MGCR 423 Post-Midterm Flashcards
What is a corporate level strategy?
Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets.
What is the purpose of a corporate level strategy?
They help companies select new strategic positions that help increase the firm’s value. (earn above avg returns)
What are the different levels of diversification?
Low, Moderate-High, Very High
Describe the 2 types of low-level diversification
- Single Business: 95% of revenue comes from a single business
- Dominant business: Between 70-95% of revenue comes from a single business
What are the 3 reasons firms diversify?
- To create value
- keep value neutral (neutralize a competitor’s market power)
- reduce value (reduce manager’s risk, increase manager’s compensation)
How can firms create value through a related diversification strategy?
- Economies of Scope
- Market Power
How can firms create value with an unrelated diversification strategy?
Financial Economies (Efficient internal capital allocation, business restructuring)
What incentives/resources encourage diversification through economies of scope?
- Cost savings/value creation through Sharing activities
- transferring core competencies
What are some motives that can encourage managers to over-diversify a firm?
- managers may want to diversify to increase their compensation -> leads to overdiversification
Describe the 2 types of moderate-high levels of diversification
- Related Constrained: Less than 70% of revenue comes from the dominant business, & all businesses share product, technological, and distribution linkages
- Related Linked (mixed related and unrelated): Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses
Describe the 1 type of very high level of diversification
Unrelated: Less than 70% of revenue comes from the dominant business, and there are no common links between businesses
What incentives/resources encourage diversification through Market power?
- Blocking competitors through multipoint competition, vertical integration
What is multipoint competition
when 2 or more diversified firms simultaneously compete in the same product areas or geographical inputs
What is vertical integration
when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration)
What incentives/resources encourage diversification through financial economies?
- savings company can realize through better allocation of financial resources based on investments inside/outside the firm.
- through efficient internal capital market allocation and asset restructuring
What is operational relatedness and what is the strategy associated with it?
- created by sharing either a primary or support activity
- activity sharing requires sharing strategic control over the business
- activity sharing may create risk b/c business-unit ties create links between outcomes
- Related constrained diversification
What is corporate relatedness and what is the strategy associated with it?
- using complex sets of resources & capabilities to link different businesses through managerial and technological. knowledge, experience and expertise
- Related Linked diversification
What are Economies of Scope?
cost savings a firm creates by successfully sharing resources and capabilities/transferring 1 or more corporate-level core competencies that were developed in one of its businesses to another one of its businesses
When does market power exist?
when a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities before the competitive level, or both.
What are some internal incentives for value-neutral diversification?
- low performance
- uncertain future cash flows
- pursuing synergy
- reducing risk for the firm
What are some external incentives for value-neutral diversification?
- antitrust regulation
- tax laws
Why are merger and acquisition strategies popular in many firms competing in the global economy?
thy help firms create value and above-average returns.
What reasons account for firms’ decisions to use acquisition strategies as a means to achieving strategic competitiveness?
- increased market power (horizontal -> synergies, vertical -> supply chain ctrl)
- overcoming entry barriers
- cost of new product development & increased speed to market
- lower risk compared to developing new products
- increased diversification
- reshaping the firm’s competitive scope (lessen competitive rivalry intensity)
- learning and developing new capabilities
What are the seven primary problems that affect a firm’s efforts to successfully use an acquisition strategy?
- target was inadequately evaluated
- large debt
- inability to achieve synergy
- too much diversification
- managers overly focused on acquisitions
- too large
What are the attributes associated with a successful acquisition strategy?
- complementary assets/resources
- fast & effective integration
- research is done to pick the right firm
- financing is easy to obtain
- merged firms have low debt
- acquiring firm has LR competitive advantage
- acquiring firm is flexible
What is a takeover?
an unfriendly acquisition
What is the definition of cooperative strategy?
a means by which collaborate to achieve a shared objective
Why is cooperative strategy important to firms competing in the current competitive landscape?
it allows firms to create value for a customer that it wouldn’t be able to by itself and is necessary in fast-cycle markets
What is a strategic alliance?
a cooperative strategy in which firms combine some of their resources to create a competitive advantage
What are the three major types of strategic alliances that firms form for the purpose of developing a competitive advantage?
- joint ventures
- equity strategic alliance
- non-equity strategic alliance
What are the four business-level cooperative strategies?
- complementary strategic alliances
- competition response strategy
- uncertainty-reducing strategy
- competition-reducing strategy
What are the key differences among the four business-level cooperative strategies?
some are proactive, some are reactive
What are the three corporate-level cooperative strategies?
- diversifying alliances
- synergistic alliances
- franchising
How do firms use each of thencorporate-level cooperative strategies for the purpose of creating a competitive advantage?
diversifying - companies share resources to engage in diversification
synergistic - companies share resources to create synergies
franchising - company expands through it’s brand name
Why do firms use cross-border strategic alliances?
- to expand in countries where M&As aren’t allowed and to test out the markets
What risks are firms likely to experience as they use cooperative strategies?
- opportunistic behaviour buy partners
- lying about what resources partners are putting into it
- not fairly investing into the alliance
What is a joint venture?
a strategic alliance in which two or more firms create a legally independent company to share some of their resources to create a competitive advantage.
What is an equity strategic alliance?
an alliance in which two or more firms own different percentages of a company that they have formed by combining some of their resources to create a competitive advantage.
What is a non equity strategic alliance?
an alliance in which two or more firms develop a contractual relationship to share some of their resources to create a competitive advantage. In this type of alliance, firms do not establish a separate independent company and therefore do not take equity positions.
What are complementary strategic alliances?
business-level alliances in which firms share some of their resources
in complementary ways to create a competitive advantage.
what is a business-level cooperative strategy?
a strategy through which firms combine some of their resources to create a competitive advantage by competing in one or more product markets.
what is a competition response strategy for alliances?
taking strategic/tactical actions against competitors based on what they’re doing
what is an uncertainty reducing strategy for alliances?
hedge risk when it comes to making new products and uncertainty especially in fast-cycle markets.
what is competition reducing strategy for alliances?
reduces competition by working with competitors and colluding (explicit or tacit - through observing - collusion)
what is mutual forbearance
a form of tacit collusion where firms do not take competitive actions against rivals they meet in multiple markets
what is a corporate-level cooperative strategy?
a strategy through which a firm collaborates with one or more companies to expand its operations.
What is corporate governance?
the set of mechanisms used to manage the relationships among stakeholders and
to determine and control
the strategic direction and performance of organizations.
what are the 4 governance mechanisms
- ownership concentration
- board of directors
- executive compensation
- market for corporate control
Why is governance necessary to control managers’ decisions?
because owners and managers have different priorities and goals
What is meant by the statement that ownership is separated from managerial control in the corporation?
ownership and control are managed by 2 different groups: shareholders own the company, but managers control it.
What is an agency relationship?
An agency relationship exists when one party delegates decision-making responsibility to a second party for compensation.
What is managerial opportunism?
the seeking of self-interest with guile (i.e., cunning or deceit).
What assumptions do owners of corporations make about managers as agents?
they assume that they will act opportunistically
How is ownership concentration used to align the interests of managerial agents with those of the firm’s owners?
large-block shareholders are increasingly active in their demands that firms adopt effective governance mechanisms to control managerial decisions so that they will best represent owners’ interests.
What trends exist regarding executive compensation?
more long-term incentive plans
What is the effect of the increased use of long-term incentives on top-level managers’ strategic decisions?
using long-term incentives facilitates the firm’s efforts (through the board of directors’ pay-related decisions) to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders
What is the market for corporate control?
an external governance mechanism that is active when a firm’s internal governance mechanisms fail
What conditions generally cause this external governance mechanism to become active? (market for corporate control)
if a company is performing badly
How does the market for corporate control constrain top-level managers’ decisions and actions?
Because the top-level managers are assumed to be responsible for the undervalued firm’s poor performance, they are usually replaced. An effective market for corporate control ensures that ineffective and/or opportunistic top-level managers are disciplined.
What are agency costs?
the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because governance mechanisms cannot guarantee total compliance by the agent.
What is ownership concentration?
the number of large-block shareholders and the total percentage of the firm’s shares they own.
what are institutional owners?
financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions.
How is a board of directors used to align the interests of managerial agents with those of the firm’s owners?
Those elected to a firm’s board of directors are expected to oversee managers and to ensure that the corporation operates in ways that will best serve stakeholders’ interests, and particularly the owners’ interests.
What factors complicate executive compensation
strategic decisions by top level managers are important and can affect the firm long term
What are the 3 types of board of directors members
Insiders
Related Outsiders
Outsiders
What are criticisms of boards of directors
- too readily approve managers’ self-serving initiatives
- exploited by managers with personal ties to board members
- not vigilant enough in hiring/monitoring CEO behaviour
How can board of directors be more effective
- more diversity
- stronger internal management
- more formal processes to evaluate the board’s performance
- create a lead director role
- change compensation of directors
What is organizational structure?
Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes.
What are organizational controls?
Organizational controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable.
What does it mean to say that strategy and structure have a reciprocal relationship?
In general, this reciprocal relationship finds structure flowing from or following selection of the firm’s strategy. Once in place though, structure can influence current strategic actions as well as choices about future strategies.
What are the characteristics of a functional structure for cost leadership?
- simple reporting structure with a few layers
- centralized decision making
- focused on process improvements through manufacturing
- highly specialized jobs
- many rules and procedures
What are the characteristics of a functional structure for differentiation?
- more complex, flexible
- strong focus on product R&D and marketing
- decentralized
- low specialization
- few formal rules and procedures
what is a simple structure?
The simple structure is a structure in which the owner-manager makes all major decisions and monitors all activities, while the staff serves as an extension of the manager’s supervisory authority
What is a functional structure?
The functional structure consists of a chief executive officer and a limited corporate staff, with functional line managers in dominant organizational areas such as production, accounting, marketing, R&D, engineering, and human resources.
What is a multidivisional structure?
The multidivisional (M-form) structure consists of a corporate office and operating divisions, each operating division representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategy to division managers.
Benefits of multidivisional structure
➢ Corporate officers are able to more accurately monitor the performance of each business, which simplifies the problem of control.
➢ Facilitates comparisons between divisions, which improves the resource allocation process.
➢ Stimulates managers of poorly performing divisions to look for ways of improving performance.
Disadvantages of multidivisional structure
➢ Difficult to coordinate across product lines
➢ Replication of resources
➢ Pressure to generalize, not specialize
What is strategic leadership?
Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary.
What is a top management team?
A top management team is composed of the individuals responsible for making certain the firm uses the strategic management process, especially to select and implement strategies.
What is strategic change?
Strategic change is change resulting from selecting and implementing a firm’s strategies.
What does determining strategic direction mean?
Determining strategic direction involves specifying the vision and the strategy to achieve the vision.
What is the balanced scorecard?
the balanced scorecard is a tool firms, including family-owned firms, use to determine if they are achieving an appropriate balance when using strategic and financial controls as a means of positively influencing performance.
4 perspectives of the balanced scorecard
■ financial (concerned with growth, profitability, and risk from the shareholders’ perspective)
■ customer (concerned with the amount of value customers perceive the firm’s products create for them)
■ internal business processes (concerned with the priorities for various business pro- cesses that create customer and shareholder satisfaction)
■ learning and growth (concerned with the firm’s efforts to create a climate that supports change, innovation, and growth)
