Corporate Strategy and Governance: Mergers, Alliances, and Agency Theory

What occurs when a firm acquires another firm at the same stage of the value chain?

Horizontal Integration

What does corporate governance focus on?

Board of Directors, Shareholders, Managers

What is Agency Theory?

A theory explaining conflicts that arise when an agent may not act in the principal's best interest.

What is the principal-agent problem?

A conflict of interest when an agent's interests do not fully align with the principal's.

Who are the primary participants in corporate governance?

Shareholders, Board of Directors, Executive Management

Why do companies expand into new industries?

Diversification to reduce risk, stabilize earnings, and capture opportunities.

When should a firm MAKE (vertically integrate) rather than buy from the market?

When internal production is more efficient, protects proprietary knowledge, or reduces transaction costs.

What cooperative arrangement involves forming a legally independent company with equal equity ownership?

Joint Venture

What is unrelated diversification?

Entering a completely different industry with no meaningful connection to current operations.

What does it mean when a firm produces a key input in-house instead of buying it?

Vertical Integration (Backward Integration)

In corporate governance, why does the agency problem arise?

Manager interests may not align with shareholder interests.

What type of alliance is formed when two companies create a new shared company to combine resources?

Joint Venture

Corporate strategy defines firm boundaries along which three dimensions?

Vertical Integration, Diversification, Geographic Scope

What distinguishes a merger from an acquisition?

Acquisitions involve full takeover; mergers combine two firms as equals.

What are collaborations where at least one partner acquires a partial ownership stake in the other?

Equity Alliance

What is CEO duality?

When the CEO is also the Chair of the Board. Main advantage: Faster decision-making.

What are reasons to acquire another firm?

Gain market share, vertical integration, diversify risk, eliminate competition.

Agency theory deals with the relationship between ____ and ____?

Principals and Agents

What is a major risk of vertical integration?

High transaction costs and reduced flexibility.

What is tacit knowledge?

Knowledge difficult to codify; based on experience and intuition.

How is tacit knowledge best transferred?

Mentoring, apprenticeships, shadowing, face-to-face interaction.

When does shareholder activism become more powerful?

Concentrated ownership, better information access, and greater coordination.

What problem arises when management acts in their own self-interest?

The Agency Problem

What are three essential elements of behavioral control?

Direct Supervision, Standard Operating Procedures, Training and Socialization

What are the two main types of transaction costs?

Search & Information Costs; Bargaining & Enforcement Costs

What is organizational culture?

Shared values and beliefs within an organization.

What is managerial hubris?

Manager overconfidence leading to overestimating their ability to create value.

What is the main responsibility of a board of directors?

Oversee management and protect shareholder interests.

What are three concepts influencing employee behavior in the behavioral control model?

Direct Supervision, Standard Operating Procedures, Training and Socialization

What is the most integrated option on the Make-or-Buy Continuum?

Parent-Subsidiary Relationship (Internal Development)

What is a potential downside to reward systems?

They may encourage unintended or undesirable behavior.