STRAT FINAL

Question 1

3 reasons to form an alliance?

Answer 1

1) Improve Current Performance
2) Create Favorable Competitive Environment
3) Facility entry or exit of new market

Question 2

4 threats to strategic allience

Answer 2

1) Cheating
2) Adverse Selection
3) Moral Hazard
4) Hold-up Hazard

Question 3

Adverse Selection

Answer 3

Promise of resources that a partner does not control

Question 4

Moral Hazard

Answer 4

Failure to provide promised resources

Question 5

Hold-up Hazard

Answer 5

Partner appropriates more value from exchange due to transaction specific investments.

Question 6

how to Limit cheating

Answer 6

Due Diligence
Contracts
Equity investments: Cross-holdings help align incentives
Firm reputations
Joint Ventures
trust

Question 7

The big challenge from strategic alliances?

Answer 7

Maximizing gains from exchange while minimizing the threat of cheating

Question 8

M&A Guidelines for Competitive Advantage

Bidding firms perspective

Answer 8

Search for rare economies
Limit information to other bidders
Limit information to the target
Avoid bidding Wars
Close the Deal Quickly
Seek Thinly Traded Markets

Question 9

Corporate level strategy should create value. Only makes sense if:

Answer 9

1) The value of the corporate whole increases.
2) The combined businesses are worth more than they would be under independent ownership.
3) equity holders can’t replicate through portfolio investing.
4) should create synergies that are not available in equity markets.

Question 10

Corporate Strategy

Answer 10

Corporate strategy is a firm’s theory of how to gain competitive advantage by operating in several businesses simultaneously.

Question 11

Different methods for increasing vertical, product or geographic scope:

Answer 11

1) Vertical Integration
2) Corporate Diversification
3) Strategic Alliances
4) Mergers and Acquisitions

Question 12

What is Vertical Integration?

Answer 12

Level of Vertical Integration is a function of the number of steps a firm accomplishes forward or backward

Question 13

Risk of Opportunism

Answer 13

Transaction specific investment drives risks from opportunism. e.g. pipeline example

Question 14

Capabilities Approach

Answer 14

Evaluation of valuable, rare, costly to imitate capabilities indicates opportunities and limits to firm boundaries. e.g. Wal-mart suppliers

Question 15

Flexibility (Real Options)

Answer 15

Uncertainty of exchange value determines firm boundary decision. e.g. Biotech

Question 16

Drivers of VI Linked to Theories

Answer 16

1) Look for transaction-specific investments: Is the firm putting a unique asset at risk if it outsources?
2) Look for capabilities: Can these be leveraged to expand into other value-adding activities?
3) Look for sources of uncertainty: Can the firm utilize market forms of exchange to offset risk of uncertainty?

Question 17

When does Vertical Integration make sense

Answer 17

when value chain economies can be created and captured

Question 18

2 ways to categorize corporate diversification

Answer 18

Product diversification
Geographic market diversification
Product market diversification

Question 19

When do you have a single business?

Answer 19

> 95% of sales in single business

Question 20

When do you have a dominant business?

Answer 20

70% to 95% in single business

Question 21

Related Business diversification

Answer 21

When a firm goes into a business that is similar or related to the business they are already in. Example: Apple create iPods and sells music. They could produce headphones as well.

Question 22

Unrelated Diversification

Answer 22

When a firm goes into a business that has nothing to do with the business they are already in. Example: If Denny’s breakfast decided to make car batteries. Brake fast and car batteries have no relation.

Question 23

Economy of scope

Answer 23

An economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced.

Question 24

Types of economies of scope?

Answer 24

Operational
   Shared activities
   Core competencies, less tangible, more complex
Financial
   Internal capital allocation
   Risk reduction
   Tax advantages
Anticompetitive
   Multipoint competition
   Deep pockets, cross-subsidization
Managerial

Question 25

Challenges to Implementing Corporate Diversification

Answer 25

Aligning the interests of owners and managers Aligning the interests of corporate parent and divisions Accessing information- the information asymmetry problem.

Question 26

Tools to use for Implementing Corporate Diversification

Answer 26

1) Organizational Structure 2) Management Controls 3) Compensation Policies

Question 27

Benefits of M form Structure

Answer 27

1) Separation of decision making (operational vs. strategic). 2) Minimizing coordination costs. 3) Better allocation of resources. 4) Designed to improve information flow.

Question 28

Management controls

Answer 28

``` 1) Evaluating divisional performance Accounting and economic measures Performance ambiguity due to economies of scope 2) Capital allocation (budgeting) 3) Transfer pricing ```

Question 29

Compensation

Answer 29

``` Once evaluations are done can award compensation in line with division and/or total firm performance. Salary Stock options Bonuses Benefits ```

Question 30

Strategic Alliances: Types?

Answer 30

Non-equity alliances Equity alliances Joint Ventures

Question 31

Non-equity alliances

Answer 31

Contract to work together to supply, produce or distribute a firm’s goods or services (without equity sharing) e.g. licensing, supply , distribution agreements

Question 32

Equity alliances

Answer 32

Partnership where one (or both) partner supplements contracts with equity holdings in alliance partner. e.g. Pharmaceutical firms and small biotech

Question 33

Joint Ventures

Answer 33

Independent firm is created by joining assets from two other firms where each contributes 50% of the total. e.g. CFM (GE and SNECMA) to produce jet engines

Question 34

Types of economies of scope?

Answer 34

``` Operational Shared activities Core competencies, less tangible, more complex Financial Internal capital allocation Risk reduction Tax advantages Anticompetitive Multipoint competition Deep pockets, cross-subsidization Managerial ```