheat)

o An alliance is an exchange context in which: partner inputs may be difficult to monitor actual value creation may be difficult to monitor

o value appropriation (allocating the value) may be: difficult to monitor subject to power dynamics


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Three Forms of Misappropriating Value

y Holdupexploiting the transaction-specific investment of partnerso When one firm makes more transaction-specific investments in a strategic alliance than partner

firms make

o Transaction specific investmentwhenever an investments value in its first-best use (within thealliance) is much greater than its value in its second-best use (outside of the alliance)

y Moral hazardproviding inputs of lesser value than promisedo Partners in an alliance may possess high-quality resources and capabilities of significant value in

an alliance, but fail to make those resources and capabilities available to alliance partners

y Adverse selectionmisrepresenting the value of inputso advertise something that you do not actually haveo Exists when an alliance partner promises to bring to an alliance certain resources that it either

does not control or cannot acquire

Sustained Competitive Advantage

y Are strategic alliances rare?o As a form of organizing economic exchange,NO!

y However, the sources of value creation within alliances maybe rarey The strategic alliances arent rare, but the value they create may be considered rare

o firms may form a combination of complementary resources within an alliance that is rareo the stock of such complementary resources may be limited so that first movers have a rare

combination

y Are strategic alliances costly to imitate?o As a form of organizing economic exchange,NO!

the organizational formper se is easily duplicatedy However, the resource combinations that create value in alliances may be very costly, if not impossible,

to imitate if:

o the value creating combination depends on social complexity (trust), causal ambiguity, and/orhistorical uniqueness

Substitutes for Strategic Alliances

y Going it alone- when firms attempt to develop all of the resource and capabilities they need to exploitmarket opportunities and neutralize market threats by themselves

o sometimes can create the same, or more, value than using alliancesy alliances will be preferred over going it alone when:

o the level of transaction-specific investment required to complete an exchange is moderateo an exchange partner possesses valuable, rare, and costly-to-imitate resources and capabilitieso there Is great uncertainty about the future value of an exchange

y alliances will be preferred over acquisitions when:o there are legal constraints on acquisitionso acquisitions limit a firms flexibility under conditions of high uncertaintyo there is substantial unwanted organizational baggage in an acquired firmo the value of a firms resources and capabilities depends on its independence


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Organizing Strategic Alliances

y Governance responses to the challenges of value creation and allocationy Formal/codified

o Explicit Contracts & Legal Sanctions creates mutual understanding imposes costs for cheating conflict resolution

o equity investments aligns interests of partners through ownership in each other indirect effect

o joint ventures aligns interests of partners through ownership of independent firm direct effect

y informalo firm reputations

the shadow of the future constrains cheatingo trust

may allow partners to exploit opportunities that would be infeasible with othermechanisms

y These responses are not mutually exclusive:o contracts may be used with equity investments and joint ventures along with firmo reputation and trust reputation and trust come into play in every type of allianceo Reputation and trust may be sources of competitive advantage because they are costly to

imitate

International Expansion

y Alliances may be attractive because:o Local market knowledge is usually criticalo governments may require a local partnero international expansion may be:

fraught with uncertainty high risk expensive

o alliance investment may be more easily reversed than internal development or acquisitionSummary:

y Successful all iance managers will:o create alliances that will produce gains from tradecomplementary resourceso identify the sources of value creationo

assess the likelihood of challenges to value creation and allocationo adopt appropriate governance responses to the challenges to value creation and allocation

y Alliances may generate competitive advantage if:o combinations of complementary resources meet the VRIO criteriao governance responses meet the VRIO criteria

y The Big Challenge of Strategic Alliances:o Maximizing gains from trade while minimizing the threat of cheating


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Strategy in Depth

y Learning race- exists in a strategic alliance when both parties to that alliance seek to learn from eachother, but when the rate at which these two firms learn varies

o the first firm to learn what it wants to learn from an alliance has the option to begin to underinvest in (or even withdraw) from the alliance

o able to prevent the slow learning firm from learning all it wanted to from the allianceo if competitorswinning a learning race can create a sustained competitive advantage

y firms may vary in learning rates because:o may be looking at different thingso may differ in terms of their ability to learnabsorptive capacityo firms can engage in activities to try to slow the rate of learning of their alliance partners

y learning races are common with entrepreneurial and large firmso entrepreneurial often looking to learn about managerial functions required to bring a product

to market (difficult)

o large firmslooking to learn about technology (less difficult)y large firms typically win the learning race

Chapter 10Mergers and AcquisitionsLogic of corporate level strategy applies

y Corporate level strategy should create value:o such that the value of the corporate whole increaseso such that businesses forming the corporate whole are worth more than they would be under


o that equity holders cannot create through portfolio investingMergers and Acquisitions Defined

o Mergerstwo firms are combined on a relatively co-equal basis parent stocks are usually retired and new stock issued name may be one of the parents or a combination one of the parents usually emerges as the dominant management

o Acquisitionsone firm buys another firm can be a controlling share, a majority, or all of the target firms stock can be friendly or hostile usually done through a tender offer

y the words are often used interchangeably even though they mean something very differenty merger sounds more amicable, less threatening

Do Mergers and Acquisitions Create Value?

y The logic:o Unrelated M&AActivity

there would be no expectation of value creation due to the lack of synergies betweenbusinesses

there might be value creation due to efficiencies from an internal capital market there might be value creation due to the exploitation of a conglomerate discount

o a corporate raider who buys and restructures firms


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Types of Mergers and Acquisitions

y Federal Trade Commission (FTC )Categories:o Related:

Vertical- a firm acquires former suppliers or customers Horizontal- a firm acquires a former competitor Product extension- a firm gains access to complementary products through an

acquisition

Market extension- a firm gains access to complementary markets through anacquisition

o Unrelated: Conglomerate- there is no strategic relatedness between a bidding and a target firm

Economic Profits in Unrelated Acquisitions

y The target firmobject of the acquisition has a current market value of $10,000y The bidding firms have a current market value of $15,000y Because there is no strategic relatedness between the bidding firms and the target firm, the value of the

bidding firms when combined with the target firm equals the sum of the value of these firms as separate

entitiesthe value of the combined would be $25,000o Bidding firms will be willing to pay a price for a target up to the value that the target firm adds

to the bidder once it is acquiredany price less than $10,000 will be a source of economic profit

for the bidding firm

o The bidding will increase until it reaches $10,000thus the bidding firm will earn a zeroeconomic profit

Different Sources of Relatedness between Bidding and Target Firms

y Lubatkins List of Potential Sources of bidder-target relatedness:o Technological economies

Scale economies that occur when the physical processes inside a firm are altered so thatthe same amounts of input produce a higher quantity of outputs

Sources of technical economies include marketing, production, experience, scheduling,banking, and compensation

o Pecuniary economies Economies achieved by the ability of firms to dictate prices by exerting market power

o Diversification economies Economies achieved by improving a firms performance relative to its risk attributes or

lowering its risk attributes relative to its performance

Sources of diversification economies include portfolio management and risk reductionEconomic Profits in Related Acquisitions

yIf bidding and target firms are strategically related, then the economic value of these

2

combined firmsis greater than their economic value as separate entities

y 1 target and 10 bidding firms, market value of the target is 10,000 and the bidding firms is 15,000o When any of the bidding firms and the target firm are combined the value is 32,000

y Bidding firms will be willing to pay a price for a target up to the value that a target firm adds once itsacquiredmax bidding price is 17,000

y The successful bidding firm will bid 17,000 and earn zero economic profity The target firm will earn an economic profit of7,000


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Do Mergers and Acquisitions Create Value?

y The logic:o Related M&A activityo Value creation would be expected due to synergies between divisions

Economies of scale Economies of scope

y Transferring competenciesy Sharing infrastructure

y The empirical evidence:o Research is based on stock market reaction to the announcement of M&A activityo this reflects the markets assessment of the expected value of the merger or acquisitiono these studies look at what happens to the price of both the acquirers stock and the targets

stock

thus, we can see who is capturing any expected value that may be createdy M&A activity creates value, on average, as follows:

o Acquiring firmsno value createdo Target firmsvalue increases by about 25%o Related M&A activity creates more value than unrelated M&A activityo M&A activity creates value, but target firms capture it

y Expected vs. operational value

Possible Motivations to Engage in Acquisitions Even Though they usually dont Generate Profits for Bidding Firms

y Survival:o Avoid competitive disadvantageo Avoid sale disadvantages

y Free cash flow:o the amount of cash a firm has to invest after all positive net present value investments in its

ongoing businesses have been funded

o Cash generating, normal return investmenty Agency problems

o Managers benefit from increases in sizeo Managers benefit from diversification

y Managerial hubris:o Unrealistic belief held by managers in bidding firms that they can manage the assets of a target

firm more efficiently than the target firms current management

o Managers believe they can beat the oddsy Potential for Above normal profits:

some M&A activity does generate above normal profits (expected and operational overthe long run) proposed M&A activity may satisfy the logic of corporate level strategy managers may see economies that the market cant see


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Jensen and Rubacks List of Reasons Why Bidding Firms Might Want to Engage in Acquisition Strategies

y to reduce production and distribution costs:o through economies of scaleo through vertical integrationo through the adoption of more efficient production or organizational technologyo through the increased utilization of the bidders management teamo through a reduction of agency costs by bringing organization-specific assets under common

ownership

y Financial Motivations:o To gain access to underutilized tax shieldso To avoid bankruptcy costso To increase leverage opportunitieso To gain other tax advantageso To gain market power in product marketso To eliminate inefficient target management

CompetitiveAdvantage

y Can an M&A strategy generate sustained competitive advantage?o Yes, if managers abilities meet VRIO criteria:

Managers may be good at recognizing & exploiting potentially value-creating economieswith other firms

Managers may be good at doing deals Managers may be good at both

y Recognizing and exploiting economies of scopeo Private economies: example

Firm Cs recognized value is $10,000 Firm A sees value of $12,000 in Firm C Firm A can earn a profit of $2,000 only if the economy remains private

o Costly to imitate economies: example if the economy betweenA & C is costly to imitate, it doesnt matter if other firms know Firm A can still earn a $2,000 profit

o Unexpected economies: example Firm C has a market value of $10,000 Firm A buys Firm C for $10,000 Firm C turns out to be worth $12,000

Rules for Bidding Firm Managers

y Search for valuable and rare economies of scopey Limit information to other biddersy L

imit information to the targety Avoid winning bidding warsy Close the deal quicklyy Operate in thinly traded acquisition markets

o A market where there are only a small number of buyers and sellers, where information aboutopportunities in the market is not widely known, and where interests besides purely maximizing

the value of a firm can be important


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Rules for Target Firm Managers

y Seek information from biddersy Invite other bidders tojoin in bidding contesty Delay, but do not stop the acquisition

Implementation Issues

y Structure, control, and compensationo M&A activity requires responses to these issues:

m-form structure is typically used management controls & compensation policies are similar to those used in

diversification strategies

o Managers must decide on the level of integration: target firm may remain somewhat autonomous target firm may be completely integrated

y Cultural differenceso high levels of integration require greater cultural blendingo cultural blending may be a matter of:

combining elements of both cultures essentially replacing one culture with the other

o integration may be very costly, often unanticipatedo the ability to integrate efficiently may be a source of competitive advantage

y Government Policyo governments may constrain ownership by foreign firmso governments may restrict repatriation of profitso government labor policy may limit a firms ability to apply management practices to target firm

Summary

y M&A activity is a mode of entry for vertical integration and diversification strategiesy A firms M&A strategy should satisfy the logic of corporate level strategyy M&A activity can create economic value at announcement, but target firms usually capture that valuey M&A activity can create value over the long term for the acquiring firm


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International Issues

y Social orientationrelative importance of individual and group interestsIndividualism---------------------------------------------------------Collectivism

o Individualismindividual interest dominate: Firm has individually oriented compensation policies Employees must make quick decisions on their own

o Collectivismgroup interests dominate: Firm has group-based compensation policies Employees who consult with others before making decisions

y Power orientationbasis on which power and authority are granted to othersRespect---------------------------------------------------------------------Tolerance

o Power Respectauthority determined by a persons position in a firm Employees do what they are told Employees are deferential to senior managers

o Power Toleranceauthority is determined by its perceived correctness Employees what to hear justifications before they do what they are told Employees may or may not be differential depending on how effective senior

management have been in the pasty Uncertainty orientation

Acceptance----------------------------------------------------------------Avoidance

o Uncertainty Acceptancechange and new opportunities are valued Employees are encourages to think outside of the box Employees understand that failure sometimes accompanies risk-taking

o Uncertainty Avoidancechange and new opportunities are not valued Employees are encouraged to reinforce the boundaries of the box Employees punish risk-takers for being foolish

y Goal orientationAggressive----------------------------------------------------------------------Passive

o Aggressive Goal Behaviorvalue material possessions Employees are willing to work long hours to accomplish objectives Employees look for tangible results from their work

o Passive Goal Behaviorvalue quality of life and welfare of others Employees will leave when work begins to interfere with the quality of life Employees are interested in how others in the firm are faring

y Time orientationLong-term-------------------------------------------------------------------Short-term

o Long-Term Outlookvalue patience, determination, and hard work Employees have long-term goals and objectives Employees focus on benefits of hard work

o Short-Term Outlooktend to focus on the present or past Employees tend to be satisfied with the status quo Employees focus on the benefits of traditional ways of doing things


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Research Made Relevant

y Managers in potential target firms can respond to takeover attempts in a number of ways to eitherincrease the wealth of the target firm shareholders, have no impact, or decrease the wealth

y The wealth effects of target firm management responses to acquisition efforts:o Reduce wealth of target firm equity holders:

Greenmaila maneuver in which a target firms management purchases any of thetarget firms stock owned by a bidder and does so for a price that is greater than the

current market value of that stock

y No economic value that could have occurred from acquisition plus the cost ofthe price of the stock

Standstill agreements- a contract between a target and a bidding firm wherein thebidding firm agrees not to attempt to take over the target for some period of time

y Forgo any value that could have been created if the acquisition would haveoccurred and reduces the number of bidders

Poison pills- a variety of actions that a target firm can take to make the acquisitionexpensive

o Responses that do not affect the wealth of target firm equity holders: Shark Repellentsa variety of relatively minor corporate governance changes that are

supposed to make it somewhat more difficult to acquire a target firm

Pac man defensefend off an acquisition by taking over the firm or firms bidding forthem

Crown jewel salesometimes a bidding firm is interested in just a few of thebusinesses currently being operated in the target firm, to prevent an acquisition, the

target firm can sell the crown jewels

Lawsuitso Increase the wealth of target firm equity holders:

Search for the white knightanother bidding firm that agrees to acquire a particulartarget in the place of the original bidding firm

Creation ofbidding auctions Golden parachutesa compensation arrangement between a firm and its senior

management team that promises these individuals a substantial cash payment if their

firm is acquired and they lose their jobs in the process

Documents

Strategic Management Final Exam