Chapters 7 – 13 Essay Questions:

Chapter 7:

1) How have changing conditions in the external environment influenced the type of M & A activity firms pursue?

During the recent financial crisis, tightening credit markets made it more difficult for firms to complete megadeals (those costing $10 billion or more). As a result, many acquirers focused on smaller targets with a niche focus that complemented their existing businesses. In addition, the relatively weak US dollar increased the interest of firms from other nations to acquire US companies.

2) How difficult is it for merger & acquisition strategies to create value &which firms benefit the most from M & A activity?

Evidence suggests that using merger & acquisition strategies to create value is challenging. This is particularly true for acquiring firms in that some research results indicate that shareholders of acquired firms often earn above-average returns from acquisitions while shareholders of acquiring firms typically earn returns that are close to zero. In addition, in approximately two-thirds of all acquisitions, the acquiring firm’s stock price falls immediately after the intended transaction is announced. This negative response reflects investor’s skepticism about the likelihood that the acquirer will be able to achieve the synergies required to justify the premium.

Figure 7.1—Reasons for Acquisitions & Problems in Achieving Success:

Reasons For Acquisitions: Problems in Achieving Success:

1 Increased Market Power Integration Difficulties

2 Overcoming Entry Barriers Inadequate Evaluation of Target

3Cost of New Product Development

& Increased Speed to MarketLarge or Extraordinary Debt

4 Lower Risk Compared to Developing New Products Inability To Achieve Synergy

5 Increased Diversification Too Much Diversification

6 Reshaping the Firm’s Competitive ScopeMgr.’s Overly Focused on

Acquisitions

7 Learning & Developing New Capabilities Growing Too Large

3) Identify & explain the seven reasons firms engage in an acquisition strategy.

1

(1) Increased market power : Market power allows a firm to sell its G/S’s above competitive levels or when the costs of its primary or support activities are below those of its competitors. Market power is derived from the size of the firm & the firm’s resources & capabilities to compete in the marketplace. Firms use horizontal, vertical, & related acquisitions to ↑ their size & market power.

(2) Overcoming entry barriers: Firms can gain immediate access to a market by purchasing a firm with an established product that has consumer loyalty. Acquiring firms can also overcome economies of scale entry barriers through buying a firm that has already successfully achieved economies of scale. Also, acquisitions can often overcome barriers to entry into int’l markets.

(3) Reducing the cost of new product development & increasing speed to market. Developing new products & ventures internally can be very costly & time consuming without any guarantee of success. Acquiring firms with products new to the acquiring firm avoids the risk & cost of internal innovation. In addition, acquisitions provide more predictable returns on investments than internal new product development. Acquisitions are a much quicker path than internal development to enter a new market, & they are a means of gaining new capabilities for the acquiring firm.

(4) Lower risk compared to developing new products internally. Acquisitions are a means to avoid internal ventures (and R&D investments), which many managers perceive to be highly risky. However, substituting acquisitions for innovation may leave the acquiring firm without the skills to innovate internally.

(5) Increased diversification. Firms can diversify their portfolio of business through acquiring other firms. It is easier & quicker to buy firms with different product lines than to develop new product lines independently.

(6) Reshaping the firm’s competitive scope. Firms can move more easily into new markets as a way to decrease their dependence on a market or product line that has high levels of competition.

(7) Learning & developing new capabilities. By gaining access to new knowledge, acquisitions can help companies gain capabilities & technologies they do not possess. Acquisitions can reduce inertia & help a firm remain agile.

4) Describe the seven problems in achieving a successful acquisition.

Acquisition strategies present many potential problems.

(1) Integration difficulties. It may be difficult to effectively integrate the acquiring & acquired firms due to differences in corporate culture, financial & control systems, management styles, & status of executives in the combined firms. Turnover of key personnel from the acquired firm is particularly negative.

(2) Inadequate evaluation of target. Due diligence assesses where, when, & how management can drive real performance gains through an acquisition. Acquirers that fail to perform effective due diligence are likely to pay too much for the target firm.

(3) Large or extraordinary debt. Acquiring firms frequently incur high debt to finance the acquisition. High debt may prevent the investment in activities such as research & development, training of employees & marketing that are required for long-term success. High debt also increases the risk of bankruptcy & can lead to downgrading of the firm’s credit rating.

2

(4) Inability to achieve synergy. Private synergy occurs when the acquiring & target firms’ assets are complementary in unique ways, making this synergy difficult for rivals to understand & imitate. Private synergy is difficult to create. Transaction costs are incurred when firms seek private synergy through acquisitions. Direct transaction costs include legal fees & investment banker charges. Indirect transaction costs include managerial time to evaluate target firms, time to complete negotiations, & the loss of key managers & employees following an acquisition. Firms often underestimate the indirect transaction costs of an acquisition.

(5) Too much diversification. A high level of diversification can have a negative effect on the firm’s long-term performance. For example, the scope created by diversification often causes managers to rely on financial controls rather than strategic controls because the managers cannot completely understand the business units’ objectives & strategies. The focus on financial controls creates a short-term outlook among managers & they forego long-term investments. Additionally, acquisitions can become a substitute for innovation, which can be negative in the long run.

(6) Managers overly focused on acquisitions. Firms that become heavily involved in acquisition activity often create an internal environment in which managers devote increasing amounts of their time & energy to analyzing & completing additional acquisitions. This detracts from other important activities, such as identifying & taking advantage of other opportunities & interacting with importance external stakeholders. Moreover, during an acquisition, the managers of the target firm are hesitant to make decisions with long-term consequences until the negotiations are completed.

(7) Growing too large. Acquisitions may lead to a combined firm that is too large, requiring extensive use of bureaucratic controls. This leads to rigidity & lack of innovation, & can negatively affect performance. Very large size may exceed the efficiencies gained from economies of scale & the benefits of the additional market power that comes with size.

5) Describe how an acquisition program can result in managerial time & energy absorption.

Typically, a substantial amount of managerial time & energy is required for acquisition strategies if they are to contribute to a firm’s strategic competitiveness. Activities with which managers become involved include those of searching for viable acquisition candidates, completing effective due diligence processes, preparing for negotiations & managing the integration process after the acquisition is completed. Company experience shows that participating in & overseeing the acquisition activities can divert managerial attention from other matters that are linked with long-term competitive success (e.g., identifying & acting on other opportunities, interacting effectively with external stakeholders).

3

6) What are the attributes of a successful acquisition program?

Acquisitions can contribute to a firm’s competitiveness if they have the following attributes:

(1) The acquired firm has assets or resources that are complementary to the acquiring firm’s core business. (2) The acquisition is friendly. (3) The acquiring firm conducts effective due diligence to select target firms & evaluates the target firm’s health (financial, cultural, & human resources). (4) The acquiring firm has financial slack. (5) The merged firm maintains low to moderate debt. (6) The acquiring firm has sustained & consistent emphasis on R&D & innovation. (7) The acquiring firm manages change well & is flexible & adaptable.

7) What is restructuring & what are its common forms?

Restructuring refers to changes in a firm’s portfolio of businesses and/or financial structure.

There are three general forms of restructuring:

4

(1) Downsizing involves reducing the number of employees, which may include decreasing the number of operating units.

(2) Downscoping entails divesting, spinning-off, or eliminating businesses that are not related to the core business. It allows the firm to focus on its core business.

(3) A leveraged buyout occurs when a party (managers, employees, or an external party) buys all the assets of a (publicly traded) business, takes it private, & finances the buyout with debt. Once the transaction is complete, the company’s stock is no longer publicly traded.

8) What are the differences between downscoping & downsizing & why are each used?

Downsizing is a reduction in the number of employees. It may or may not change the composition of businesses in the company’s portfolio. In contrast, the goal of downscoping is to reduce the firm’s level of diversification. Downsizing is often used when the acquiring form paid too high a premium to acquire the target firm or where the acquisition created a situation in which the newly formed form had duplicate organizational functions such as sales or manufacturing. Downscoping is accomplished by divesting unrelated businesses. Downscoping is used to make the firm less diversified & allow its top-level managers to focus on a few core businesses. A firm that downscopes often also downsizes at the same time.

9) What is an LBO & what have been the results of such activities?

Leveraged buyouts (LBOs) are a restructuring strategy. Through a leveraged buyout, a (publicly-traded) firm is purchased so that it can be taken private. In this manner, the company’s stock is no longer publicly traded. LBOs usually are financed largely through debt, & the new owners usually sell off a # of assets.

There are three types of LBOs: (1) Management buyouts (MBOs)(2) Employee buyouts (EBOs)(3) Whole-firm buyouts

Because they provide managerial incentives, MBOs have been the most successful of the 3 leveraged buyout types. MBOs tend to result in downscoping, an increased strategic focus, & improved performance.

10) What are the results of the three forms of restructuring?

Downsizing usually does not lead to higher firm performance. The stock markets tend to evaluate downsizing negatively, as investors assume downsizing is a result of problems within the firm. In addition, the laid-off employees represent a significant loss of knowledge to the firm, making it less competitive. The main positive outcome of downsizing is accidental, since many laid-off employees become entrepreneurs, starting up new businesses. In contrast, downscoping generally improves firm performance through reducing debt costs & concentrating on the firm’s core businesses. LBOs have mixed outcomes. The resulting large debt increases the financial risk & may

5

end in bankruptcy. The managers of the bought-out firm often have a short-term & risk-averse focus because the acquiring firm intends to sell it within five to eight years. This prevents investment in R&D & other actions that would improve the firm’s core competence. But, if the firms have an entrepreneurial mindset, buyouts can lead to greater innovation if the debt load is not too large.

Chapter 8 Essay Questions:

1) What are the motives for firms to pursue international diversification? What are the 4 basic benefits firms can derive by moving into international markets?

One of the primary reasons for implementing an international strategy is to gain potential new opportunities. Traditional motives include extending the product life cycle, securing needed resources & having access to low-cost factors of production. In addition, companies may diversify internationally to gain access to the large demand potential of other countries. There is also pressure for global integration of operations, driven by growing universal product demand. Companies can achieve economies of scale by expanding beyond their domestic markets. Companies also wish to distribute their operations across many countries to reduce the effect of currency fluctuations & to reduce the risk of devaluation.

When firms successfully move into international markets, they can experience: increased market size, greater returns on major investments, greater economies of scope, scale, or learning, & a competitive advantage through location.

2) Describe the 4 factors that provide a basis for international business-level strategies.

An international strategy is commonly designed primarily to capitalize on four business level benefits: (1) increased market size, (2) earning a return on large investments, (3) economies of scale & learning, & (4) advantages of location. These factors are interrelated. Increased market size is achieved by expansion beyond the firm’s home country. International expansion increases the number of potential customers a firm may serve. As the number of potential customers increases, the return on a large investment increases. Leveraging a technology beyond the home country allows for more units to be sold & initial investments recovered more quickly. The development of some products, such as major new aircraft like the Airbus A380, require such large amounts of R&D that development of the product would not be feasible at the scale of the local market alone. Projects such as these require global scale to be feasible. Lastly, advantages of location can be realized through internationalization. These advantages include access to low-cost labor, critical resources, or customers.

3) Discuss the 3 international corporate-level strategies. On what factors are these strategies based?

International corporate strategy focuses on the scope of a firm’s operations through both product & geographic diversification. The three basic international corporate-level strategies vary on the need for local responsiveness to the market & the need for global integration. The multidomestic strategy focuses on competition within each country in which the firm operates. Firms employing a multidomestic strategy decentralize strategic & operating decisions to the strategic business units operating in each country so business units can customize their goods & services to the local

6

market. The use of global integration in this strategy is low. The global strategy assumes more standardization of product demand across country boundaries. Therefore, competitive strategy is centralized & controlled by the home office, placing high emphasis on global integration of operations. The strategic business units in each country are interdependent & the home office integrates these businesses. The firm offers standardized products across country markets. It emphasizes economies of scale & the opportunity to use innovations developed in one nation to other markets. The transnational strategy seeks to achieve both global efficiency (through global integration) & local responsiveness. This strategy is difficult to implement. One goal requires global coordination while the other requires local flexibility. Flexible coordination builds a shared vision & individual commitment through an integrated network. The effective implementation of the transnational strategy often produces higher performance than either of the other corporate-level strategies.

4) Identify & describe the modes of entering international markets. What are their advantages & disadvantages?

Firms may enter international markets in any of five ways: exporting, licensing, forming strategic alliances, making acquisitions, & establishing new, wholly owned subsidiaries (greenfield ventures). Most firms, particularly small ones, begin with exporting (marketing & distributing their products abroad). This involves high transportation costs & possibly tariffs. An exporter has less control over the marketing & distribution of the product than in other methods of entering the international market. In addition, the exporter must pay the distributor or allow the distributor to add to the product price in order to offset its costs & earn a profit. In addition, the strength of the dollar against foreign currencies is a constant uncertainty. But, the advantages are that the company does not have the expense of establishing operations in the host countries. The Internet makes exporting easier than in previous times. Licensing (selling the manufacturing & distribution rights to a foreign firm) is also popular with smaller firms. The licenser is paid a royalty on each unit sold by the licensee. The licensee takes the risks & makes the financial investments in manufacturing & distributing the product. It is the least costly way of entering international markets. It allows a firm to expand returns based on a previous innovation. But there are disadvantages. Licensing provides the lowest returns, because they must be shared between the licensee & the licensor. Licensing gives the licenser less control over the manufacturing & marketing process. There is the risk that the licensee will learn the technology & become a competitor when the original license expires. If the licenser later wishes to use a different ownership arrangement, the licensing arrangement make create some inflexibility. Strategic alliances involve sharing risks & resources with another firm in the host-country. The host country partner knows the local conditions; the expanding firm has the technology or other capabilities. Both partners typically enter an alliance in order to learn new capabilities. The partnership allows the entering firm to gain access to a new market & avoid paying tariffs. The host-country firm gains access to new technology & innovative products. Equity-based alliances are more likely to produce positive gains. Alliances work best in the face of high uncertainty & where cooperation is needed between partners & strategic flexibility is important. But, many alliances fail due to incompatibility & conflict between the partners. Cross-border acquisitions provide quick access to a new market, but they are expensive & involve complex negotiations. Cross-border acquisitions have all the problems of domestic acquisitions with the complication of a different culture, legal system & regulatory requirements. Acquisitions are expensive & usually involve debt-financing. The most expensive & risky means of entering a new international market is through the establishment of a new, wholly owned subsidiary or greenfield venture. Alternatively, it provides the advantages of maximum control for the firm and, if successful, potentially the greatest returns as well. This alternative is suitable for firms with strong intangible capabilities and/or proprietary technology. The risks are high because of the challenges of operating in an unfamiliar

7

environment. The company must build new manufacturing facilities, establish distribution networks, & learn & implement new marketing strategies.

5) Discuss the effect of international diversification on a firm’s returns.

Research shows that returns vary as the level of diversification increases. At first, returns decrease, then as the firm learns to manage the diversification, returns increase. But, as diversification increases past some point, returns level off & become negative. Firms that are broadly diversified in international markets usually receive the most positive stock returns, especially when they diversify geographically into core business areas. International diversification can lead to economies of scale & experience, location advantages, increased market size, & the potential to stabilize returns (which reduces the firm’s overall risk). International diversification improves a firm’s ability to increase returns from innovation before competitors can overcome the initial competitive advantage. In addition, as firms move into international markets, they are exposed to new products & processes that stimulate further innovation. The amount of international diversification that can be managed varies from firm to firm & according to the abilities of the firm’s managers. The problems of central coordination & integration are mitigated if the firm diversifies into more friendly countries that are geographically & culturally close.

6) Identify & describe the major risks of international diversification.

International diversification carries multiple risks. The major risks are political & economic. Political risks are related to governmental instability & to war. Instability in a government creates economic risks & uncertainty created by government regulation. Governmental instability can result in the existence of many potentially conflicting legal authorities, corruption, & the risk of nationalization of company assets. Economic risks are related to political risks. Economic risks include the increased trend of counterfeit products & the lack of global policing of these products. Another economic risk is the perceived security risk of a foreign firm acquiring firms that have key natural resources or firms that may be considered strategic in regard to intellectual property. In addition, differences in & fluctuations of the value of different currencies is another economic risk. The security risk created by terrorism prevents U.S. firms from investing in some regions. The relative strength or weakness of the dollar affects international firms’ competitiveness in certain markets & their returns.

Chapter 9 Essay Questions:

1) Identify & define the different types of strategic alliances.

Strategic alliances are cooperative strategies between firms whereby resources & capabilities are combined to create a competitive advantage. All strategic alliances require firms to exchange & share resources & capabilities to co-develop or distribute goods or services. The three basic types of strategic alliances are: (1) joint ventures, where a legally independent company is created by at least two other firms, with each firm usually owning an equal percentage of the new company; 2) equity strategic alliances, whereby partners own different percentages of equity in the new company they have formed; & (3) nonequity strategic alliances, which are contractual relationships between firms to share some of their resources & capabilities. The firms do not establish a separate organization, nor do they take an equity position. Because of this, nonequity strategic alliances are less formal & demand fewer partner commitments than joint ventures & equity strategic alliances. Typical forms are licensing agreements, distribution agreements & supply contracts.

8

2) Explain the rationales for a cooperative strategy under each of the three types of basic market situations (i.e., slow, standard, & fast cycles).

In slow-cycle markets (markets that are near-monopolies), firms cooperate with others to gain entry into restricted markets or to establish franchises in new markets. Slow-cycle markets are rare & diminishing. Cooperative strategies can help firms in (presently) slow-cycle markets make the transition from this relatively sheltered existence to a more competitive environment.

In standard-cycle markets (which are often large & oriented toward economies of scale), firms try to gain access to partners with complementary resources & capabilities. Through the alliance, the firms try to increase economies of scale & market power.

In fast-cycle markets (characterized by instability, unpredictability, & complexity), sustained competitive advantages are rare, so firms must constantly seek new sources of competitive advantage. In fast-cycle markets, alliances between firms with excess resources & capabilities & firms with promising capabilities who lack resources help both firms to rapidly enter new markets.

3) Identify the four types of business-level cooperative strategies & the advantages & disadvantages of each.

Through vertical & horizontal complementary alliances, companies combine their resources & capabilities in ways that create value. Vertical complementary strategic alliances result when firms creating value in different parts of the value chain combine their assets to create a competitive advantage. Vertical complementary strategies have the greatest probability of being successful compared with other types of cooperative strategies. But firms using this type of alliance need to be wise in how much technology they share with their partners. Vertical complementary alliances rely heavily on trust between partners to succeed. Horizontal complementary strategic alliances are developed when firms in the same stage of the value chain combine their assets to create additional value. Usually they are formed to improve long-term product development & distribution opportunities. Horizontal complementary strategies can be unstable because they often join highly rivalrous competitors. In addition, even though partners may make similar investments, they rarely benefit equally from the alliance.

The competition response strategy involves alliances formed to react to competitors’ actions. Usually they respond to strategic, rather than tactical, actions because the alliances are difficult to reverse & expensive to operate. The uncertainty-reducing strategy is used to hedge against risk & uncertainty, such as when entering new product markets or in emerging economies. Both of these strategies are less effective in the long-run than the complementary alliances which are focused on creating value.

Competition reducing (collusive) strategies are often illegal. There are two types of collusive competition reducing strategies: explicit collusion & tacit collusion. Explicit collusion exists when firms directly negotiate production output & pricing agreements to reduce competition. These are illegal in the U.S. & in most developed economies. Tacit collusion exists when several firms in an industry indirectly coordinate their production & pricing decisions by observing each other’s competitive actions & responses. Both types of collusion result in lower production levels & higher prices for consumers.

4) Identify the three types of corporate-level cooperative strategies.9

A diversifying strategic alliance allows firms to share some of their resources & capabilities to diversify into new product or market areas. A synergistic strategic alliance allows firms to share some of their resources & capabilities to create economies of scope. These alliances create synergy across multiple functions or multiple businesses between partner firms. Franchising is a strategy in which the franchisor uses a contractual relationship to describe & control the sharing of its resources & capabilities with franchisees. A franchise is a contract between two independent organizations whereby the franchisor grants the right to the franchisee to sell the franchisor’s product or do business under its trademarks in a given location for a specified period of time.

5) Why are cooperative strategies often used when firms pursue international strategies? What are the advantages & disadvantages of international cooperative strategies?

A cross-border strategic alliance is an international cooperative strategy in which firms headquartered in different nations combine some of their resources & capabilities to create a competitive advantage. The typical reasons follow:

1) In general, multinational firms outperform firms operating only on a domestic basis. Firms may be able to leverage core competencies developed domestically in other countries.

2) Limited domestic growth opportunities push firms into international expansion.

3) Some governments require local ownership in order for foreign firms to invest in businesses in their countries, which requires foreign firms to ally with local firms.

4) Local partners often have significantly more information about factors contributing to competitive success such as local markets, sources of capital, legal procedures, & politics, which makes an alliance useful for a foreign firm.

5) Cross-border alliances can help firms transform themselves or better use their competitive advantages surfacing in the global economy. On the negative side, cross-border alliances are more complex & risky than domestic strategic alliances.

6) Identify & define the two different types of network strategies.

A network cooperative strategy is a cooperative strategy wherein several firms form multiple partnerships to achieve shared objectives.

Stable alliance networks (primarily found in mature industries) usually involve exploitation of economies of scale or scope. In this type of network, the firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core industries.

Dynamic alliance networks (witnessed mainly in rapidly changing industries) are used to help a firm keep up when technologies shift rapidly by stimulating product innovation & successful market entries. Dynamic alliance networks explore new ideas & typically generate frequent product innovations with short product life cycles.

7) Identify the competitive risks associated with cooperative strategies.

Cooperative strategies are not risk free strategy choices; as many as 70% fail. If a contract is not developed appropriately & fails to avert opportunistic behavior, or if a potential partner firm

10

misrepresents its competencies or fails to make available promised complementary resources, failure is likely. Furthermore, a firm may make investments that are specific to the alliance while the partner does not. This puts the investing firm at a disadvantage in terms of return on investment. The core of many failures is the lack of trustworthiness of the partner(s) who act opportunistically.

8) Describe the 2 strategic management approaches to managing alliances.

The ability to effectively manage competitive strategies can be one of a firm’s core competencies. There are two basic approaches to managing competitive alliances.

Cost minimization leads firms to develop protective formal contracts & effective monitoring systems to manage alliances. Its focus is to prevent opportunistic behavior by the partner(s).

Opportunity maximization is intended to maximize value creation opportunities. It is less formal & places fewer constraints on partner behaviors. But, identifying trustworthy partners is the key to this second approach. If (well-founded) trust is present, monitoring costs are lowered & opportunities will be maximized. Trust is more difficult to establish between international partners. Ironically, the cost minimization approach is more expensive to implement & to use than the opportunity maximization approach.

Chapter 10 Essay Questions:ESSAY

1. What is corporate governance & how is it used to monitor & control managers' decisions?

Corporate governance is the relationship among stakeholders that is used to determine & control the firm’s strategic direction & its performance. Effective governance that aligns top-level managers’ interests with shareholders’ interests can produce a competitive advantage for the firm. Corporate governance includes oversight in areas where there are conflicts of interest among major stakeholders, including the election of directors, supervision of CEO pay, & the organization’s overall structure & strategic direction. Three internal governance mechanisms (ownership concentration, the board of directors, & executive compensation) & an external mechanism (the market for corporate control) are used in U.S. corporations. Unfortunately, corporate governance mechanisms are not always successful.

PTS: 1 DIF: Medium REF: 286-287 OBJ: 10-01NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing administration & control

2. Discuss the effect of the separation of ownership & control in the modern corporation.

Ownership is typically separated from control in the large U.S. corporation. Owners (principals) hire managers (agents) to make decisions that maximize the value of their firm. As risk specialists, owners diversify their risk by investing in an array of corporations. As decision-making specialists, top executives are expected by owners to make decisions that will result in earning above-average returns for which they are compensated. Thus, the typical corporation is characterized by an agency relationship that is created when one party (the firm’s owners) hires & pays another party

11

(top executives) to use decision-making skills. Since owners may not possess the specialized skill to run a large company, delegating these tasks to managers should produce higher returns for owners.

PTS: 1 DIF: Medium REF: 287-288 OBJ: 10-02NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing administration & control

3. Define the agency relationship & managerial opportunism & discuss their strategic implications.

The separation of owners & managers creates an agency relationship. An agency relationship exists when a principal hires an agent as a decision-making specialist to perform a service. Some problems that result from the agency relationship between owners & managers include the potential for a divergence of interests & a lack of direct control of the firm by shareholders. Managerial opportunism is the seeking of self-interest with guile. It is both an attitude & a set of behaviors, which cannot be perfectly predicted from the agent’s reputation. Top executives may make strategic decisions that maximize their personal welfare & minimize their personal risk, such as excessive product diversification. Decisions such as these prevent the maximization of shareholder wealth, which is supposed to be the top executives’ priority. Although shareholders implement corporate governance mechanisms to protect themselves from managerial opportunism, these mechanisms are imperfect. Agency costs include the costs of managerial incentives, monitoring costs, enforcement costs, & the individual financial losses incurred by principals (owners of the firm) because governance mechanisms cannot guarantee total compliance by the agents (managers).

PTS: 1 DIF: Medium REF: 288 OBJ: 10-03NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Managing administration & control

4. Define the three internal corporate governance mechanisms & how they may be used to control & monitor managerial decisions.

The three internal corporate governance mechanisms are: ownership concentration, the board of directors, & executive compensation. Ownership concentration is based on the number of large-block shareholders & the percentage of shares they own. With significant ownership percentage, institutional investors, such as mutual funds & pension funds, are often able to influence top executives’ strategic decisions & actions. Thus, unlike diffuse ownership, which tends to result in relatively weak monitoring & control of managerial decisions, concentrated ownership produces more active & effective monitoring of top executives. An increasingly powerful force in corporate America, institutional owners are actively using their positions of concentrated ownership in individual companies to force managers & boards of directors to make decisions that maximize a firm’s value. These owners (e.g., CalPERS) have caused poorly-performing CEOs to be ousted from the firm. The board of directors, elected by shareholders, is composed of insiders, related outsiders, & outsiders. The board of directors is a governance mechanism shareholders expect to run the firm in such a ways as to maximize shareholder wealth. Outside directors are expected to be more independent of a firm’s top executives than are those who hold top management positions within the firm. A board with a significant percentage of insiders tends to be weak in monitoring & controlling management decisions. Boards of directors have been criticized for being ineffective, & there is a movement to more formally evaluate the performance of boards & their individual members. Executive compensation is a highly visible & often criticized governance

12

mechanism. Salary, bonuses, & long-term incentives such as stock options are intended to reward top executives for aligning their goals with the interests of shareholders. A firm’s board of directors has the responsibility of determining the degree to which executive compensation succeeds in controlling managerial behavior. But, it is difficult to evaluate top executives’ performance, & so executive compensation tends to be linked to financial measures which do not necessarily reflect the effectiveness of the executive’s decision on long-term shareholder outcomes. In addition, many external factors affect the performance of a firm. Moreover, performance incentive plans can be subject to management manipulation. Consequently, executive compensation is a far-from-perfect governance mechanism.

PTS: 1 DIF: Medium REF: 292-295 | 297-298OBJ: 10-04NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

5. Discuss the difficulties in establishing performance-based compensation plans for executives.

Executive compensation, especially long-term incentive compensation, is complicated. First, the strategic decisions made by top-level managers are typically complex & nonroutine; as such, direct supervision of executives is inappropriate for judging the quality of their decisions. Because of this, there is a tendency to link the compensation of top-level managers to measurable outcomes such as financial performance. Second, an executive’s decision often affects a firm’s financial outcomes over an extended period of time, making it difficult to assess the effect of current decisions on the corporation’s performance. In fact, strategic decisions are more likely to have long-term, rather than short-term, effects on a company's strategic outcomes. Third, a number of other factors affect firm performance. Unpredictable economic, social, or legal changes make it difficult to discern the effects of strategic decisions. Thus, although performance-based compensation may provide incentives to managers to make decisions that best serve shareholders’ interests, such compensation plans alone are imperfect in their ability to monitor & control managers.

Although incentive compensation plans may increase firm value in line with shareholder expectations, they are subject to managerial manipulation. For instance, annual bonuses may provide incentives to pursue short-run objectives at the expense of the firm’s long-term interests. Supporting this conclusion, some research has found that bonuses based on annual performance were negatively related to investments in R&D, which may affect the firm’s long-term strategic competitiveness. Although long-term performance-based incentives may reduce the temptation to underinvest in the short run, they increase executive exposure to risks associated with uncontrollable events, such as market fluctuations & industry decline. Long-term incentives may not be highly-valued by a manager: thus, firms may have to overcompensate managers when they use long-term incentives.

PTS: 1 DIF: Medium REF: 298-299 OBJ: 10-05NOT: AACSB: Business Knowledge & Analytical Skills | Management: Motivation Concepts | Dierdorff & Rubin: Managing administration & control

6. Describe the market for corporate control & its implications for organizations.

The market for corporate control is composed of individuals & firms who buy ownership positions in (e.g., take over) potentially undervalued firms to form a new division in an established firm or

13

to merge the two previously-separate firms. The target firm’s top management team is usually replaced because it is assumed to be partly responsible for formulating & implementing the strategy that led to poor firm performance. The market for corporate control is (supposedly) triggered by low corporate performance by a firm relative to competitors in its industry. Thus, the market for corporate control should act as a control mechanism for corporate governance that leads to the replacement of under-performing executives. But, the market for corporate control is not an efficient governance mechanism because in reality many of the firms taken over have above-average performance. Hostile takeovers, on the other hand, are typically triggered by poor performance. Some managers have sought to buffer themselves from the effect of the market for corporate control (hostile takeovers) by instituting golden parachutes that will pay the managers significant extra compensation if the firm is taken over. Those & other takeover defenses are intended to increase the costs of mounting a takeover & reducing the managers’ risk of losing their jobs. Examples of takeover defenses include asset restructuring, changes in the financial structure of the firm, reincorporation in another state, & greenmail. These defense tactics are controversial & the research on their effectiveness is inconclusive. Most institutional investors oppose them.

PTS: 1 DIF: Medium REF: 299-300 OBJ: 10-06NOT: AACSB: Business Knowledge & Analytical Skills | Management: Environmental Influence | Dierdorff & Rubin: Managing administration & control

7. Briefly compare & contrast corporate governance in the U.S., Germany, & Japan, & China.

Corporate governance structures used in Germany & Japan differ from each other & from the ones used in the U.S. Historically, the U.S. governance structure has focused on maximizing shareholder value. Banks have been at the center of the German corporate governance structure, because as lenders, banks become major shareholders in the firms. Shareholders usually allow the banks to vote their ownership positions, so banks have majority positions in many German firms. The German system has other unique features. For example, German firms with more than 2,000 employees are required to have a two-tier board structure, separating the board’s management supervision function from other duties that it would normally perform in the U.S. (e.g., nominating new board members). Historically, German executives have not been dedicated to the maximization of shareholder value, because private shareholders rarely have major ownership in German firms, nor do larger institutional investors play a significant role.

Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, & consensus. Japan continues to follow a bank-based financial & corporate governance structure compared to the market-based financial & corporate governance structure in the United States. In addition, Japanese firms belong to keiretsu, groups of firms tied together by cross-shareholding. In many cases, the main-bank relationship of the firm is part of a keiretsu. However, the influence of banks in monitoring & controlling managerial behavior & firm outcomes is beginning to lessen & a minor market for corporate control is emerging.

Chinese corporate governance has become stronger in recent years. There has been a decline in equity held in state-owned enterprises, but the state still dominates the strategies employed by most firms. Firms with higher state ownership tend to have lower market value & more volatility in those values over time. In a broad sense, the Chinese governance system has been moving towards the Western model in recent years. For example, YCT International recently announced that it was strengthening its corporate governance with the establishment of an audit committee within its board of directors, & appointing three new independent directors. In addition, recent research shows that the compensation of top executives in Chinese companies is closely related to prior & current financial performance of the firm.

14

PTS: 1 DIF: Medium REF: 302-304 OBJ: 10-07NOT: AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Managing administration & control

8. How does corporate governance foster ethical strategic decisions & how important is this to top-level executives?

Governance mechanisms focus on the control of managerial decisions to ensure that the interest of shareholders, the most important stakeholder, will be served. But shareholders are just one stakeholder along with product market stakeholders (e.g., customers, suppliers, & host communities) & organizational stakeholders (e.g., managerial & nonmanagerial employees). These stakeholders are important as well. Therefore, at least the minimal interests or needs of all stakeholders must be satisfied through the firm’s actions. Otherwise, dissatisfied stakeholders will withdraw their support from one firm & provide it to another (e.g., employees will exit & seek another employer, customers seek other vendors, etc.). Some believe that ethically responsible companies design & use governance mechanisms to ensure that the interests of all stakeholders are served.

Top-level executives are monitored by the board of directors. All corporate stakeholders are vulnerable to unethical behaviors by the firm. If the image of the firm is tarnished, the image of customers, suppliers, shareholders, & board members is also tarnished. Top-level managers, as the agents who have been hired to make decisions that are in shareholders’ best interests, are ultimately responsible for the development & support of an organizational culture that allows unethical decisions & behaviors. The board of directors has the power & responsibility to enforce this expectation.

The decisions & actions of a corporation’s board of directors can be an effective deterrent to unethical behaviors. The board has the power to hold top managers accountable for unethical actions as they can hire & fire these managers. Thus, the board of directors, which holds a position above the firm’s highest-level managers, holds considerable power over top-level executives & can set & enforce standards for ethical behaviors within the organization.

PTS: 1 DIF: Medium REF: 306-307 OBJ: 10-08NOT: AACSB: Ethics | Management: Ethical Responsibilities | Dierdorff & Rubin: Managing decision-making processes

Chapter 11 Essay Questions:

ESSAY

1. Discuss the difference between strategic & financial controls.

Strategic & financial controls are both types of organizational controls that guide the use of strategy, indicate how to compare actual results with expected results, & suggest corrective actions if there is an unacceptable difference. Strategic controls are largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment & the company’s competitive advantages. Strategic controls are concerned with the fit between what the firm might do (opportunities) & what it can do (competitive advantages). Financial controls are largely objective criteria used to measure the firm’s performance against previously established quantitative standards. Accounting-based measures, such as return on

15

investment & return on assets, & market-based measures, such as economic value added, are examples of financial controls.

PTS: 1 DIF: Medium REF: 320-321 OBJ: 11-01NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

2. Describe the three major types of organizational structure & their appropriate use.

Firms typically have a simple structure when they are small & the owner-manager makes all the important decisions & monitors all activities. Informal relationships, few rules, limited task specialization, & unsophisticated information systems are characteristic of simple structures. A simple structure is appropriate for firms offering a single product line in a single geographic market. It is well-matched with focus strategies & business-level strategies. As firms grow larger & more complex, the functional structure is adopted. A professional CEO with a limited corporate staff & functional line managers is required. This allows for specialization of organizational functions such as accounting, production, & human resources. Coordination & communication systems are more complex in the functional structure than in the simple structure. As firms diversify in products and/or geographic areas, they evolve to the multidivisional structure & one of its related forms (cooperative, competitive, SBU). The cooperative multidivisional structure, used to implement the related-constrained corporate-level strategy, has a centralized corporate office & extensive integrating mechanisms. Divisional incentives are linked to overall corporate performance. The related-linked SBU multidivisional structure establishes separate profit centers within the diversified firm. Each profit center may have divisions offering similar products, but the centers are unrelated to each other. The competitive multidivisional structure used to implement the unrelated diversification strategy is highly decentralized & makes little use of integrating mechanisms. It employs objective financial criteria to evaluate each unit’s performance. All units compete for corporate resources.

PTS: 1 DIF: Medium REF: 322-324 OBJ: 11-03 | 11-04NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

3. Discuss the organizational structures used to implement the different business-level strategies.

Business-level strategies are usually implemented through the functional structure. The cost leadership strategy requires a centralized functional structure, one in which manufacturing efficiency & process improvements are emphasized. Jobs are specialized, & rules & procedures are formal. The differentiation strategy’s functional structure focuses on marketing & research & development. Decision-making & authority are decentralized. Jobs are not highly specialized & procedures are informal. These characteristics allow employees to exchange ideas & to be more creative. The organizational structure supporting the integrated cost leadership/differentiation strategy must be simultaneously centralized & decentralized. Jobs are semi-specialized & procedures call for some formal & some informal job behavior.

PTS: 1 DIF: Medium REF: 324-327 OBJ: 11-03NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Managing administration & control

16

4. Define the three major dimensions of organizational structure: specialization, centralization, & formalization. How do these dimensions vary in organizations implementing the cost-leadership, differentiation, & the cost-leadership/differentiation strategies?

Specialization is concerned with the number & types of jobs required to complete the work of the organization. Centralization is the extent to which authority for decision-making is retained at higher managerial levels in the organization. Formalization is the degree to which formal rules & procedures govern work in the organization. Cost-leadership strategies are best implemented with high specialization, centralization, & formalization. This results in efficiency. The differentiation strategy is best implemented with decentralized organizations, unspecialized jobs, & low formalization. This allows employees to interact frequently & develop new ideas for products. The cost-leadership/differentiation strategy is difficult to implement because it requires decision-making that is centralized & decentralized, jobs that are semi-specialized & rules & procedures that produce both formal & informal job behavior.

PTS: 1 DIF: Medium REF: 324-327 OBJ: 11-03NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

5. Discuss the organizational structures used to implement corporate-level strategies.

Corporate-level strategies involve multidivisional structures, which have three forms. The cooperative form of the multidivisional structure is used to implement a related-constrained strategy. The cooperative form emphasizes integrating mechanisms, such as liaisons, temporary teams, & task forces. The intent is to share divisional competencies & create economies of scope. A centralized corporate office facilitates cooperation among divisions. Rewards are linked to overall corporate performance & divisional performance. The SBU form of the multidivisional structure is used to implement a related-linked strategy. Each strategic business unit is a profit center & divisions within an SBU are organized to achieve economies of scope and, perhaps, economies of scale. The SBUs are fairly independent, but the divisions within each SBU may be integrated to share competencies. The corporate headquarters is mainly involved in strategic planning for the whole portfolio of businesses, although it also provides strategic help & training to the SBUs. The competitive form of the multidivisional structure is used to implement an unrelated diversification strategy. The structure is highly decentralized. Controls emphasize competition between divisions for internal capital allocations. No integrating mechanisms are used. Objective financial criteria are used to evaluate each unit’s performance, which compete for corporate resources. Corporate headquarters focuses on long-range planning.

PTS: 1 DIF: Medium REF: 327-328 | 330-334 | 334 (Table 11.1)OBJ: 11-04NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

6. Describe the organizational structure associated with a firm that pursues an unrelated diversification strategy.

An unrelated diversification strategy seeks to create value through the efficient internal allocation of capital or through the buying, restructuring, & selling of businesses. Therefore, the unrelated diversified firm employs the competitive form of the multidivisional structure which emphasizes competition between separate units for corporate capital. To realize the benefits of the efficient

17

allocation of capital, the businesses must have separate & identifiable profit performances. In this structure, the corporate headquarters sets rate-of-return expectations & maintains an arms-length relationship with the divisions. Headquarters audits operations & disciplines managers in divisions that do not meet those rate-of-return standards. Thus, financial controls are heavily used & integrating devices are not needed.

PTS: 1 DIF: Medium REF: 332-334 | 334 (Table 11.1)OBJ: 11-04NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

7. Describe the organizational structures used to implement the three international strategies.

A multidomestic strategy is implemented with a worldwide geographic area structure. This structure uses no integrating mechanisms, & it emphasizes decentralization, low formalization, & informal coordination among units. This facilitates the strategic objective of responding to local market differences. The worldwide product divisional structure is used to implement a global strategy. Since this type of firm offers standardized products across the globe, this organizational structure emphasizes centralization to achieve economies of scale & scope. Decision-making is centralized. Integrating mechanisms, such as liaison roles & teams, are important. The transnational strategy is implemented with a combination structure. Because it must be simultaneously centralized & decentralized, integrated & nonintegrated, formalized & nonformalized, the combination structure is difficult to organize. There is a strong emphasis on cultural diversity. There are two combination structures, the global matrix structure & the hybrid global design. The matrix structure involves multiple reporting relationships & promotes flexibility & response to customer needs. The hybrid global design combines some divisions which are product oriented & some which are oriented to particular geographic markets.

PTS: 1 DIF: Medium REF: 334-338 OBJ: 11-05NOT: AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Managing administration & control

8. Describe the organizational structures used to implement cooperative strategies, giving attention to the role of the strategic center firm.

Generally, cooperative strategies are implemented through organizational structures framed around strategic networks (a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements such as joint ventures & alliances). There are two types of business level complementary alliances, vertical & horizontal. Vertical alliances group firms with competencies in different stages of the value chain. Horizontal alliances group firms with competencies at the same stage of the value chain. Vertical alliances are much more common than horizontal alliances. To facilitate the effectiveness of a strategic network, a strategic center firm may be necessary. The strategic center firm performs four critical functions. First, it uses strategic outsourcing to partner with firms other than just network members. The strategic center firm also requires the alliance members to find opportunities for the network to create value through cooperative work. The second function concerns competencies. The strategic center firm seeks ways to support each member’s efforts to create core competencies that can benefit the network. Third, the strategic center firm focuses on technology, managing the development & sharing of technology-based ideas among network partners. Finally, in a race to learn, the strategic center firm guides participants in efforts to form network-specific competitive

18

advantages through friendly rivalry to develop skills needed to form capabilities that create value for the network.

PTS: 1 DIF: Medium REF: 338 | 340-342OBJ: 11-06NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

Chapter 12 Essay Questions:ESSAY

1. What is strategic leadership, who has primary responsibility for strategic leadership, & what are the five key strategic leadership actions?

Strategic leadership is the ability to anticipate, envision, maintain flexibility, & empower others to create strategic change. The CEO has primary responsibility for strategic leadership, which is shared with the board of directors, the top management team & divisional general managers. The five key strategic leadership actions are: determining a strategic direction, effectively managing the firm’s resource portfolio, sustaining an effective organizational culture, emphasizing ethical practices, & establishing balanced organizational controls.

PTS: 1 DIF: Medium REF: 352 | 354 | 362 (Figure 12.4)OBJ: 12-01 | 12-04 | 12-05 | 12-06 | 12-07 | 12-08NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Learning, motivation, & leadership

2. What is a top management team, & how does it affect a firm’s performance & its abilities to innovate & design & implement effective strategic changes?

The top management team is composed of the key managers in the organization who are responsible for selecting & implementing the firm’s strategy. Typically, the top management team includes all officers of the firm (defined by the title of vice president or above) and/or those who serve as a member of the board of directors. Team characteristics have been shown to affect the strategy of the organization. A heterogeneous top management team is composed of individuals with varied functional backgrounds, experiences, & education. A homogeneous team’s members are similar to one another in characteristics & experiences. A heterogeneous team is more likely to formulate an effective strategy because of its varied expertise & knowledge. Additionally, heterogeneous top management teams have been shown to positively affect performance. In particular, heterogeneous teams positively affect innovation & strategic change in firms. But, heterogeneous teams are less cohesive than homogeneous teams because of communication difficulties, & it is more difficult for heterogeneous teams to implement strategies. Consequently, a heterogeneous top management team must be managed effectively to use the diversity in a positive way.

PTS: 1 DIF: Medium REF: 356 OBJ: 12-02NOT: AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Managing decision-making processes

3. Discuss how the managerial succession process & the composition of the top management team interact to affect strategy.

19

Internal labor markets represent the opportunities for employees to take managerial positions (including the position of CEO) within a firm. The external labor market is the collection of career opportunities for managers in firms outside of the one for which they currently work. CEOs may be selected from internal or external candidates. Internal CEO selection is preferred by employees & by those who wish the firm to continue in its present strategies. External CEO succession is considered a sign that the board of directors wants change. Internal CEOs are less likely to seek change in the firm’s strategy than external CEOs. It is important to note that the source of the CEO (from the internal or external labor market) & the top management team’s composition interact to affect the likelihood of strategic change. If a firm hires a new internal CEO & has a homogeneous top management team, it is unlikely that the firm’s strategy will change. If the firm employs a new internal CEO but has a heterogeneous top management team, it will probably continue the current strategy, but innovation will be encouraged. If the top management team is homogeneous, but an external CEO is chosen, the situation will be ambiguous. Finally, if the top management team is heterogeneous & an external CEO is chosen, strategic change is likely.

PTS: 1 DIF: Medium REF: 358-359 | 359 (Figure 12.3)OBJ: 12-03NOT: AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Managing decision-making processes

4. Define human capital & its importance to the firm’s success.

Human capital represents the knowledge & skills of the firm’s entire workforce. Effective strategic leaders view human capital as a capital resource that requires investment rather than as a cost to be minimized. It is thought that people are the organization’s only truly sustainable source of competitive advantage. So, effective human resource management practices are necessary to successfully select & use people to attain the firm’s goals. Not only must future leaders be trained, but the entire workforce must be able to learn continuously to build skills & knowledge that lead toward innovation. Layoffs can be disastrous because they strip skills & knowledge from the firm, leaving remaining employees unable to perform their tasks effectively.

PTS: 1 DIF: Medium REF: 364 OBJ: 12-05NOT: AACSB: Business Knowledge & Analytical Skills | Management: HRM | Dierdorff & Rubin: Learning, motivation, & leadership

5. What is organizational culture? What must strategic leaders do to develop & sustain an effective organizational culture?

Organizational culture is the set of ideologies, symbols, & core values that is shared throughout the organization & that influences the way the firm conducts its business. An organization’s culture can be a source of competitive advantage. It is more difficult to change a firm’s culture than to sustain it. But effective strategic leadership recognizes when a change in a firm’s culture is necessary. Incremental changes to the firm’s culture are typically used to implement strategies. Sometimes radical changes are used to support strategies that differ from the firm’s historical pattern. Shaping & reinforcing change in an organization’s culture require communication & problem solving, selection processes that find people with the right values, effective performance appraisals focused on goals reflecting the new culture, & reward systems that reward behaviors reflecting the new core values. Change occurs only when it is actively supported by the CEO, other top managers, & middle management.

20

PTS: 1 DIF: Medium REF: 365 OBJ: 12-06NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Learning, motivation, & leadership

6. As a strategic leader, what actions could you take to establish & emphasize ethical practices in your firm?

Ethical practices should be institutionalized within the organization. That is, ethical practices should become the set of behavior commitments & actions accepted by the firm’s employees & other stakeholders. A formal program to manage ethics can act as a control system to inculcate ethical values throughout the organization. Strategic leaders can shape ethical practices in a firm by: (1) establishing & communicating specific goals to describe the firm’s ethical standards (e.g., developing & disseminating a code of conduct), (2) continuously revising & updating the code of conduct, based on inputs from people throughout the firm & from other stakeholders (e.g., customers & suppliers), (3) disseminating the code of conduct to all stakeholders to inform them of the firm’s ethical standards & practices, (4) developing & implementing methods & procedures to use in achieving the firm’s ethical standards (e.g., use of internal auditing practices that are consistent with the standards), (5) creating & using explicit reward systems that recognize acts of courage (e.g., rewarding those who use proper channels & procedures to report observed wrongdoing), & (6) creating a work environment in which all people are treated with dignity.

PTS: 1 DIF: Medium REF: 355-356 OBJ: 12-07NOT: AACSB: Ethics | Management: Ethical Responsibilities | Dierdorff & Rubin: Learning, motivation, & leadership

7. What are organizational controls? Why are strategic controls & financial controls important aspects of the strategic management process?

Organizational controls are the formal, information-based procedures used by managers to maintain or alter patterns in organizational activities. Controls provide the parameters within which strategies are to be implemented, as well as forming guidelines for corrective actions when adjustments are required. There are two main types of controls: financial & strategic. Financial controls focus on short-term financial outcomes. Strategic controls focus on the content of strategic actions. Financial controls give feedback about the outcomes of past actions. Strategic controls focus on the drivers of the firm’s future performance. Emphasizing either financial or strategic controls has important implications for the strategic management process. For example, emphasizing financial controls often produces more short-term & risk-averse managerial actions because financial outcomes may be caused by events beyond the managers’ direct control. In contrast, strategic control encourages lower-level managers to make decisions that incorporate moderate & acceptable levels of risk because outcomes are shared between the business-level executives making strategic proposals & the corporate-level executives evaluating them.

PTS: 1 DIF: Medium REF: 356-357 OBJ: 12-08NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing decision-making processes

Chapter 13 Essay Questions:

ESSAY

21

1. Define the 3 types of innovative activity. Which is the most critical activity for U.S. firms?

Firms engage in three types of innovative activity. Invention is the act of creating & developing a new product or process. Innovation is the process of commercializing the products or processes that surfaced through invention. The success of an invention is judged by technical criteria. The success of innovation is judged by commercial criteria. Imitation is the adoption of an innovation by similar firms. Imitation usually leads to product or process standardization, offering the product at a lower price without as many features. Innovation is the most critical activity because commercializing inventions is difficult.

PTS: 1 DIF: Medium REF: 382 OBJ: 13-03NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills

2. What is the importance of international entrepreneurship?

In general, internationalization leads to improved firm performance. Research shows that new ventures that enter international markets increase their learning of new technological knowledge, which enhances their performance. Because of the learning & the economies of scale & scope afforded by operating in international markets, firms are often stronger competitors in their domestic markets as well. In addition, internationally diversified firms are generally more innovative than domestic-only firms.

PTS: 1 DIF: Medium REF: 383 OBJ: 13-05NOT: AACSB: Multicultural & Diversity | Management: Creation of Value | Dierdorff & Rubin: Managing strategy & innovation

3. Describe the three strategic approaches used to produce & manage innovation: internal corporate venturing, cooperative strategies, & acquisitions.

Internal corporate venturing is the set of activities a firm uses to create inventions & innovations through internal means. There are two forms of internal corporate venturing, (1) autonomous strategic behavior (a bottom-up process employing product champions) & (2) induced strategic behavior (a top-down process whereby product innovations are fostered by the current strategy & structure of the firm). In the cooperative strategy approach to innovation, firms may choose to share their knowledge & skills sets with other organizations through strategic alliances. The ideal partners have complementary assets with the potential to lead to future innovations. Frequently, established firms exchange investment capital & distribution capabilities with newer, entrepreneurial firms with new technical knowledge. Acquisition of other companies represents the third approach firms use to produce & manage innovation. Acquiring another firm rapidly extends the firm’s product line & increases the firm’s revenues. However, firms using the acquisition strategy may lose the ability to innovate internally.

PTS: 1 DIF: Medium REF: 384 | 386-388 | 390-393OBJ: 13-06 | 13-07 | 13-08NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills

4. Discuss the differences between autonomous strategic behavior & induced strategic behavior.

22

Autonomous strategic behavior & induced strategic behavior are the two processes of internal corporate venturing. Autonomous strategic behavior is a bottom-up process through which a product champion facilitates the commercialization of an innovative good or service. Induced strategic behavior is a top-down process in which a firm’s current strategy & structure facilitate product or process innovations that are associated with them.

PTS: 1 DIF: Medium REF: 386-388 OBJ: 13-06NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Managing strategy & innovation

5. Discuss the methods an organization can use to facilitate cross-functional integration.

Shared values & effective leadership support cross-functional integration. The firm’s culture, based on its vision & mission, promotes unity & supports cross-functional integration. Strategic leaders set goals & allocate resources for cross-functional teams. A high-quality communication system allows team members to share knowledge. Effective communications helps create synergy & gains team members’ commitment to innovation.

PTS: 1 DIF: Medium REF: 389 OBJ: 13-06NOT: AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Strategic & systems skills

6. Discuss the potential benefits & disadvantages of innovation through cooperative strategies.

A firm may not have the knowledge & capabilities necessary to be entrepreneurial & innovative. A strategic alliance in those cases offers an excellent means to obtain the needed knowledge & resources. However, strategic alliances are not without risks. The strategic alliance partner can appropriate a firm’s technology or knowledge & use these to enhance its own competitive abilities. Additionally, a firm can become involved in too many alliances, which can harm its innovative capabilities.

PTS: 1 DIF: Medium REF: 390-391 OBJ: 13-07NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills

7. Discuss the benefits & risks of acquiring another firm to gain access to innovations.

Through acquisition an organization can gain another firm’s innovations & innovative capabilities. Acquisitions are a means to rapidly extend the firm’s product lines & increase revenues. Buying innovation, however, comes with the risk of reducing a firm’s internal invention & innovative capabilities.

PTS: 1 DIF: Medium REF: 393 OBJ: 13-08NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills

23