Business Policy - Exam 3

Front 1

In what industry life cycles is a cost leadership strategy rare?

Back 1

Emerging

Front 2

Under what conditions is the cost leadership strategy inimitable? When is it easily and not easily imitated?

Back 2

cost leadership is inimitable in high cost conditions.

EASILY = unbalanced industry capacity&demand, non-proprietary technology, highly observable technology, transactional exchange

NOT EASILY = balanced industry capacity and demand, protected tech, highly unobservable tech (Causal ambiguity), relational exchange (social complexity)

Front 3

What organizational structure is generally best for a cost leadership strategy?

Back 3

FUNCTIONAL

Front 4

What managerial controls are used to implement a cost leadership strategy?

Back 4

R&D = focus on product extensions and process improvements

MKT = emphasis on value, reliability, and price

Manufacturing = Lean, low cost, good quality

Finance = focus on low cost & stable financial structure

ACC = collect cost data & adopt conservative acc principles

Sales = focus on value, reliability, and low price

Front 5

What activities are employees motivated for to properly implement a cost leadership strategy?

Back 5

should reinforce formal & informal management controls; examples = stock options, bonuses for cost reduction/financial performance, non-monetary rewards like vacations, parking places etc

Front 6

FIVE sources of cost leadership

Back 6

1. Economies of Scale

2. Diseconomies of Scale

3. Learning Curve Economies

4. Differential Access to input
5. Technological advances

6. Policy Choices

Front 7

Economies of scale

Back 7

average cost per unit falls as quantity increases; cost advantage because competitors may not be able to match scale BC of capital requirements (barrier to entry)

Front 8

Diseconomies of Scale

Back 8

occurs when firms become too large and bureaucratic; are an advantage for those who do not have diseconomies of scale

when production is excessive, per unit costs increase from: physical limits to efficient size, worker de-motivation, managerial diseconomies (complexity), physical distance to market & suppliers.

Front 9

Learning Curve Economies

Back 9

a firm becomes more efficient at a process with experience; more complicated processes offer greater experience advantage

Front 10

Differential (Low Cost) Access to (Productive) Inputs-- 4 ways to do this

Back 10

1. History -- being in the right place at the right time

2. Market timing -- being 1st into new market

3. Natural endowment -- being owner of mineral deposit

4. Locking up source -- being owner of all output from source

Front 11

Technology Independent of Scale

Back 11

Technology differences create cost differences, may allow small firms to become cost competitive, size advantage depends of how valuable and protectable the tech is

Front 12

Policy Choices

Back 12

decisions ab products/services added, high sales volume needed for low cost goods, every manager/employee involved with cost reduction strategy

EX - Ryanair

Front 13

Bases of Differentiation (3)

Back 13

1. Product attributes

2. Firm-customer relationships

3. Firm linkages

Front 14

Product Attributes -- 4 ways

Back 14

1. Product features -- shape of a golf club head

2. Product Complexity -- ex multiple functions on a watch

3. Timing of intro -- first to market

4. Location -- ex locating next to freeway

Front 15

Firm Customer Relationships --3 ways

Back 15

1. Customization -- ex creating a unique piece of jewelry for customer

2. Consumer Marketing -- creating brand loyalty to a consumer thru image/marketing/advertising

3. Reputation -- sponsoring local schools w/ charitable gifts

Front 16

Firm Linkages

Back 16

1. Linkages among internal departments' -- sharing new incentive plan developed in mkt dept with all depts

2. Linkages among other firms-- companies sponsoring NASCAR

3. Product mix -- a furniture store beings to sell home gym equipment, computer and lawn mowers

4. Distribution channels -- a doughnut shop begins selling products in gas stations

5. Service and support --

Front 17

The ability of companies that produce complex software packages to tailor these packages to the specific needs of their customers is an example of product differentiation through:

1. timing

2. complexity

3. product customization

4.consumer marketing

Back 17

3. product customization

Front 18

TRUE OR FALSE: In emerging industries, product-differentiation efforts often focus on product refinement as a basis for product differentiation.

Back 18

FALSE

Front 19

In developing a compensation policy used to implement a product-differentiation strategy, firms will:

1. punish individuals for taking risks when their projects are not successful.

2. provide appropriate incentives for managers and employees to reduce costs.

3. reward employees for creativity

4. hold individuals responsible for experiments that fail.

Back 19

3.

Front 20

Cross-functional product development teams are suitable for a firm pursuing a ________ strategy.

Back 20

differentiation

Front 21

Which of the following bases of product differentiation is typically the easiest to duplicate?

1. Product customization

2.Product features

3.Firm reputation

4.Product mix

Back 21

2

Front 22

________ levels of production are associated with ________ levels of employee specialization.

Back 22

high; high

Front 23

As the volume of production in a firm increases, the average cost per unit decreases until some optimal volume of production is reached, after which the average costs of production begin to rise because of_________

Back 23

diseconomies of scale

Front 24

TRUE OR FALSE: Compensation at cost-leadership firms is usually tied directly to product innovation and customer service efforts.

Back 24

FALSE

Front 25

If a firm gets too large, it will eventually experience both diseconomies of scale and an increase in costs associated with the learning-curve effect as cumulative volume of production grows.

Back 25

FALSE

Front 26

Which of the following compensation policies is most likely to enhance a firm's ability to pursue a low-cost strategy?

1.Awarding employees bonuses that are equal to 50% of the total cost savings achieved based on employee suggestions and initiatives

2. Awarding employees bonuses based on the total amount of goods produced

3. Awarding employees bonuses based on customer comment cards

4. Awarding employees bonuses based solely on how long they have been employed with the company

5. All are appropriate responses

Back 26

1

Front 27

Compensation Policies for Cost Leadership

Back 27

1. Stock options

2. Monetary rewards for cost reduction/financial performance

3. Non-monetary rewards like vacations and parking spots

Front 28

Compensation Policies for Differentiation

Back 28

1. Reward for creativity

2. Reward risk taking; don't punish failures

3. Broad measures of performance

Front 29

Organizational Structure(s) for Cost Leadership

Back 29

Functional

Front 30

Organizational Structure(s) for Differentiation

Back 30

Cross-functional teams; Complex matrix structure

Front 31

How to create value in fragmented industry?

Back 31

Branding

Front 32

How to create value in emerging industry?

Back 32

First mover advantage: take market share

Front 33

How to create value in mature industry?

Back 33

Refining product/adding service

Front 34

How to create value in declining industry?

Back 34

Exploit niches

Front 35

Strategy

Back 35

firms theory about how to gain a competitive advantage

Front 36

Competitive advantage

Back 36

ability to create more economic value than competitor

Front 37

Economic Value

Back 37

difference between the perceived value and cost of production

Front 38

SMART Objectives are:

Back 38

Specific, measurable, appropriate, realistic, timely

Front 39

DEPICT tool used for ____ and means

Back 39

used for general environment that affects all industries; Demographic, Economic, Poli-Legal, International, Cultural, Technological

Front 40

Porter's Five Forces used to describe ____ and five forces are _____

Back 40

describe industry specific environmental issues; Threat of Suppliers, New Entrants, Rivals, Buyers, Substitutes

Front 41

What came up with Porter's Five Forces? What's the ideal outcome of using this?

Back 41

Michael Porter; low because profitability is HIGH when threats are LOW

Front 42

What do use to conduct internal analysis

Back 42

VIRO = Valuable, Inimitable, Rare, Organizational

Front 43

Who created VIRO? When?

Back 43

Jay Barney - 1991

Front 44

movingcloser to the raw materials by moving up supply chain into another industry(pre - assembly)

Back 44

Backward integration

Front 45

movingcloser to the end consumer farther down the supply chain

Back 45

Forward Integration

Front 46

Three BROAD Ways to Diversify

Back 46

1. Product Diversification - diversify by offering various types of products

2. Geographic market diversification - diversify by where products are offered

3. Product market diversification - offering multiple products in multiple markets

Front 47

FOUR Economies of Scope

Back 47

1. Operational

2. Financial

3. Anticompetitive actions

4. Managerial Incentives

Front 48

Difference between diversification and differentiation

Back 48

Diversification means moving into differentmarkets or industries while differentiation is making yourself different in your industry

Front 49

THREE Types of Strategic Alliances

Back 49

Nonequity; Equity; Joint Venture

Front 50

Threats in Strategic Alliances

Back 50

1. Adverse Selection - misrepresenting the values of skills/abilities

2. Hold up costs - exploit the investment of partners; demanding higher returns than agreed

3. Moral Hazard - providing skills/abilities of lesser value than promised

Front 51

Related vs Unrelated acquistion

Back 51

Related acquisition - operational economies of scope, synergies…combined will be higher thanindividual sums

Unrelatedacquisition - final cost to firm is the sum of the two independentorganizations

Front 52

FIVE Economies of Scope in International

Back 52

1. To manage corporate risk

2. Leverage current core competencies

3. Develop new core competencies

4. Gain access to low- cost factors of production 5. Gain access to new customers

Front 53

FOUR Organizational Structures for International Strategy

Back 53

1. Coordinated Federation - each country is full profit/loss center

2. Centralized Hub - corporate level decisions

3. Decentralized Federation - few relationships among units

4. Transnational Structure - low cost & local; capabilities shared across profit & loss centers

Front 54

When is a strategy of vertical integration difficult for competitors to imitate?

Back 54

The function may be costly to imitate if:

1. Integrated resources possess resource combinations that are the result of:Historical uniqueness, Causal ambiguity, Social complexity 2. Capital requirements are prohibitive

3. Strategic alliances may be a substitute for vertical integration

Front 55

When does vertical integration make sense?

Back 55

When the focal firm can capture more value than a market exchange provides

Front 56

What controls are used to successfully oversee and implement forms of verticalintegration?

Back 56

1. Budgets

2. Board committees

3. Compensation= individuals get bonuses for individual performance + salary; group get bonuses for group performance to support capabilities & stock options for performance to support flexibility

Front 57

Geographic market diversification example?

Back 57

US company going into UK market

Front 58

Product diversification example ?

Back 58

make bicycles, now going to make vehicles

Front 59

Product-market diversification example?

Back 59

L'Oreal making different products for different markets to fit tastes/preferences of locals

Front 60

Three Types of Diversification?

Back 60

1. Limited Diversification

2. Related Diversification

3. Unrelated Diversification

Front 61

Types of limited diversification?

Back 61

1. Single business = 95% or more of revenues come from a business
2. Dominant business = between 70-95% of firm revenues come from a single business

Front 62

Types of related diversification?

Back 62

1. Related - constrained= less than 70% of firm revenues come from a single business, & different businesses share numerous links & common attributes
2. Related - linked = less than 70% of firm revenues come from a single business & different businesses share only a few links and common attributes or different links & common attributes

Front 63

Unrelated diversification

Back 63

Less than 70% of firm revenues come from a single business, and there are few, if any, links or common attributes among businesses

Front 64

What type of diversification is capsim?

Back 64

LIMITED

Front 65

When is corporate diversification valuable to the firm?

Back 65

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Front 66

Subcatergories for Operational Economies of Scope

Back 66

1. Shared activities (Input activities like purchasing/warehousing/suppliers/inventory delivery system; production activity like components, assembly facilities, maintenance operation; warehousing and distribution; sales and marketing like common advertising efforts, promotional activities, pricing systems, sales force, order processing services; dealer support and service like dealer training, service network, warranties & guarantees, etc)
2. Core Competencies= complex sets of resources and capabilities that link different businesses in a firm through knowledge & experiences (core competencies are what a firm does exceptionally well)

Front 67

Subcategories for Financial Economies of Scope

Back 67

1. Capital allocation = in an internal capital market, businesses of a firm compete for corporate capital; insiders can allocate capital more efficiently than external capital markets
2. Risk Reduction = risk level of cash flow in diversified firm is lower than risk in un-diversified firm
3. Tax Advantages = Losses in one business can offset losses in another; when payments on debt are tax deductible, debt capacity can be increased.

Front 68

Subcategories for Anticompetitive Economies of Scope

Back 68

1. Multipoint Competition/Tacit Collusion = when firms work together to reduce competitive forces to a mutually beneficial level.
2. Market Power = using profits in one business to compete in another (ex- predatory pricing; firms acquiring competition)

Front 69

Subcategories for Incentives to Diversify

Back 69

1. Managerial Compensation = compensation tied to firm size, incentivizes managers to increase firm size via employees/sales/etc, larger scope = more compensation

Front 70

What are 4 costly to duplicate economies of scope?

Back 70

1. Core Compentencies
2. Internal capital allocation
3. Multipoint competition
4. Exploiting market power

Front 71

What are 4 easy to duplicate economies of scope?

Back 71

1. Shared activities
2. Risk reduction
3. Tax advantages
4. Employee compensation

Front 72

Which structure is most appropriate for corporate diversification?

Back 72

M Form = Multi-divisional structure

Front 73

What is the function of

1. Owners
2. Board of Directors
3. Senior Executive
4. Division GM

Back 73

1.

2. Monitor decision-making in the firm; ensure decisions are consistent with interests of outside equity holders
3.

4. Responsible for managing day to day of business, oversee managers, compete for capital/exploit corporate economies of scope, have strategic formulation & implementation responsibilies

Front 74

What managerial controls are used in a corporate diversification strategy?

Back 74

(1) evaluating performance across divisions;

(2) allocating capital across divisions, and

(3) transferring intermediate products between divisions

Front 75

3 Ways Value is Created with Strategic Alliances

Back 75

1. Improve Current Operations
2. Shape Competitive Environment
3. Facilitate Entry & Exit

Front 76

Subcategories for shape competitive environment

Back 76

1. Facilitating tech standards : partners agree on a standard and avoid a battle for the industry standard
2. Facilitating tacit collusion : partners communicate within an alliance in subtle, legal ways; similar comm btwn competitors may be illegal (ex pricing, production, etc)

Front 77

Subcategories for Facilitate Entry & Exit

Back 77

1. Low-cost entry into new industries = partner provides instant access and legitimacy
2. Low-cost exit from industries = partner is an informed buyer
3. Managing uncertainty = alliances serve as "Real" options

Front 78

When are strategic alliances valuable, rare, inimitable, and how are they organized?

Back 78

Can become this with combo of resources that is hard to figure out (social complexity, causal ambiguity, historical uniqueness) and rare

Front 79

Can an M&A strategy generate a sustained competitive advantage?

Back 79

YES, HOW?

Exploiting managerial competency/capability

Front 80

Value is created for ____ in M&A strategy at announcement? long term?

Back 80

announcement = Target firm

long term = acquiring firm

Front 81

Subcategories of Low Cost Factors of Production

Back 81

1. Raw Materials
2. Labor
3. Tech

Front 82

Subs of Develop New Core Compentencies

Back 82

1. Intent to learn
2. Transparency of business partners
3. Receptivity to learning

Front 83

Subs of manage corporate risk

Back 83

1. Barriers to diversification may exist for individual equity holders and not for international firms.

2. In private firms, owners can maintain control and manage risk without “cashing out”

Front 84

How do firms organize international business operations?

Back 84

1. Market Governance = exporting
2. Intermediate Market Governance = licensing, non-equity alliances, equity alliances, joint ventures
3. Hierarchical Governance = Merger, Acquisitions, Wholly owned subsidiaries