Unit Test 2 Flashcards
What is the main goal of corporate-level strategy?
To create value such that the combined businesses are worth more together than independently, leveraging synergies and economies of scope Equity holders sshould not be able to achieve this through portfolio investing alone.
What are the types of Corporate Diversification at a general level?
Product Diversification: operating in multiple industries
Georgraphic Market Diversification: Operating in multiple geographic markets
Product-market Diversification: operating in multiple industries in multiple geographic markets
What is vertical integration?
It is a strategy where a firm controls additional stages of its supply chain, either by moving backward to suppliers or forward to customers.
What are the advantages of vertical integration?
Cost reduction, revenue enhancement, capturing value through synergies, and avoiding market uncertainties.
What are the disadvantages of vertical integration?
High capital costs, reduced flexibility, and potential inefficiencies in managing diverse operations.
What are the three main types of diversification?
Product diversification, Geographic diversification, and Product-Market diversification.
What is related diversification?
A strategy where a firm expands into businesses that share commonalities or links with existing operations, such as resources, markets, or technology.
What is unrelated diversification?
A strategy where a firm expands into businesses with no significant links to its current operations, often for financial reasons.
How do you enter a foreign market?
Exporting, Licensing/Franchising, and Foreign Direct Investment (Greenfield and Acquisition).
What is the CAGE framework?
A model for assessing country differences across Cultural, Administrative, Geographic, and Economic dimensions to evaluate international strategies.
What are the advantages and disadvantages of Greenfield investments?
Advantages: High control, transfer of practices and culture. Disadvantages: High costs, political/legal risks, slow entry.
What are strategic alliances?
Cooperative agreements between firms to share resources and capabilities for mutual benefit, such as joint ventures, equity alliances, and non-equity alliances.
What are the benefits of strategic alliances?
Accessing complementary resources, achieving economies of scale, managing risks, and facilitating entry into new markets.
What are the risks of strategic alliances?
Cultural differences, misalignment of objectives, loss of proprietary knowledge, and over-dependence on partners.
What is corporate social responsibility (CSR)?
A company’s commitment to ethical practices, sustainability, and contributing positively to society, beyond profit maximization.
What is the VRIO framework?
A tool to assess resources and capabilities for competitive advantage: Valuable, Rare, Inimitable, and Organized.
What is the difference between mergers and acquisitions?
Mergers involve combining two firms as equals, while acquisitions involve one firm purchasing another, often with unequal control.
What are economies of scope in diversification?
Cost advantages that arise from sharing resources, spreading core competencies, or leveraging market power across multiple businesses.
What are the FTC categories of M&A activity?
Vertical, Horizontal, Product Extension, Market Extension, and Conglomerate.
What is the role of governance in strategic alliances?
To address challenges of value creation and allocation through contracts, equity arrangements, and building trust among partners.
What are the four types of economies of scope?
Operational (e.g., sharing activities), Financial (e.g., tax advantages), Anticompetitive (e.g., mutual forbearance), and Managerialism (e.g., managerial incentives).
What are the risks firms face in international markets?
Cultural differences, regulatory challenges, economic disparities, and geographic remoteness.
What is the significance of Porter’s Diamond Framework?
It identifies factors like demand conditions, firm strategy, related industries, and factor conditions that influence a country’s competitive advantage.
Mergers & Acquisitions
Why do firms pursue M&A activities?
To achieve synergies, economies of scale, access new markets, and respond to competitive pressures.
Mergers & Acquisitions
What is managerial hubris in M&A?
When managers overestimate their ability to create value through acquisitions, leading to potentially poor decisions.
What are the three value considerations for Vertical Integration?
- Level Capabilities: Use strengths from one area to improve others
- Exploit Flexibility: Maintain adaptability in changing environments
- Manage Opportunism: Reduce risks from market opportunism by internalizing operations; must be a cost-effective.
4
Form vs Function in Vertical Integration
Form is often imitable
Function may be costly to replicate
Types of Corporate Diversification at a specific level?
Limited Diversification
Related Diversification
Unrelated Diversification: businesses are not related (Congolomerate)
Critera for Diversification?
- Must be some economy of scope
- Focal firm must have a cost advantage over outside equity holders in exploiting any economies of scope
TRUE OR FALSE
What are the modes of entry /alternatives for vertical integration
- M&A
- Acquisition
- Internal development
Strategic Alliance can be an alternative
TRUE OR FALSE
M&A Activity can create economic value at announcement, but target firms usually capture that value
TRUE
TRUE OR FALSE
M&A Activity can create short-term value for the aquiring firm
FALSE
M&A activity can create LONG-TERM value for the acquiring firm
How can Alliances create economic value?
- acessing complementary resources and capabilities
- leveraging exisiting resources and capabilities
3 types of Alliances
- Non-equity : contracts, licensing, agreements
- Equity Alliance: cross equity holdings, partners own stakes in eachother
- Joint Venture: Joint equity holdings, independent firm is created
How can alliances generate competitive advantage?
- combinations of complementary resources meet the VRIO criteria
- Governance responses meet the VRIO criteria
VRIO stands for? What happens if vertical integration strategy meets the VRIO Criteria?
- Valuable, Rare, Imitability, Organized
- Creates competitive advantage
Why would a firm to choose to expand internationally?
- market seeking
- efficient seeking
- natural resource seeking
- strategic asset seeking
Substitutes of Strategic Alliances?
M&A
Internal Development
4 dimensions of distance: CAGE
Cultural: differences in language, religion, social norms etc.
Administrative (institutional): differences in societal institutions
Geographic: distance between countries (taking into account the ease of transportation/communication infrastructure)
Economic: differences in consumer wealth, income level/distribution, infrastructure, prevailing business practices etc.
What are modes of entry for diversification strategies?
- M&A
- Strategic Alliances
