Capstone Final Exam Study Guide 3b6c5c

aB AD 4013: Corporate Strategy FINAL EXAM – Review Sheet

Exam Format: 30 Multiple choice questions (2 points each – total 60 points) 4 Essay questions (40 points) TOTAL 100 points “Old” material Introduction to Corporate Strategy  Understand what does the industrial organization (IO) model of above-average returns argue. o Industry in which firm chooses to compete has a stronger influence on the firm's performance than do choices made by managers inside the organization. o Four Underlying Assumptions:  The external environment is assumed to impose pressure/constraints.  Most firms competing in an industry are assumed to control similar resources.  Resources are highly mobile across firms.  Decision makers are assumed to be rational and acting in the firm’s best interest.  The “secret” for AAR – a cost leadership or differentiated strategy (generic corporate strategies). Corporate-level Strategy – diversification  Describe the concepts of related and unrelated diversification Related: Concentric diversification o Economies of scope represent cost savings attributed to entering an additional business and sharing activities or using capabilities and core competencies developed in another business that can be transferred to a new business without significant additional costs. · Operational relatedness in sharing activities; in transferring skills or corporate core competencies among units (eliminates duplication and provides intangible resources) Synergies: diversifying into businesses whose value chains possess competitively valuable “strategic fits” with the value chain(s) of the present business(es). o Market power motives: Blocking competitors through multipoint competition (mutual forbearance) Unrelated: Conglomerate Diversification o Financial economies of scope: · Improve efficiency of capital allocation (internal capital markets) · Restructuring of acquired assets (Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market) o Best Targets for Unrelated Diversification · Companies with undervalued assets (Capital gains may be realized · Companies in financial distress



Explain the curvilinear relationship between diversification and performance.

“New” material International strategies  Describe the four international corporate-level strategies: international, multidomestic (i.e., multinational), global, and transnational. o International: refers to selling products in markets outside of the firm’s domestic market.  Companies try to create value by transferring skills and products to foreign markets.  Product development is centralized at home.  Companies establish manufacturing and marketing facilities in each major country but head offices exercises tight control over it.  Multidomestic: strategy and operating decisions are decentralized to strategic business units in each country.  Products and services are tailored to local markets.  Business units in one country are independent of each other.  Assumes markets differ by country or regions.  Focus on competition in each market.  Prominent strategy among European firms due to broad variety of cultures and markets in Europe.  Global: Products are standardized across national markets.  Decisions regarding business-level strategies are centralized in the home office.  Strategic business units are assumed to be interdependent.

    

Emphasizes economies of scale. Often lacks responsiveness to local markets. Requires resource sharing and coordination across borders (which also makes it difficult to manage) Transnational: Seeks to achieve both global efficiency and local responsiveness. Difficult to achieve because of simultaneous requirements (global integrated network).  Strong central control and coordination to achieve efficiency  Decentralization to achieve local market responsiveness  Must pursue organizational learning to achieve competitive advantage



What are the factors favoring Global vs. Multinational Strategies? o Factors favoring a Global approach  Increased similarity of consumer lifestyle  Rapid advances in technology, communication, transportation  Reduced trade barriers, more opened markets  Nations with productive, low-cost labor  Leveraging risks  Factors favoring a Multidomestic approach  Industry standards remain diverse across nations  Customers continue to demand products/ services tailored to local needs

 

Understand and explain the different international entry strategies. A t venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.



A subsidiary company, subsidiary, or daughter company[1] is a company that is completely or partly owned and partly or wholly controlled by another company that owns more than half of the subsidiary's stock A Strategic Alliance is a relationship between two or more parties to pursue a set of agreed  upon goals or to meet a critical business need while remaining independent organizations.  This form of cooperation lies between M&A and organic growth.





Franchising is the practice of using another firm's successful business model.



Licensing is a written agreement entered into by the contractual owner of a property or activity giving permission to another to use that property or engage in an activity in relation to that property. The property involved in a licensing agreement can be real, personal or intellectual. Almost always, there will be some consideration exchanged between the licensor and the licensee.



Exporting



What is the role of culture? (Hofstede’s framework) o a set of characteristics common to a particular group of people o a set of interrelated systems  e.g., how individuals use resources to survive; institutions, norms, roles, and values that exist around individuals; the motivation, perception, and learning of individuals  objective (e.g., tools and artifacts) and subjective (e.g., beliefs, attitudes, norms, etc.) aspects of man-made elements  culture is pervasive -- the core values, norms, and beliefs of individuals within a society that are formed in complex knowledge during childhood and reinforced throughout life  Hofstede  Power Distance (40 < 44)  Expectations of equality/acceptance of unequal power distributions  Uncertainty Avoidance (46 < 56)  Tolerance for ambiguity and use of structures to make things predictable  Individualism-Collectivism (91 > 50)  Relationship between the individual and the group  Masculinity-Femininity (62 > 50)  Tendency to “masculine” values of achievement, advancement  Long-Term Orientation (29 < 33)  Tendency to value future rewards, perseverance, and thrift



What are some of the risks linked to the international business strategies? o Political risks include  instability in national governments  war, both civil and international  potential nationalization of a firm’s resources  Economic risks  differences and fluctuations in the value of different currencies  differences in prevailing wage rates  difficulties in enforcing property rights  unemployment  Management problems  cost of coordination across diverse geographical business units  institutional and cultural barriers  understanding strategic intent of competitors  the overall complexity of competition

Strategy Implementation: Corporate Governance  What is corporate governance? o Mechanisms that determine allocation of decision making authority o A relationship among stakeholders used to control the strategic direction and performance of organizations o Concerned with making strategic decisions more effectively o Used to establish order between a firm’s owners and it’s top-level managers whose interests may be in conflict



 

Define and explain the “agency problem”? (agency theory) o Principal and agent have divergent interests and goals o Shareholders lack direct control of large, publicly traded corporations o Agent makes decisions that result in the pursuit of goals that could be in conflict with those of the principal o Agent could become victim to managerial opportunism managerial opportunism is the seeking of self-interest goals; o Managerial opportunism prevents the maximization of shareholder wealth (the primary goal of owner/principals) o It is difficult or expensive for the principal to that the agent has behaved appropriately What are the mechanisms that are used to find a solution to the agency problem? (i.e., describe the internal and external governance mechanisms) Internal governance mechanisms: o Ownership Concentration o Relative amounts of stock owned by individual shareholders and institutional investors o Board of Directors o Individuals responsible for representing the firm’s owners by monitoring toplevel managers’ strategic decisions o Executive Compensation o Use of salary, bonuses, and long-term incentives to align managers’ interests with shareholders’ interests  External governance mechanisms o Market for Corporate Control o Purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness o external auditors o government regulations  What is the role of CEO? What is CEO duality? o The CEO, must perform two functions crucial to the SM of corporations:  Provide executive leadership  Articulate a strategic vision for the firm  Present a role for other to identify with and follow (e.g., behavior, attitude, values, etc)  Communicate high performance standards & show confidence in followers’ abilities to meet these standards  Manage the strategic planning process  Evaluate division/units to make sure they fit together into an overall corporate plan o CEO duality means that the roles of the chair of the board and CEO are combined.  What is the relationship between CEO pay and performance? Linear relationship  Classic pay for performance relationship  Unfortunately, this relationship is weak  The stronger relationship is with firm size



What is the relationship between CEO pay and firm size? o CEO pay increases at a decreasing rate

o           



Wh at is the

relationship between form performance and firm size? o        



Sarbanes-Oxley Act

o

—This act represents a shift toward government regulation of corporate standards relating to auditing, ing, quality control, ethics, and independence, through the Public Company ing Oversight Board (PCAOB).

o

—Section 404 requires the Company’s CEO and CFO to annually assess internal controls, and sign written statements, acknowledging responsibility in maintaining controls over financial reporting.

Strategy Implementation: Corporate Culture and Leadership  What is corporate culture, why is it important, and how is a company’s culture perpetuated?

 corporate culture refers to a specific collection of values and norms shared by organizational  “A system of shared meaning held by that distinguish the organization from other organizations” (Robbins).  “The way we do things around here” (Deal & Kennedy). Why is it important?  Helps organizations solve two basic problems  Internal integration  External adaptation  Defines the boundaries between organizations  Identifies of the organization  Generates commitment to the organization  Stabilizes the social system of the organization  Increases behavioral consistency



Perpetuated:  Selecting employees based on how well their personalities “fit” in  Organization socialization:  Systematic indoctrination of new employees  Senior employees’ reinforcement of core values  Continuously revising and updating the code of conduct  Story-telling of company legends  Ceremonies honoring employees who display cultural ideals  Visibly rewarding those who follow cultural norms What is strong culture? Weak culture? Adaptive culture? o Strong Cultures  Conduct business according to a clear, widely-understood philosophy  Management spends considerable time communicating and reinforcing values  People do things because they believe it is the right thing to do - there is a risk of groupthink  Weak Cultures  Many subcultures  Few values and norms widely shared  Few strong traditions  Little cohesion among the departments  Weak employee allegiance to company’s vision and strategy  No strong sense of company identity  Adaptive Cultures  managers paying close attention to all of their constituencies, especially customers, initiating change when needed, and taking risks. Those that are innovative and encourage and reward initiative by middle and lower-level managers.



Adaptive  Strong culture with high performance





Core values suggest that most mangers care deeply about customers, stockholders, and employees  Managers pay attention to people and processes capable of creating useful change (Johnson and Johnson) Occupational Culture



What are some factors causing corporate culture to evolve? o Internal crises o Revolutionary technologies o New challenges o Arrival of new leaders (new CEOs, managers) o Turnover of key employees o Diversification into new businesses (mergers, acquisitions) o Expansion into different geographic areas (company subcultures) o Rapid growth adding new employees



Explain the difference between separation, integration, deculturation, and assimilation. o Separation: merging companies remain separate with their own culture o Integration: cultures combined into a new composite culture o Deculturation: Acquiring firm imposes its culture on unwilling acquire firm o Assimilation: Acquired company embraces acquiring firm’s cultural values

Strategy Implementation: Organizational Structure and Control  What is organizational structure? A formal system of task and reporting relationships that determines how employees use resources to achieve organizational goals  Describe the Functional, Multidivisional, Matrix, and Network structure (what does each structure look like, advantages, disadvantages, when is the structure used) – see Nokhia’s article if the diagrams are confusing. Functional: Employees are grouped together based on the primary skill they use to do their job  Advantages:  Learn from observing each other  Reduces duplication of activities (some economies of scale)  More control over functions  Good coordination within function

 Disadvantages:  More difficult to coordinate interdepartmental activities  Managers might lose sight of organizational goals (narrow perspective - self interest)  Decisions concentrated at top of hierarchy creating delays More effective when:  The organization is relatively small to medium size  The activities are geographically centered  The firm is specialized in few products and services (3 or 4 at most)  The environment is relatively stable Multidivisional:  Advantages:

 More flexible (good for unstable, changing environment)  Allows managers to specialize in only one product area, geogr. or mkt. division  More ability for profits and production by divisions  Increased coordination of functional departments; more cooperation across functions  Disadvantages:  Duplication of resources across divisions  Poor coordination across divisions  Fosters little cooperation among divisions (divisions get into dysfunctional rivalries)  Overemphasis on short term performance  Divisional structure is more effective when:  the organization is relatively large and produces a wide range of goods and services  the firm is geographically de-centralized  the environment is relatively stable Matrix:     

Advantages: Reinforces technical expertise (functional specialists are still grouped together) Interdisciplinary cooperation, expertise available to all divisions Flexibility, adaptability Facilitates the efficient use of resources

 Disadvantages:  Increases the number of power conflicts (more politics)  Increases confusion and stress for “two bosses” employees  Impeded decision making (many meetings and many people are needed for decisions to be made)  Matrix structure is more effective when:  the dual chain of command can be sustained (good when different objectives need to be balanced)  the organization is very large (many customers, products and regions)  the environment and customer needs are changing Network:

 Advantages:  Takes advantages of resources world wide  Flexibility, adaptability  Facilitates work in teams  Disadvantages:  Needs a lot of coordination and control

 Can lose organizational part  Weakened culture and organizational commitment  





Why some researchers argue that a company should match strategy and structure? Strategy and structure have a reciprocal relationship: o Structure flows from or follows the selection of the firm’s strategy but … o Once in place, structure can influence current strategic actions as well as choices about future strategies Why is organizational control important? o Organizational control will lead to more effective and more efficient performance because hindrances to a successful strategy have been eliminated. How does organic control (Clan/culture control) differ from bureaucratic control? What are examples of each? What are some problems linked with each form of control? Generic Forms of Organizational Control o Bureaucratic Control (formal, impersonal, centralized)  Profit goals  Output quotas  Rules and procedures  Standardization and monitoring  Reward systems (greater compensation through incentives) (regional/corporate performance weighted more) o Clan or Culture-based Control (informal)  Norms, shared values, socialization, corporate culture  Internalization of organizational goals

You should also be familiar with the main issues confronting the companies discussed during each case analysis. In addition, you should know how to define (explain, describe) the concepts introduced during lectures. Questions from the articles: Hamel, G., Doz, Y., & Prahalad, C. (1989) “Collaborate with your competitors and win”  According to Hamel, Doz, and Prahalad, what four principles are followed by companies that benefit the most from collaboration? o Collaboration is competition in a different form o Harmony is not the most important measure of success o Cooperation has limits o Learning from partners is paramount  What are the conditions under which collaboration can be beneficial to both companies (at least for a period of time)? o The partners’ strategic goals converge while their competitive goals diverge. o The size and market power of both partners are modest compared with industry leaders. o Each partner believes it can learn from the other and at the same time limit access to proprietary skills  How might companies develop safeguards against the unintended transfer of information? Why is this process critical for the success of any collaboration?

o

Using gatekeepers to control s and information flows with a partner. To ensure that a strategic alliance does not work against your company.

Read (2011) “Seven myth of corporate governance”  If given one of the myth of corporate governance you should be able to explain (i.e., talk about it). 1. The structure of the board = the quality of the board a. Attributes that dont matter independent chairman, a lead director, the number of outside directors, the independence of its directors, the in- dependence of its committees, size, diversity, the number of “busy” directors, and whether the board is interlocked. b. Attributes that do matter less well examined, including the qualification and engagement of individul directors, boardroom dynamics, 2. CEOS are systematically overpaid a. the compensation awarded to the average CEO is much more modest than these authors sug- gest.  1.6 million 3. There is no “pay for performance” in CEO compensation a. Pay for performance” is the notion that the amount of compensation awarded to an executive should be related to the value of the services rendered during a specified period. b. it is not true that the typical CEO is not paid to perform. On average, CEOs hold a personal equity stake in the companies they manage 4. Companies are prepared for a CEO succession a. False bc At many companies, succession planning appears to be compliance-based rather than operational (i.e., the company has a list of potential candidates but could not name a permanent successor if called to do so immediately). 5. Regulation improves corporate governance a. there is little evidence that legislative mandates improve corporate outcomes. For exam- ple, ten years after the age of Sarbanes-Oxley, experts are still debating whether the regulation is cost effective. b. some research findings suggest that Dodd-Frank is more likely to destroy than enhance shareholder value. 6. Voting recommendations are based on rigorous research a. Evidence says that these recommendations are influential but also says they are  not correct, because They have not been shown to increase shareholder value, correlate with improved operating performance, or predict negative events such as financial restatements, bankruptcies, or class-action lawsuits 7. Best practices are the solution (most destructive) a. Despite the best efforts of regulatory, commercial, and academic experts, no one has yet identified standards that are consistently associated with improved cor- porate outcomes. b. Corporations are organizational systems. Their success is predicated on their external setting, the interactions of their constituents, and the processes by which the corporate strategy is planned and executed

Hofstede, G. (2011) “Dimensionalizing Cultures: The Hofstede model in context” – this article describes the six dimensions of culture. In class we talked only about five dimensions and I would like you to only those five dimensions for the exam: Power Distance, Uncertainty Avoidance, Individualism/collectivism, masculinity /Femininity, Long/Short Term Orientation. You should know what each dimension means (the tables in the article are very helpful) and give some examples of business practices that differ between countries based on these dimensions (you can find these examples in the article and in our lecture slides).     

For example: Low power distance select managers based on educational achievement vs high  selects based off social class High uncertainty avoid­ risk averse vs low­ more risk taking Low indi­ promotion based on seniority vs high­ promo based on indi performance Low masc­ more time off vs high­ less time off ST orien­ immediate rewards necessary vs LT­ more LT goals

Ghemawat, P. (2001) “Distance Still Matters: The Hard Reality of Global Expansion”  According to Ghemawat what are the four dimensions of distance (when talking about the

  

distance between two countries)? (describe and discuss each of these dimensions) o

                     



Why does Ghemawat consider these dimensions to be very important in of evaluating a market’s relative attractiveness? o They can dramatically change a company’s assessment of the relative attractiveness of foreign markets. LEGO: Moved manufacturing overseas, loosened control on licensing and didn’t work. ILLY: International expansion, (Distance countries) measuring attractiveness of countries. Hofestede Gorlsch: International expansion. Product differentiation (stupid bottle) APPLE: Innovation, differentiation.