MNGT 4800 Exam 4 Zachary

final exam

Business Strategy

concerns the question of "how to compete" in a single product market

Firms pursue competitive advantages through either a _______________________ or __________________________ generic strategy

Differentiation or Cost-Leader

As firms grow, they may look for opportunities to expand to new markets by...

•Offering new products and/or services
•Competing in different geographic regions

To succeed, managers must formulate a:

Corporate Strategy

Corporate Strategy

•Addresses the question "Where do we compete?"
-In what industry or industries should we compete? What products and services should we offer across business units?
-In what geographic regions should we compete?

Concentration Strategies:

refer to actions firms use to compete in a SINGLE INDUSTRY
•Ex: McDonald's, Starbucks, and Subway all rely heavily on concentration strategies to dominate their markets

Three (3) types of concentration strategies:

1) Market penetration
2) Market development
3) Product development

-Firms can use one or any combination of these strategies to grow within an industry; they don't have to choose just one

1) Market Penetration:

involves an attempt to gain additional market share in an EXISTING MARKET using EXISTING PRODUCTS
-Typically involves aggressive advertising to attract new customers in existing markets
-ex: McDonald's: targeting Hispanic-Americans with "me encanta" ad campaign

2) Market Development:

involves attempting to sell EXISTING PRODUCTS in NEW MARKETS
- Entering a new retail channel; ex: starbucks and Dunkin introduced in home versions of their coffee available at grocery stores
- Entering a new geographic region; Southwest Airlines expanded outside southwest US

3) Product Development

refers to the creation of NEW PRODUCTS to serve EXISTING MARKETS
•E.g., McDonald's has introduced several new lines of products including coffee and smoothies (McCafe) and healthy options
•E.g., soft drink giants Coca-Cola and Pepsi routinely introduce new products to reinvigorate customers, Coke Zero

Horizontal Integration:

refers to an attempt to pursue a concentration strategy (expand a firm's presence in an industry) by acquiring or merging with a rival

Acquisition

describes the purchase or takeover of one company by another
-Can be friendly or unfriendly—also called a HOSTILE TAKEOVER
•The acquiring firm tends to be larger than the target firm
-ex: acquisition of Pixar by Disney was friendly

Merger

describes the joining of two independent companies to form a COMBINED ENTITY
•Tend to be friendly; the target firm tends to welcome the merger
•Stock from one firm is typically exchanged 1:1 for stock in new firm
•Firms tend to be similar in size

Waves of horizontal integration lead to _______________________ __________________________.

Industry Consolidation
-ex: pharmaceutical industry has seen considerable consolidation in the late 2000s
-legacy airline carriers acquire smaller airlines

Horizontal Integration Advantages - Sources of value creation (4):

1. Reduction in competitive intensity
-as the industry approaches an oligopolistic structure, surviving firms focus less on price competition, possibly increasing profitability

2. Positively affects several Porter's 5 forces (which analyzes attractiveness of an industry)
-reduces power of buyers and suppliers
-reduces the threat of firm entry (makes it harder to compete)
-reduces rivalry among existing competitors

3. Lower Costs
-firms are able to lower costs through increased economies of scale

4. Increased Differentiation
-can help firms fill gaps in their product and service offerings

Horizontal Integration Disadvantages - Sources of Costs (3):

1. Integration Failure
-often difficult to integrate 2 organizations with potentially different strategies and structures

2.Reduced Flexibility
-As size increases, it becomes more difficult for firms to respond to changes in the environment

3. Increased potential for legal trouble
-As firms increase in market share, there is increased scrutiny by federal anti-trust organizations

T/F: In most cases, mergers and acquisitions create a competitive advantage.

FALSE; most of the time they DO NOT create a competitive advantage.
-Most mergers destroy shareholder value because anticipated synergies (the things they thought would work together) never materialize
-The potential value created is often assumed within the price of the acquisition; sometimes companies get swept up in a bidding war for an acquisition, resulting in WINNER'S CURSE
- escalation of commitment

Winner's Curse

companies get swept up in a bidding war for an acquisition

Confirmation Bias

selectively searching for information that confirms one's own ideas about an event (ex: mergers & acquisitions). They ignore information saying "hey we probably shouldn't do this".

Why do firms engage in Mergers and Acquisitions (since they rarely work out)?

1. Principal-agent problems
-incentives such as higher pay/benefits, increased power/prestige may incentivize managers to grow the firm using M&A.
-May also be a function of MANAGERIAL HUBRIS: CEOs think that as long as they're in charge, company won't fail

2. Desire to overcome competitive disadvantage
-ex: to compete with Nike, #2 Adidas acquired #3 Reebok

3. Superior acquisition and integration capability
-Some firms are better at managing/ negotiating acquisitions than others, like Cisco who has acquired over 150 companies

Vertical Integration:

involves expanding into a new portion of the industry value chain; Backwards or Forward integration; becoming your own buyer or supplier
-Can be attractive when a firm's buyers and suppliers have too much power and are becoming increasingly profitable at firm's expense

Benefits of Vertical Integration (4):

1. Securing critical supplies and distribution channels
2. Lowering costs
3. Improving quality
4. Facilitating scheduling and planning
-ex: Pepsi's forward integration into bottling business gave them more control over pricing, quality, distribution, and in-store display

Risks of Vertical integration (4):

1. Increased Costs
-in house suppliers may have higher costs bc they are not good at it or aren't exposed to market competition

2. Reduced quality
-in house suppliers don't have same incentives to keep quality high

3. reducing flexibility
-when industry production methods change, it may be expensive for in house suppliers to change production methods

4. increasing the potential for legal repercussions
-can increase concerns of monopolistic power

Diversification Strategy:

involves entering an entirely new industry
-Different from vertical integration, which involves moving up or down WITHIN an incumbent industry
-Can be accomplished through a variety of entry modes including greenfield entry, joint venture, or M&A

Strategic leaders should consider three (3) tests when thinking about diversifying:

1. How attractive is the industry a firm is considering entering? (Porters)
2. How much will it cost to enter? Exit?
3. Will the firm be better off?

Related Diversification:

occurs when a firm moves into a new industry that is similar to their existing industry
•E.g., Apple has diversified from computers to MP3 players to smartphone and tablets

Some firms engage in related diversification to develop or exploit a ______ _____________.

Core competency

Core Competency:

-Describes a unique set of skills that can be leveraged in different businesses to create a competitive advantage; something that you're good at.
-ex: Apple has a core competency in innovation, which they leverage to compete across all their businesses

Some firms engage in related diversification to develop or to regain a _____ _______ _____________.

slipping core competency
-Ex: Disney's acquisition of Pixar in 2005 was intended to reestablish its core competency in character development

Unrelated Diversification

describes when firms enter an industry that lacks important similarities to its existing industry
•Ex: Coca-Cola acquired Columbia Pictures in 1982 for $750M, then sold it in 1989 for $3.4B
•Ex: Berkshire Hathaway owns dozens of businesses that range from fast food to insurance to utilities

T/F: Successful unrelated diversification is difficult since firm competencies don't necessarily transfer to a different industry

True
•Ex: Harley-Davidson attempted a line of bottled water
•Ex: Starbucks expanded into the furniture business

Sometimes executives desire to exit one or more industries because:

Strategy for Getting Smaller
•They're facing insurmountable competition (it's getting too competitive)
•Want to focus on more profitable and/or sustainable businesses
•They're facing insolvency (spending more money than they're bringing in)

Retrenchment:

Strategy for Getting Smaller
-involves reducing the size of part of a firm's operation
•Often a means of cutting costs
•Typically through layoffs

Divestment:

Strategy for Getting Smaller
-refers to selling off part of a firm's operations.
•Can be used to help firms focus on more promising profit center; chevron sold coal division to focus on energy sources
•In some cases, divestment reverses a forward vertical integration move; ex: Ford sold Hertz to focus on auto manufacturing

In other cases, Divestment may reverse a _________ vertical integration move

backwards
-Ex: GM divested its parts manufacturing business Delphi

Many firms divest businesses via a _______________

Spin-Off

Spin-off:

Strategies for Getting Smaller
-Creating a new company whose stock is owned by investors
•Ex: Toyota was spun off from Toyoda Automatic Loom Works
-Firm investors receive shares in the new company based on share ownership in the parent company

When selling parts of a firm is not an option, executives may be facing ________________.

Liquidation

Liquidation

-Executives simply shut down portions of the firms operations
-Often at a significant financial loss
-Can be painful, but can help firms be more competitive in the long run
•Ex: In 2011, Ford scrapped its Mercury brand

T/F: Failing to cut-off a hemorrhaging business can jeopardize the whole company

True
•Ex: In 2011, Borders Group filed for Chapter 7 bankruptcy, liquidating the entire firm
-Closed 399 stores and leaving 10,700 employees without a job

Portfolio Planning:

is a process that helps executives assess their firm's prospects within each industry it operates in, offers suggestions, and provides ideas for allocating resources

BCG Matrix

the best-known approach to portfolio planning

What are the 2 dimensions of BCG Matrix?

1. Market Share
2. Market Growth

Four categories of BCG Matrix?

1. STAR
2. CASH COW
3. QUESTION MARK
4. DOG

STAR

business units with high market share and high growth potential; businesses of the future, businesses your firm wants to be in

CASH COW

business units with high market share and low growth potential; markets in the mature phase of the industry life cycle, not a lot of new consumers

QUESTION MARK

business units with low market share, but high growth potential; smaller units in the industry but the industry itself is poised for significant growth

DOG

business units with low market share and low growth potential; want to get rid of these

Organizational Design:

the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization
-The goal is to allow managers to translate strategy into reality

Structure follows Strategy:

Implies that organizational design must be flexible enough to accommodate the formulated strategy and future growth /expansion

Apple's key to innovation strategy is supported by it's ____________ ___________

collaborative structure

Three (3) levers of organizational design

1) Structure - determines how work efforts of individuals and teams are orchestrated
2) Culture - shared norms and values of organizational members
3) Control systems - internal governance mechanisms used to align incentives of employees with owners

Organizational Structure:

determines how the work efforts of individuals and teams are orchestrated and how resources are distributed
-A key part of organizational design
-Defines how jobs and tasks are divided and integrated
-Delineates reporting relationships up and down the hierarchy

Four (4) key elements of an organizational structure

1) Specialization
2) Formalization
3) Centralization
4) Hierarchy

Division of Labor:

a process of splitting up a task into a series of smaller tasks, each performed by a specialist
•Ex: many firms rely on assembly lines to efficiently manufacture products

Organizational Chart:

a diagram displaying how an organization is structured based on two (2) types of linkages:
1. Vertical Linkages
2. Horizontal Linkages
(Informal Linkages)

(1) Vertical Linkages:

describe the hierarchical relationship between supervisors and subordinates

(2) Horizontal Linkages

describe the relationships among equals in an organization

(3) Informal Linkages

is a third unofficial linkage that describes personal and political relationships in organizations

Specialization:

describes the degree to which a task is divided into separate jobs (i.e., degree of labor division)

T/F: Specialization tends to decrease with firm size

FALSE
specialization tends to INCREASE with firm size

T/F: While specialization can increase productivity, it can also decrease employee satisfaction/increase burnout

TRUE

Formalization

captures the extent to which employee behavior is steered by explicit and codified rules/procedures; high formalization can help firms achieve consistent and predictable results

Centralization

refers to the degree to which decision making is concentrated at the top of the organization

Centralized decision making can result in....

slow response time and reduced customer satisfaction

Decentralized decision making can...

hurt consistency and prevent coordinated responses

Hierarchy

determines the formal, position-based reporting lines and stipulates who reports to whom

Tall Structures

Have many levels

Flat structures

have few levels

Span of control

how many employees directly report to a manager; determined by the number of levels

T/F: Intermediate spans of control are often most efficient

True

Firms transition in type of structure as they grow in ...

size and complexity

As firms grow in size, they (increase/ decrease) in complexity?

increase

Transition types:

Simple Structure ---> Functional Structure ---> Multidivisional Structure or Matrix Structure

Simple Structure:

the founder(s) tend to make all the important decisions and run the day-to-day operations
•Generally used by small firms with low complexity
•Firms tend to outgrow the simple structure quickly as complexity and size increase
-they're the marketing, accounting, IT, and sales person

Functional Structure:

groups employees into distinct functional areas based on domain expertise
•Include R&D, manufacturing, marketing/sales, HR, accounting, etc
•Each division has a "department head" who reports to the CEO, who ultimately coordinates and integrates the work of each function
•Allows for a higher degree of specialization and deeper expertise, improving efficiency
•Still relatively flat structure, so tends to be quick and flexible

Drawbacks to functional structure (2):

1) Can lack effective communication channels between departments
-Ex: R&D manager may not effectively communicate with marketing
-puts more pressure on CEO to coordinate effectively
-may set temporary CROSS-FUNCTIONAL TEAMS that include members from different functional areas

2) Difficult to address a higher level of diversification, which often comes from further growth
-thus, managers may find it necessary to again restructure

Multidivisional Form:

consists of several distinct strategic business units (SBUs)
•Each SBU is operated more or less independently from others and reports to its own manager/CEO who reports to higher corporate office
-ex: Pizza Hut and KFC each have a CEO, but they report to YUM! CEO.

Matrix Structure:

Combines the M-FORM and FUNCTIONAL structures
•Each SBU is organized under a single corporate office (M-form), but a second layer of structure is provided by either:
-Geographic region (i.e., North America, South America, etc)
-Functional area (i.e., R&D, marketing, accounting, etc)
-Product/service offering (i.e., product/service 1, 2, 3, etc)
•Allows firms to gain benefits from M-form (i.e., domain expertise, economies of scale, efficient information processing) with benefits of functional structure (i.e., responsiveness and decentralized focus)

Drawbacks of the Matrix Structure:

•Difficult to implement
•Reporting structures are not very clear (ex: employees have > 1 boss)
•Can slow decision-making and increase administrative costs (because now you need the approval from multiple bosses)

Organizational Culture

describes the collectively shared values and norms of an organization's members

Values:

define what is considered important
•Help define a firm's identity (i.e., "who are we and what is important?")

Norms:

define appropriate employee attitudes and behaviors
•Help define "how we do things around here"

Employees learn and effect a firm's culture through ___________________________ whereby values and norms are internalized

Socialization
•Occurs via day-to-day interaction with others in the organization

Strong Cultures

those firms wherein the core values are widely shared by employees and norms have been internalized
•Ex: Chick-fil-a employees all share the values underlying customer service and behave accordingly
•Ex: Google is famous for a fun and flexible work environment

Artifacts

what culture is expressed through; elements of the firm

Rules of Conduct

an artifact; written rules defining appropriate behavior
•Ex: most firms produce an employee handbook that formally discuss how employees should act and respond to customers

Vocabulary

an artifact; the language, acronyms, jargon, slang, signs, slogans, songs, etc that define the organization
•Ex: Starbucks employees communicate in mix of jargon and acronyms
•Ex: many firms have very recognizable slogans or theme songs that define the organization among consumers

Rituals:

an artifact; rites, ceremonies, and taboos
•Ex: employee recognition ceremonies, retreats, etc
-ex: camp war eagle

Myths and Stories:

an artifact; the history, saga, myths, and legends of the firm
•E.g., a recent Ford advertisement references their long history of building quality automobiles as it seeks to "build the future"

Founder Imprinting:

addresses "where does culture come from?"; the influence of the founder(s) on the definition and shape of a firm's culture
•Founders establish the initial strategy, structure, and culture
•Ex: Steve Jobs at Apple, Walt Disney at Disney, Bill Gates at Microsoft, etc

Over time, these culture values and norms become reinforced by...

employees

Group Think

a negative consequence wherein opinions coalesce around a leader with little critical evaluation of the leader

T/F: An organization's culture CAN be a source of competitive advantage if it meets the VIRO criteria

TRUE
•It must be valuable, rare among competitors, and difficult to imitate
•Firms must be organized to capture the value created by the culture

T/F: A valuable culture negatively influences employee behaviors.

FALSE
-it POSITIVELY influences employee behaviors.
•Employees feel apart of something bigger than themselves
•Firm can rely on fewer levels of hierarchy and less supervision
•Help align employee behaviors with the strategic goals of the firm

Strategic Control-and-Rewards Systems:

internal governance mechanisms put in place to align the incentives of principals (owners) and agents (employees)

Input Controls

seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures

Output controls:

seek to guide employee behavior by defining expected results (outputs)
-the means of achieving those outputs may be left up to employees (but not always)

Input controls are called "input controls" because...

they are considered BEFORE employees make business decisions.

Budgets

Managers set ________________ so employees know how to best allocate resources in order to accomplish a task