Study Guide for Exam 2
Note: This study guide is prepared for your convenience. As such, it
highlights some material. However, this does not eliminate the need for
reading the chapters and other recommended material.
Textbook – Hill & Jones, 9th edition.
Chapter 8
Global and national environments (e.g., national competitive advantage) pp. 244-250 –
Also see Fig. 8.1
Increasing profitability through global expansion pp. 250-256
Cost pressures and local responsiveness pp. 256-260
Choosing a global strategy pp. 260-266 – especially Fig. 8.3
Basic entry decisions and choice of entry mode pp. 266-273, especially Table 8.1
Making alliances work pp. 273-278
Outline:
According to Michael Porter, certain countries have been successful in certain industries
(e.g., Switzerland in the watch-making industry, banking, etc.; Japan in electronics,
automobiles, etc.) for four reasons: (1) they have the resources or factor endowments
(2) they have favorable domestic demand conditions, (3) they have related and supporting
industries, and (4) their industries are very competitive domestically.
A multinational company can make profit (create value) by transferring its strengths
(distinctive competencies) to international arena. It can also obtain economies through
locating its business in the appropriate geographical area, so that it has the best "costmix". It also allows the company to grow bigger, and thereby realize substantial
economies of scale.
What should be the strategy of a multinational company? It depends on the
pressure for local responsiveness and the pressure for cost reduction. Strong pressure for
cost reduction results in a company pursuing a "global strategy" (standardization). On
the other hand, if a company needs to be responsive to customer tastes, it needs to pursue
a multidomestic strategy. Transnational strategy is a compromise between the two.
Similarly, an MNC can enter a country through various "modes". Each one has its
advantages, as well as disadvantages. Sometimes, a joint venture is the only possible
mode of entry in international markets, because the local government may insist on it.
But there is always a possibility that the joint venture partner might "cheat" or act
opportunistically.
Chapter 9
Corporate strategy and the multibusiness model pp. 285-286
Horizontal integration pp. 286-292
Vertical integration, advantages and disadvantages pp. 292-300, especially Fig. 9.2, 9,3
Alternatives to vertical integration pp. 300-303
Strategic outsourcing pp. 303-307
Outline:
Vertical integration is also called a "make-or-buy" decision or the reason why a firm
exists in the first place. For example, why does a firm decide to make a product instead
of buying it from the market? This is a very important question in strategic management
and economics.
Actually Ronald Coase got the Nobel Prize for addressing this question. There are two
types of vertical integration: Forward and backward. Also, there are some additional
types of vertical integration: Full - when the company makes 100%
of the raw materials, as well as markets all of it; Quasi -- The firm makes only part of
the raw materials (say, 30%), and buys the rest from outside; Taper -- The firm makes
only a certain percentage of a component, and buys the rest of it from outside. Taper
integration holds the suppliers in check, should they cheat.
Vertical integration is beneficial because it creates "barriers to entry" for potential
competitors. It also protects product quality, and improves scheduling. More
importantly, where the assets are "specialized", vertical integration helps, because the
firm the does not need to deal with opportunistic suppliers. But when the demand or
technology is uncertain, vertical integration runs into problems. Similarly, bureaucratic
costs also set a limit to vertical integration. A firm has alternatives to vertical integration:
short term contracts and competitive bidding, strategic alliances and long term
contracting, co-operative relationships (hostage taking, credible commitments, parallel
sourcing, etc.)
Chapter 10
See Fig. 10.5 for a general understanding of diversification and vertical integration
Increasing profitability through diversification pp. 313-320
Types of diversification pp. 320-323
Disadvantages of diversification pp. 323-327
Related versus unrelated diversification, etc. pp. 327-329
Internal new ventures pp. 330-334
Acquisitions pp. 334-339
Joint ventures pp. 339-340
Restructuring p. 340
You also need to know various “portfolio planning matrices” – e.g., Boston Consulting
Group Matrix, McKinsey/GE Matrix, and Industry Evolution Matrix (see Blackboard
web site for handouts)
Outline:
Diversification is another corporate level strategy. Read about the advantages and
disadvantages of diversification. Diversification can be related or unrelated. Which one
is better? In general, related has more advantages but it also has more disadvantages than
unrelated. The advantage includes economies of scope. Economies of scope mean it is
cheaper to make two products for a company instead of two companies making them
separately. Got it?? This may be because of sharing of resources between products.
Obviously, unrelated diversification doesn't have this advantage. But related
diversification also has an additional disadvantage. When two businesses are related, the
company needs to co-ordinate them (e.g., communicate among the businesses, schedule
different production processes across businesses, etc.) Unrelated diversification doesn't
have this disadvantage. Overall, related is somewhat better than unrelated diversification.
At the corporate level, the top management needs to know how its various businesses are
doing. This is called corporate level planning or SWOT analysis at the corporate level.
There are 3 matrices that allow one to do this: the BCG matrix, McKnisey (or GE
matrix) and Product Market Evolution (or Industry Evolution matrix). Read about the
matrices from the book on B-School reserve. Industry Evolution matrix is a part of the
earlier edition (on reserve in the B-School library).
The BCG matrix is simple, but it is too simplistic. The McKinsey matrix is much more
refined. But it is "static" (doesn't tell you what's going to happen in future). The
Industry Evolution matrix is dynamic. The two dimension of the industry evolution
matrix are (1) the stage of the industry life cycle, and (2) competitive position.
The matrices let you do SWOT analysis or planning at the corporate level. But the
company needs to have at least two businesses to be able to use the matrices. Further, if
the businesses are related, the matrices don't make any sense. Where do we go from
here? The matrices suggest the appropriate "entry" or "exit" strategies.
There are three entry strategies: Internal new venturing, Acquisitions, Joint Ventures.
Which one is the best? It really depends. For example, if the industry is embryonic,
the products are related, etc. internal new venturing is preferable. But this strategy can
fail if the scale of entry is small or because of poor commercialization.
Acquisitions are attractive where the costs of development are large or the industry is
mature. But this strategy can fail if there is a "mismatch" of cultures, or the company
doesn't screen the acquisition target well or sometimes, simply because of a "dumb"
bidding (actually, overbidding) strategy. In addition, sometimes, the managerial ego
(hubris) makes acquisitions unsuccessful. Joint ventures are useful, especially where the
partners have complementary strengths. But a company can easily lose control of the
joint venture. Plus, the partner may cheat.
What about "exit strategies"? Sometimes, a company can spin off its parts, like Pepsico
did with Taco Bell, KFC and Pizza Hut, because these businesses did not related to the
core business. Spin off means creating a separate company. It makes sense especially
when the stock market is favorable. Management buyout is another exit strategy.
Harvest and liquidation are some more examples. Also, read about turnaround strategies,
and the causes of corporate decline (such as poor management, overexpansion,
inadequate financial controls, competition, inertia, etc.)
Chapter 11
Stakeholder and corporate performance pp. 347-352, especially Fig. 11.1
Agency theory pp. 352-356
Governance mechanisms pp. 356-364
Ethics and strategy pp. 364-374
Outline:
How do the owners of a company (e.g., stockholders) control the management? Answer:
Through the board of directors. But why do they even need to control the management in
the first place? This is because the management has its own interests (e.g., maximizing
its utility or compensation), whereas the stockholders really want to maximize their
wealth. This is called the "agency problem", because it arises out of the fact that the
management is an agent of the stockholders.
The board of directors needs to be really strong in order to control the management
properly. Some obvious signs of a weak board of directors are: the presence of too many
"insiders" on the board, CEO also being the chairperson of the board, too much free cash
floating around (because the management does not pay the cash/dividends to the
stockholders, etc.)
The result of a weak board (or failure of corporate governance/control) means
inefficiency, misuse of resources, too much unrelated diversification, etc. As soon as
other companies sense this inefficiency, they try to take over the target company. The
target usually responds to this takeover attempt in several ways (e.g., poison pill, golden
parachutes, etc.) Some of them may actually help the target, some may not have any
effect, whereas some types of resistance may harm the target stockholders.
One kind of cure to the "free cash problem" is the leveraged buyout. In this case, a public
company goes private or the equity is swapped for debt. The interest payments (as a
result of debt) keep the management on its toes (as opposed to equity, where the
management is not really legally required to pay dividends).
One of the ways in which the stockholders can cure the agency problem is by offering the
management "right" incentives, such as stock-based compensation or profit-based
(instead of revenue or growth based) compensation.
There are several philosophical approaches to ethics, such as the Friedman doctrine
(focused mainly on increasing profits), utilitarian ethics (maximization of good and
minimization of harm), Knatian (people should not be treated as means), and rights
theories (individual rights that trump over collective good).
Chapter 12
Implementing strategy through organizational design pp. 380-381
Building blocks of organizational structure pp. 381-388
Strategic control systems pp. 388-394
Organizational culture pp. 394-398
Building distinctive competencies at functional level pp. 398-403
Implementing strategy in a single industry pp. 403-414, especially Fig. 12.5 (functional
structure), 12.7 (product structure), 12.9 (geographic structure), and 12.10 (matrix
structure)
Restructuring pp. 414-416
Outline:
This chapter discusses how a firm can implement different business level strategies in a
single business through structure, culture, and controls.
Differentiation is the way a company allocates people and resources to tasks. It may be
either vertical or horizontal. Integration, on the other hand, involves coordinating the
people from different departments or divisions, etc. Vertical differentiation involves span
of control (how many people a supervisor can supervise at a time), height of an
organization (tall or flat), as well as centralization/decentralization. The span of control
depends on the situation. For example, if employees are motivated and
competent, a supervisor will be able to supervise a large number of people (large span of
management). The height of the structure often increases the bureaucratic costs.
As far as horizontal differentiation is concerned, these are the different types of structure
that we discussed in class. You need to know (1) what a particular type of structure looks
like, (2) its advantages, and (3) its disadvantages.
The way a company (e.g., owners or shareholders) control its management forms an
important type of implementation, along with the organizational structure. The financial
and output controls are "result" oriented, whereas the behavior and culture type of
controls are more process or "behavior" oriented. You must understand these
thoroughly. Also, read the advantages and disadvantages of each. In particular, the book
elaborates on "culture" as a type of control. Which is the best type of control? It depends
on your strategy and the environment. For example, a company using a differentiation
strategy may use "culture" to control its employees, whereas a company that uses a cost
leadership strategy may use financial or output controls. Finally, there are different types
of reward systems. You need to know their types.
The types of structure discussed in this chapter include functional, product-team,
geographic, and matrix. You need to know the advantages and disadvantages of these
structures. Also, you need to know how these structures and various controls correspond
to the type of strategy. You also need to know the different types of integrating
mechanisms (e.g., direct contact, liaison, etc.)
Also, focus on the section “how to implement cost leadership and differentiation”
Chapter 13
Multidivisional structure pp. 423-433, especially Fig. 13.1
Also see Table 13.1
Implementing strategies across countries, especially see Table 13.2 pp. 434-442
Entry mode and implementation pp. 442-446
Information technology pp. 446-451
This chapter discusses how a firm can implement corporate level strategies (e.g.,
diversification, global expansion, etc.) – unlike business level strategies in the previous
chapter – through structure, culture, controls, etc.
Practice Questions:
1. A multi-domestic strategy is usually preferable when
a. the pressure for cost reduction is intense
b. pressure for customer responsiveness is intense
c. the company wants to make a standardized product
d. there are substantial economies of scale
e. all of the above
Answer: b
2. Vertical integration usually works well when
a. the company's assets are not very unique
b. the demand is highly uncertain
c. the technology is highly uncertain
d. there are a large number of suppliers supplying the raw materials
e. the company's assets are very specialized
Answer: e
3. If a company's business unit operates in an industry that is very stable (mature), but
the company has a high relative market share in the industry, the business unit is most
likely a
a. star
b. cash cow
c. question mark
d. dog
e. none of the above
Answer: b
4. The functional structure
a. allows considerable specialization or development of expertise
b. does not allow for efficiency
c. is very expensive to manage
d. allows free communication across department
e. none of the above
Answer: a
5. Financial controls
a. are behavior oriented
b. are very subjective
c. are very objective
d. are inappropriate for "cost leader"
e. none of the above
Answer: c
6. When a company's demand is declining because of poor promotion, chances are that
______ function will soon be politically powerful.
a. manufacturing
b. research and development
c. finance
d. marketing
e. human resources
Answer: d