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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 firms 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 firms 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 joint 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
AStrategicAllianceisarelationshipbetweentwoormorepartiestopursueasetofagreed
upongoalsortomeetacriticalbusinessneedwhileremainingindependentorganizations.
ThisformofcooperationliesbetweenM&Aandorganicgrowth.

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? (Hofstedes 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 support 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 firms 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 firms owners and its 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 verify 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 firms 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

Wh
at
is
the

relationship between form performance and firm size?


o

Sarbanes-Oxley Act

This act represents a shift toward government regulation of corporate standards


relating to auditing, accounting, quality control, ethics, and independence, through
the Public Company Accounting Oversight Board (PCAOB).

Section 404 requires the Companys 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 companys culture perpetuated?

corporate culture refers to a specific collection of values and


norms shared by organizational members
A system of shared meaning held by members 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 members 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 companys 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 firms 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 Nokhias
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 accountability 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 firms 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?

Using gatekeepers to control contacts 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. FalsebcAt 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 passage
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. Evidencesaysthattheserecommendationsareinfluentialbutalsosaystheyare
notcorrect,becauseThey 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 remember 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).

Forexample:Lowpowerdistanceselectmanagersbasedoneducationalachievementvshigh
selectsbasedoffsocialclass
Highuncertaintyavoidriskaversevslowmorerisktaking
Lowindipromotionbasedonseniorityvshighpromobasedonindiperformance
Lowmascmoretimeoffvshighlesstimeoff
STorienimmediaterewardsnecessaryvsLTmoreLTgoals

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 terms of evaluating a
markets relative attractiveness?
o They can dramatically change a companys assessment of the relative
attractiveness of foreign markets.
LEGO:
Moved manufacturing overseas, loosened control on licensing and didnt work.
ILLY:
International expansion, (Distance countries) measuring attractiveness of countries. Hofestede
Gorlsch:
International expansion. Product differentiation (stupid bottle)
APPLE:
Innovation, differentiation.