IB Jeopardy

What are the three key dimensions of corporate strategy?

• Vertical integration (value chain ownership)

• Diversification (product/service expansion)

• Geographic scope (regional/national/global presence

Why do firms need to grow?

• Increase profits & shareholder value

• Reinvest in the business

• Reduce costs through economies of scale

• Increase market power

• Diversify risk across business units

• Motivate management & avoid hostile takeovers

What are transaction costs?

• External costs (contract search, negotiation, enforcement)

• Internal costs (hiring, training, organizational setup)

When should a firm vertically integrate?

• If Costs in-house < Costs market → Make (own production or distribution)

• If Costs market < Costs in-house → Buy (outsource to suppliers)

What is the principal-agent problem?

• Issue: Managers (agents) may act in their own interests, not shareholders'

• Example: Unnecessary perks like corporate jets, golf outings

• Solution: Incentives & governance mechanisms

What is information asymmetry in markets?

• One party has more knowledge than the other (usually the seller)

• Leads to bad quality crowding out good quality

• Examples: Used cars, e-commerce fraud, mortgage-backed securities

What is vertical integration?

• Ownership of parts of the supply chain

• Backward integration: Owning suppliers

• Forward integration: Owning distribution & retail

What are the benefits of vertical integration?

• Lower costs & improved quality

• Better scheduling & planning

• Control over critical supplies & distribution

What are the risks of vertical integration?

• Higher costs if inefficient

• Reduced flexibility to adapt to market changes

• Potential legal and regulatory issues

When does vertical integration make sense?

• Raw material shortages (e.g., Ford owning mines)

• Improving customer experience (e.g., Apple owning retail stores)

11. What factors lead to vertical market failure?

• Few buyers & sellers (oligopolies)

• High asset specificity (costly switching)

• Frequent transactions (negotiation inefficiencies)

What are alternatives to full vertical integration?

• Taper integration: Mix of in-house production & outsourcing

• Strategic outsourcing: Delegating non-core activities

What are the three types of diversification?

• Product diversification (expanding product offerings)

• Geographic diversification (expanding markets)

• Product-market diversification (doing both)

What are the four types of corporate diversification?

• Single business: >95% revenue from one business

• Dominant business: 70-95% from one business

• Related diversification: Sharing resources/competencies

• Unrelated diversification (conglomerate): No shared competencies

How does diversification enhance firm performance?

• Economies of scale (lower costs)

• Economies of scope (increase value)

• Risk reduction across markets

What are the three tests for diversification to create shareholder value? (Porter’s 3 Tests)

• Attractiveness Test: Industry must be profitable or have potential

• Cost of Entry Test: Entry cost must not erase future profits

• Better-Off Test: New business must create synergies with existing business

Why do firms restructure?

• Refocus core business

• Improve capital efficiency

• Enhance performance

What is the BCG growth-share matrix?

• Stars: High growth, high market share

• Cash cows: Low growth, high market share

• Question marks: High growth, low market share

• Dogs: Low growth, low market share

How do internal capital markets create value?

• Allocate resources efficiently across business units

• Reduce reliance on external funding

When should a firm make (vertically integrate) rather than buy?

• If Costs in-house < Costs market

• Own production of inputs

• Control distribution channels

When should a firm buy instead of making?

• If Costs market < Costs in-house

• Outsource to suppliers or third-party providers

What are the main disadvantages of organizing economic activity within firms?

• Principal-agent problem (managers may act in self-interest)

• Inefficiencies due to bureaucracy

• High internal transaction costs

What are the main disadvantages of operating in the market?

• Information asymmetry (sellers often have more knowledge)

• Quality uncertainty

• Difficulty in enforcing contracts

What is vertical integration?

Ownership of inputs (backward integration) or distribution channels (forward integration)

What are the benefits of vertical integration?

• Lower costs

• Improved quality control

• Enhanced scheduling and planning

• Securing supply and distribution

What are the risks of vertical integration?

• Increased costs if inefficient

• Reduced flexibility in adapting to market changes

• Possible legal and regulatory issues

When does vertical integration make sense?

• Raw material supply issues (e.g., Ford owning mines)

• Improving customer experience (e.g., Apple owning retail stores)

What are alternatives to full vertical integration?

• Taper integration (mix of in-house and outsourced production)

• Strategic outsourcing (delegating non-core activities)

What are the three main types of diversification?

• Product diversification (expanding product lines)

• Geographic diversification (expanding markets)

• Product-market diversification (doing both)

What are the four levels of corporate diversification?

• Single business (>95% revenue from one business)

• Dominant business (70-95% from one business)

• Related diversification (shared resources/competencies)

• Unrelated diversification (conglomerate) (no shared competencies)

How does diversification enhance firm performance?

• Economies of scale (lower costs)

• Economies of scope (increased value)

• Risk reduction across industries

What are Porter’s three tests for successful diversification?

• Attractiveness Test – Industry must be profitable

• Cost of Entry Test – Entry cost must not erase future profits

• Better-Off Test – Must create competitive advantage or synergy

What are the three ways firms can grow?

• Build – Internal development

• Borrow – Strategic alliances or partnerships

• Buy – Acquisitions

What factors determine whether a firm should build, borrow, or buy?

• Relevancy: Are internal resources sufficient?

• Tradability: Can resources be acquired externally via contracts?

• Closeness: Does the firm need strong collaboration with a partner?

• Integration: Can the target firm be easily integrated?

What is strategic outsourcing?

• Moving non-core activities to external firms

• Common in IT, healthcare, HR, and manufacturing

Why do firms form strategic alliances?

• Strengthen competitive position

• Enter new markets

• Hedge against uncertainty

• Gain access to complementary assets

• Learn new capabilities

What are the three types of strategic alliances?

• Non-equity alliances – Contracts (e.g., licensing, franchising)

• Equity alliances – Partial ownership (e.g., Tesla & Panasonic)

• Joint ventures – New entity jointly owned (e.g., Hulu)

What makes strategic alliances successful?

• Relationship-specific investments

• Knowledge-sharing routines

• Building trust

What is the difference between a merger and an acquisition?

• Merger – Two companies combine as equals (e.g., Delta & Northwest)

• Acquisition – One company buys another (can be friendly or hostile)

What are the common reasons for M&As?

• Reduce competition (horizontal mergers)

• Access new markets & distribution channels

• Overcome entry barriers

• Gain new capabilities

Why do many M&As fail?

• Overpaying for targets

• Integration challenges

• Unrealized synergies

• Principal-agent problems (executive ego and empire-building)

What are examples of successful M&As?

Disney acquiring Marvel & Pixar (strong integration strategy)

What are examples of failed M&As?Quaker Oats acquiring Snapple (overpaid and poor integration)

• Quaker Oats acquiring Snapple (overpaid and poor integration)

• Microsoft acquiring Nokia (cultural misalignment)

What are the three ways firms achieve growth?

• Build: Internal organic growth

• Borrow: Strategic alliances/partnerships

• Buy: Mergers and acquisitions

What are the key questions in the Build-Borrow-Buy Framework?

• Relevancy: Are internal resources sufficient?

• Tradability: Can resources be acquired externally?

• Closeness: Is strong collaboration needed?

• Integration: Can the firm effectively integrate an acquisition?

When should a firm choose to build rather than borrow or buy?

• When internal resources are highly relevant

• When the firm has a competitive advantage in the resource area

When does borrowing through alliances make sense?

• When external resources are available for licensing or partnerships

• When moderate closeness is required (e.g., joint ventures)

When should a firm acquire another company (buy)?

• When the target company has unique resources that cannot be easily borrowed

• When full integration is needed to capture value

What are strategic alliances?

Agreements between firms to share knowledge, resources, and capabilities

Why do firms enter strategic alliances?

• Strengthen market position

• Enter new markets

• Hedge against uncertainty

• Gain complementary assets

• Learn new capabilities

What are the three types of strategic alliances?

• Non-equity alliances: Based on contracts (e.g., licensing, franchising)

• Equity alliances: Partial ownership in a partner firm

• Joint ventures: Creation of a new, jointly-owned entity

What makes strategic alliances successful?

• Relationship-specific investments

• Knowledge-sharing routines

• Trust between partners

What is the difference between a merger and an acquisition?

• Merger: Two firms combine as equals (e.g., Delta & Northwest)

• Acquisition: One firm purchases another (friendly or hostile takeover)

What are common motivations for M&As?

• Reduce competition (horizontal integration)

• Enter new markets

• Gain new capabilities or technologies

Why do many M&As fail?

• Overestimation of synergies

• Cultural mismatches

• Poor integration execution

What is globalization?

• Increasing economic and social interdependence worldwide

• Enabled by lower trade barriers, technological advancements, and reduced transportation costs

What are the two main aspects of globalization?

• Globalization of markets: Merging of distinct national markets (e.g., McDonald's, Coca-Cola)

• Globalization of production: Sourcing goods/services from different countries to optimize costs

What are the main drivers of globalization?

• Market factors (similar customer needs worldwide)

• Cost factors (lower production costs)

• Environmental factors (technological progress, regulatory changes)

• Competitive factors (firms expanding globally to remain competitive)

What are the advantages of international expansion?

• Access to larger markets: Economies of scale & competitive advantage

• Access to low-cost inputs: Cheaper labor and materials

• Developing new competencies: Exposure to innovation and expertise

What are the disadvantages of international expansion?

• Liability of foreignness: Cultural & economic unfamiliarity

• Loss of reputation: Risk of unethical practices in foreign markets

• Loss of intellectual property: Risk of technology theft or reverse engineering

What does the CAGE framework analyze?

• Cultural distance: Differences in values, language, social norms

• Administrative distance: Differences in legal, political, and regulatory environments

• Geographic distance: Physical distance, infrastructure, time zones

• Economic distance: Differences in wealth, cost structures, and consumer preferences

Why is cultural distance important for international expansion?

Impacts communication, management styles, and consumer preferences

How does geographic distance affect expansion strategies?

Large distances increase transportation costs and logistical complexity

What are the four main global strategies?

• International strategy: Selling the same products abroad with minimal changes

• Multidomestic strategy: Adapting products to local markets

• Global-standardization strategy: Cost-efficient, uniform products worldwide

• Transnational strategy: Balancing cost efficiency with local responsiveness

What are the different modes of entering a foreign market?

• Exporting: Low cost, low risk

• Licensing & franchising: Low investment, risk of losing control

• Joint ventures: Shared investment, shared risks

• Wholly owned subsidiary: High control, high investment

What is the "Death of Distance" hypothesis?

The idea that technological advancements reduce the importance of geographic distance

What are the four key factors in Porter’s Diamond Model?

• Factor conditions: Natural and human resources, infrastructure

• Demand conditions: Sophisticated local customers drive innovation

• Competitive intensity: Strong domestic competition leads to global competitiveness

• Related & supporting industries: Presence of suppliers and complementary industries

What are some examples of national competitive advantages?

• U.S.: Biotechnology, software, and finance

• Germany: Automotive engineering and manufacturing

• Japan & South Korea: Consumer electronics

• India: IT outsourcing and business services

What is organizational design?

The process of structuring a firm’s operations, culture, and control mechanisms.

What are the key components of organizational design?

• Structure (how resources & efforts are coordinated)

• Culture (shared values & norms)

• Control (monitoring & modifying operations)

What is organizational inertia?

The failure of firms to adapt to internal or external changes.

What are the four building blocks of organizational structure?

• Specialization: Degree of task division

• Formalization: Extent of rule-based operations

• Centralization: Where decision-making power resides

• Hierarchy: Reporting lines within the firm

What are the pros and cons of specialization?

• Pros: Increases expertise & efficiency

• Cons: Limits flexibility & cross-functional understanding

What are the advantages and disadvantages of formalization?

• Pros: Consistency, predictability, safety

• Cons: Slower decisions, less innovation, hindered customer service

What are the impacts of centralization?

• High centralization → Slow decision-making, lower customer satisfaction

• Low centralization → More agility & responsiveness

What is hierarchy, and what does “span of control” mean?

• Hierarchy: Defines reporting structures

• Span of control: Number of employees reporting to a manager

What are the characteristics of mechanistic organizations?

• High specialization & formalization

• Tall hierarchies, centralized decision-making

• Best for cost-leadership strategies

9. What are the characteristics of organic organizations?

• Low specialization & formalization

• Flat structures, decentralized decision-making

• Best for innovation & differentiation strategies

What are the characteristics of a simple structure?

• Used by small firms with low complexity

• Founders make strategic and operational decisions

What is a functional structure, and when is it useful?

• Groups employees by expertise (e.g., marketing, R&D, finance)

• Works best for focused, single-business firms

What are the advantages and disadvantages of a functional structure?

• Pros: Efficiency, clear accountability, specialization

• Cons: Poor cross-functional communication, limits diversification

What is a multidivisional (M-form) structure, and when is it used?

• Used when firms diversify into multiple products or geographies

• Divides company into strategic business units (SBUs) with profit/loss responsibility

What are the differences between related and unrelated M-form structures?

• Related M-form: SBUs cooperate, centralized decision-making

• Unrelated M-form: SBUs compete for resources, decentralized decision-making

What are the disadvantages of an M-form structure?

• Bureaucracy & duplication of efforts

• Slower decision-making

• Internal competition & politics

What is a matrix structure, and when is it used?

• Combines functional & divisional structures

• Best for firms pursuing a transnational/global strategy

What are the disadvantages of a matrix structure?

• Complexity & high administrative costs

• Unclear reporting relationships

• Slower decision-making due to conflicting priorities

What is the difference between closed and open innovation?

• Closed innovation: R&D happens internally

• Open innovation: Uses external sources (customers, universities, alliances)

What are the key elements of organizational culture?

• Values: What the organization considers important

• Norms: Expected behaviors & attitudes

• Artifacts: Physical expressions of culture (office layout, symbols, events)

Where does organizational culture come from?

• Founder imprinting (e.g., Steve Jobs at Apple)

• Reinforcement through values & reward systems

How does organizational culture change?

• Changes in leadership

• Strategic shifts or external disruptions

• Refinement to prevent rigidity

How can culture be a competitive advantage?

• If it is valuable, rare, inimitable, and organized (VRIO framework)

• Helps in economic value creation

What are input controls?

• Set rules & procedures to guide behavior before decisions are made

• Example: Budgets, operating procedures

What are output controls?

• Define expected results while allowing flexibility in execution

• Higher motivation when employees have autonomy, mastery, and purpose

What is the role of firms in the market?

• Engage in contracts for value creation & distribution

• Reduce transaction costs and improve performance

• Compete in a market-driven environment

How can market strategies impact community resilience?

• Positively: Sustainability efforts, job creation, local investment

• Negatively: Environmental harm, wage suppression, monopolistic behavior

What are some examples of market strategies that enhance community resilience?

• COVID-19 vaccines – Innovation for health & access to new markets

• Tesla & electric vehicles – Sustainability & carbon footprint reduction

• Sustainable fashion (Nike, Reformation) – Reducing waste & ethical sourcing

What is a non-market strategy?

Business strategies beyond economic transactions, including political & social influence

Who are key actors in the non-market environment?

Government, NGOs, activists, civil society, and media

What is the goal of non-market strategies?

Influence regulations, policies, and social perceptions to gain a competitive advantage

What is Corporate Social Responsibility (CSR)?

A firm’s voluntary actions to benefit society beyond legal and financial interests