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 twothirds 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: 1 2 3 4 5 6 7 Increased Market Power Overcoming Entry Barriers Cost of New Product Development & Increased Speed to Market Lower Risk Compared to Developing New Products Increased Diversification Reshaping the Firm’s Competitive Scope Learning & Developing New Capabilities Problems in Achieving Success: Integration Difficulties Inadequate Evaluation of Target Large or Extraordinary Debt Inability To Achieve Synergy Too Much Diversification Mgr.’s Overly Focused on Acquisitions 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 (6) Managers overly focused on acquisitions. 3 . making this synergy difficult for rivals to understand & imitate. time to complete negotiations. Transaction costs are incurred when firms seek private synergy through acquisitions.g. identifying & acting on other opportunities. 5) Describe how an acquisition program can result in managerial time & energy absorption. 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. Private synergy is difficult to create. For example. Company experience shows that participating in & overseeing the acquisition activities can divert managerial attention from other matters that are linked with longterm competitive success (e. The focus on financial controls creates a short-term outlook among managers & they forego long-term investments. Private synergy occurs when the acquiring & target firms’ assets are complementary in unique ways. (5) Too much diversification. completing effective due diligence processes. a substantial amount of managerial time & energy is required for acquisition strategies if they are to contribute to a firm’s strategic competitiveness. & the loss of key managers & employees following an acquisition. Moreover. which can be negative in the long run. during an acquisition. This leads to rigidity & lack of innovation. Additionally. Activities with which managers become involved include those of searching for viable acquisition candidates. Very large size may exceed the efficiencies gained from economies of scale & the benefits of the additional market power that comes with size. Indirect transaction costs include managerial time to evaluate target firms. & can negatively affect performance. Firms often underestimate the indirect transaction costs of an acquisition. Acquisitions may lead to a combined firm that is too large. Typically. A high level of diversification can have a negative effect on the firm’s long-term performance. Direct transaction costs include legal fees & investment banker charges. the managers of the target firm are hesitant to make decisions with long-term consequences until the negotiations are completed. preparing for negotiations & managing the integration process after the acquisition is completed. such as identifying & taking advantage of other opportunities & interacting with importance external stakeholders. requiring extensive use of bureaucratic controls. interacting effectively with external stakeholders). acquisitions can become a substitute for innovation..(4) Inability to achieve synergy. (7) Growing too large. This detracts from other important activities. 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. (4) The acquiring firm has financial slack. (3) The acquiring firm conducts effective due diligence to select target firms & evaluates the target firm’s health (financial. (5) The merged firm maintains low to moderate debt. 7) What is restructuring & what are its common forms? Restructuring refers to changes in a firm’s portfolio of businesses and/or financial structure. cultural. (6) The acquiring firm has sustained & consistent emphasis on R&D & innovation.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. (7) The acquiring firm manages change well & is flexible & adaptable. & human resources). There are three general forms of restructuring: 4 . (2) The acquisition is friendly. LBOs usually are financed largely through debt. or an external party) buys all the assets of a (publicly traded) business. 9) What is an LBO & what have been the results of such activities? Leveraged buyouts (LBOs) are a restructuring strategy. as investors assume downsizing is a result of problems within the firm. the goal of downscoping is to reduce the firm’s level of diversification. A firm that downscopes often also downsizes at the same time. Downscoping is accomplished by divesting unrelated businesses. a (publicly-traded) firm is purchased so that it can be taken private. the laid-off employees represent a significant loss of knowledge to the firm. making it less competitive. In contrast. MBOs have been the most successful of the 3 leveraged buyout types. (3) A leveraged buyout occurs when a party (managers. 10) What are the results of the three forms of restructuring? Downsizing usually does not lead to higher firm performance. the company’s stock is no longer publicly traded. & the new owners usually sell off a # of assets. which may include decreasing the number of operating units. or eliminating businesses that are not related to the core business. Downscoping is used to make the firm less diversified & allow its top-level managers to focus on a few core businesses. The resulting large debt increases the financial risk & may 5 . spinning-off. Through a leveraged buyout. 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. an increased strategic focus. In addition. since many laid-off employees become entrepreneurs. It allows the firm to focus on its core business. The main positive outcome of downsizing is accidental. takes it private. downscoping generally improves firm performance through reducing debt costs & concentrating on the firm’s core businesses. Once the transaction is complete. There are three types of LBOs: (1) Management buyouts (MBOs) (2) Employee buyouts (EBOs) (3) Whole-firm buyouts Because they provide managerial incentives.(1) Downsizing involves reducing the number of employees. starting up new businesses. the company’s stock is no longer publicly traded. LBOs have mixed outcomes. & improved performance. It may or may not change the composition of businesses in the company’s portfolio. In this manner. 8) What are the differences between downscoping & downsizing & why are each used? Downsizing is a reduction in the number of employees. employees. (2) Downscoping entails divesting. The stock markets tend to evaluate downsizing negatively. & finances the buyout with debt. In contrast. MBOs tend to result in downscoping. require such large amounts of R&D that development of the product would not be feasible at the scale of the local market alone. The three basic international corporate-level strategies vary on the need for local responsiveness to the market & the need for global integration. they can experience: increased market size. such as major new aircraft like the Airbus A380. critical resources. companies may diversify internationally to gain access to the large demand potential of other countries. 2) Describe the 4 factors that provide a basis for international business-level strategies. & a competitive advantage through location. When firms successfully move into international markets. greater economies of scope. 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. Projects such as these require global scale to be feasible. or learning. driven by growing universal product demand. There is also pressure for global integration of operations. advantages of location can be realized through internationalization. Lastly. Increased market size is achieved by expansion beyond the firm’s home country. 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 . (3) economies of scale & learning. 3) Discuss the 3 international corporate-level strategies. Companies also wish to distribute their operations across many countries to reduce the effect of currency fluctuations & to reduce the risk of devaluation. or customers. As the number of potential customers increases. securing needed resources & having access to low-cost factors of production. But. (2) earning a return on large investments. These advantages include access to low-cost labor. International expansion increases the number of potential customers a firm may serve. This prevents investment in R&D & other actions that would improve the firm’s core competence. The multidomestic strategy focuses on competition within each country in which the firm operates. & (4) advantages of location. 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. An international strategy is commonly designed primarily to capitalize on four business level benefits: (1) increased market size. In addition. Leveraging a technology beyond the home country allows for more units to be sold & initial investments recovered more quickly. Companies can achieve economies of scale by expanding beyond their domestic markets. the return on a large investment increases. These factors are interrelated. greater returns on major investments. scale. 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 development of some products. if the firms have an entrepreneurial mindset. Traditional motives include extending the product life cycle. buyouts can lead to greater innovation if the debt load is not too large.end in bankruptcy. potentially the greatest returns as well. & establishing new. placing high emphasis on global integration of operations. What are their advantages & disadvantages? Firms may enter international markets in any of five ways: exporting. This strategy is difficult to implement. particularly small ones. The licensee takes the risks & makes the financial investments in manufacturing & distributing the product. 4) Identify & describe the modes of entering international markets. There is the risk that the licensee will learn the technology & become a competitor when the original license expires. Acquisitions are expensive & usually involve debt-financing. Strategic alliances involve sharing risks & resources with another firm in the host-country. The strategic business units in each country are interdependent & the home office integrates these businesses. It is the least costly way of entering international markets. It allows a firm to expand returns based on a previous innovation. The firm offers standardized products across country markets. the expanding firm has the technology or other capabilities. Licensing gives the licenser less control over the manufacturing & marketing process. The effective implementation of the transnational strategy often produces higher performance than either of the other corporatelevel strategies. The Internet makes exporting easier than in previous times. the licensing arrangement make create some inflexibility. In addition. Alliances work best in the face of high uncertainty & where cooperation is needed between partners & strategic flexibility is important.market. If the licenser later wishes to use a different ownership arrangement. This alternative is suitable for firms with strong intangible capabilities and/or proprietary technology. many alliances fail due to incompatibility & conflict between the partners. Flexible coordination builds a shared vision & individual commitment through an integrated network. forming strategic alliances. begin with exporting (marketing & distributing their products abroad). licensing. It emphasizes economies of scale & the opportunity to use innovations developed in one nation to other markets. the strength of the dollar against foreign currencies is a constant uncertainty. Equity-based alliances are more likely to produce positive gains. Licensing (selling the manufacturing & distribution rights to a foreign firm) is also popular with smaller firms. legal system & regulatory requirements. if successful. but they are expensive & involve complex negotiations. Therefore. 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 licenser is paid a royalty on each unit sold by the licensee. Cross-border acquisitions have all the problems of domestic acquisitions with the complication of a different culture. But. it provides the advantages of maximum control for the firm and. But. The host-country firm gains access to new technology & innovative products. Most firms. The transnational strategy seeks to achieve both global efficiency (through global integration) & local responsiveness. The risks are high because of the challenges of operating in an unfamiliar 7 . The global strategy assumes more standardization of product demand across country boundaries. because they must be shared between the licensee & the licensor. Alternatively. In addition. Licensing provides the lowest returns. Cross-border acquisitions provide quick access to a new market. But there are disadvantages. The use of global integration in this strategy is low. This involves high transportation costs & possibly tariffs. competitive strategy is centralized & controlled by the home office. One goal requires global coordination while the other requires local flexibility. making acquisitions. The most expensive & risky means of entering a new international market is through the establishment of a new. The host country partner knows the local conditions. the advantages are that the company does not have the expense of establishing operations in the host countries. wholly owned subsidiary or greenfield venture. 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. An exporter has less control over the marketing & distribution of the product than in other methods of entering the international market. wholly owned subsidiaries (greenfield ventures). The security risk created by terrorism prevents U. Strategic alliances are cooperative strategies between firms whereby resources & capabilities are combined to create a competitive advantage. location advantages. Instability in a government creates economic risks & uncertainty created by government regulation. International diversification improves a firm’s ability to increase returns from innovation before competitors can overcome the initial competitive advantage. & the potential to stabilize returns (which reduces the firm’s overall risk). nonequity strategic alliances are less formal & demand fewer partner commitments than joint ventures & equity strategic alliances. where a legally independent company is created by at least two other firms. 5) Discuss the effect of international diversification on a firm’s returns. 8 . nor do they take an equity position. whereby partners own different percentages of equity in the new company they have formed. 6) Identify & describe the major risks of international diversification. The three basic types of strategic alliances are: (1) joint ventures. In addition. distribution agreements & supply contracts. Chapter 9 Essay Questions: 1) Identify & define the different types of strategic alliances. All strategic alliances require firms to exchange & share resources & capabilities to co-develop or distribute goods or services. Because of this. with each firm usually owning an equal percentage of the new company. Research shows that returns vary as the level of diversification increases. But. 2) equity strategic alliances. The firms do not establish a separate organization. Typical forms are licensing agreements. International diversification carries multiple risks. In addition. especially when they diversify geographically into core business areas. returns increase. returns decrease. 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. increased market size.environment. corruption. as diversification increases past some point. differences in & fluctuations of the value of different currencies is another economic risk. Firms that are broadly diversified in international markets usually receive the most positive stock returns. they are exposed to new products & processes that stimulate further innovation. The major risks are political & economic. At first. The company must build new manufacturing facilities. & the risk of nationalization of company assets. returns level off & become negative. Economic risks include the increased trend of counterfeit products & the lack of global policing of these products. Political risks are related to governmental instability & to war. The problems of central coordination & integration are mitigated if the firm diversifies into more friendly countries that are geographically & culturally close. Governmental instability can result in the existence of many potentially conflicting legal authorities. establish distribution networks. which are contractual relationships between firms to share some of their resources & capabilities. then as the firm learns to manage the diversification.S. Economic risks are related to political risks. International diversification can lead to economies of scale & experience. The relative strength or weakness of the dollar affects international firms’ competitiveness in certain markets & their returns. & (3) nonequity strategic alliances. firms from investing in some regions. as firms move into international markets. The amount of international diversification that can be managed varies from firm to firm & according to the abilities of the firm’s managers. & learn & implement new marketing strategies. firms cooperate with others to gain entry into restricted markets or to establish franchises in new markets. In fast-cycle markets. The uncertainty-reducing strategy is used to hedge against risk & uncertainty. Through the alliance. These are illegal in the U. In fast-cycle markets (characterized by instability. In addition. Horizontal complementary strategies can be unstable because they often join highly rivalrous competitors. the firms try to increase economies of scale & market power. Usually they are formed to improve long-term product development & distribution opportunities. firms try to gain access to partners with complementary resources & capabilities. Tacit collusion exists when several firms in an industry indirectly coordinate their production & pricing decisions by observing each other’s competitive actions & responses. so firms must constantly seek new sources of competitive advantage. rather than tactical.. Slow-cycle markets are rare & diminishing. actions because the alliances are difficult to reverse & expensive to operate.2) Explain the rationales for a cooperative strategy under each of the three types of basic market situations (i. slow. alliances between firms with excess resources & capabilities & firms with promising capabilities who lack resources help both firms to rapidly enter new markets.S. Both types of collusion result in lower production levels & higher prices for consumers. & in most developed economies. In standard-cycle markets (which are often large & oriented toward economies of scale). unpredictability. & complexity). 3) Identify the four types of business-level cooperative strategies & the advantages & disadvantages of each. sustained competitive advantages are rare. The competition response strategy involves alliances formed to react to competitors’ actions. standard. Vertical complementary strategic alliances result when firms creating value in different parts of the value chain combine their assets to create a competitive advantage. Competition reducing (collusive) strategies are often illegal. 9 . Cooperative strategies can help firms in (presently) slow-cycle markets make the transition from this relatively sheltered existence to a more competitive environment. even though partners may make similar investments. they rarely benefit equally from the alliance. & fast cycles). companies combine their resources & capabilities in ways that create value. There are two types of collusive competition reducing strategies: explicit collusion & tacit collusion. But firms using this type of alliance need to be wise in how much technology they share with their partners. Through vertical & horizontal complementary alliances. Usually they respond to strategic. Vertical complementary strategies have the greatest probability of being successful compared with other types of cooperative strategies. Vertical complementary alliances rely heavily on trust between partners to succeed. 4) Identify the three types of corporate-level cooperative strategies.e. Horizontal complementary strategic alliances are developed when firms in the same stage of the value chain combine their assets to create additional value. Explicit collusion exists when firms directly negotiate production output & pricing agreements to reduce competition. Both of these strategies are less effective in the long-run than the complementary alliances which are focused on creating value. In slow-cycle markets (markets that are near-monopolies). such as when entering new product markets or in emerging economies. 3) Some governments require local ownership in order for foreign firms to invest in businesses in their countries. 2) Limited domestic growth opportunities push firms into international expansion. On the negative side. The typical reasons follow: 1) In general. or if a potential partner firm 10 . 5) Cross-border alliances can help firms transform themselves or better use their competitive advantages surfacing in the global economy. These alliances create synergy across multiple functions or multiple businesses between partner firms. 6) Identify & define the two different types of network strategies. Franchising is a strategy in which the franchisor uses a contractual relationship to describe & control the sharing of its resources & capabilities with franchisees. legal procedures. 7) Identify the competitive risks associated with cooperative strategies. If a contract is not developed appropriately & fails to avert opportunistic behavior. the firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core industries. Cooperative strategies are not risk free strategy choices. multinational firms outperform firms operating only on a domestic basis. Dynamic alliance networks explore new ideas & typically generate frequent product innovations with short product life cycles. 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. In this type of network. as many as 70% fail. 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. Stable alliance networks (primarily found in mature industries) usually involve exploitation of economies of scale or scope. & politics. 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.A diversifying strategic alliance allows firms to share some of their resources & capabilities to diversify into new product or market areas. which makes an alliance useful for a foreign firm. Firms may be able to leverage core competencies developed domestically in other countries. sources of capital. cross-border alliances are more complex & risky than domestic strategic alliances. 4) Local partners often have significantly more information about factors contributing to competitive success such as local markets. A synergistic strategic alliance allows firms to share some of their resources & capabilities to create economies of scope. which requires foreign firms to ally with local firms. A network cooperative strategy is a cooperative strategy wherein several firms form multiple partnerships to achieve shared objectives. corporations. Ironically. It is less formal & places fewer constraints on partner behaviors.S. Corporate governance includes oversight in areas where there are conflicts of interest among major stakeholders. As risk specialists. identifying trustworthy partners is the key to this second approach. supervision of CEO pay. failure is likely. monitoring costs are lowered & opportunities will be maximized. ESSAY 1. PTS: 1 DIF: Medium REF: 286-287 OBJ: 10-01 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing administration & control 2. the board of directors. corporate governance mechanisms are not always successful. This puts the investing firm at a disadvantage in terms of return on investment. Owners (principals) hire managers (agents) to make decisions that maximize the value of their firm. Three internal governance mechanisms (ownership concentration. Unfortunately. But. The ability to effectively manage competitive strategies can be one of a firm’s core competencies. corporation. top executives are expected by owners to make decisions that will result in earning above-average returns for which they are compensated.misrepresents its competencies or fails to make available promised complementary resources. owners diversify their risk by investing in an array of corporations. Effective governance that aligns top-level managers’ interests with shareholders’ interests can produce a competitive advantage for the firm. Opportunity maximization is intended to maximize value creation opportunities. the cost minimization approach is more expensive to implement & to use than the opportunity maximization approach. Trust is more difficult to establish between international partners. Cost minimization leads firms to develop protective formal contracts & effective monitoring systems to manage alliances. As decision-making specialists. & the organization’s overall structure & strategic direction. a firm may make investments that are specific to the alliance while the partner does not. decisions? Chapter 10 Essay Questions: What is corporate governance & how is it used to monitor & control managers' Corporate governance is the relationship among stakeholders that is used to determine & control the firm’s strategic direction & its performance.S. including the election of directors. 8) Describe the 2 strategic management approaches to managing alliances. the typical corporation is characterized by an agency relationship that is created when one party (the firm’s owners) hires & pays another party 11 . Its focus is to prevent opportunistic behavior by the partner(s). Furthermore. If (well-founded) trust is present. Discuss the effect of the separation of ownership & control in the modern corporation. Thus. Ownership is typically separated from control in the large U. The core of many failures is the lack of trustworthiness of the partner(s) who act opportunistically. There are two basic approaches to managing competitive alliances. & executive compensation) & an external mechanism (the market for corporate control) are used in U. unlike diffuse ownership. CalPERS) have caused poorly-performing CEOs to be ousted from the firm. The board of directors. With significant ownership percentage. PTS: 1 DIF: Medium REF: 288 OBJ: 10-03 NOT: 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. 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. Agency costs include the costs of managerial incentives. The three internal corporate governance mechanisms are: ownership concentration. 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. These owners (e. & executive compensation. these mechanisms are imperfect. A board with a significant percentage of insiders tends to be weak in monitoring & controlling management decisions. institutional investors. Although shareholders implement corporate governance mechanisms to protect themselves from managerial opportunism. The board of directors is a governance mechanism shareholders expect to run the firm in such a ways as to maximize shareholder wealth. Decisions such as these prevent the maximization of shareholder wealth. Thus. the board of directors. such as mutual funds & pension funds. An agency relationship exists when a principal hires an agent as a decision-making specialist to perform a service. Define the agency relationship & managerial opportunism & discuss their strategic implications. enforcement costs. & the individual financial losses incurred by principals (owners of the firm) because governance mechanisms cannot guarantee total compliance by the agents (managers). The separation of owners & managers creates an agency relationship. An increasingly powerful force in corporate America. Boards of directors have been criticized for being ineffective. Executive compensation is a highly visible & often criticized governance 12 . & outsiders. PTS: 1 DIF: Medium REF: 287-288 OBJ: 10-02 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing administration & control 3. which is supposed to be the top executives’ priority. which cannot be perfectly predicted from the agent’s reputation. Managerial opportunism is the seeking of self-interest with guile.g. concentrated ownership produces more active & effective monitoring of top executives. It is both an attitude & a set of behaviors. are often able to influence top executives’ strategic decisions & actions. Top executives may make strategic decisions that maximize their personal welfare & minimize their personal risk. such as excessive product diversification. which tends to result in relatively weak monitoring & control of managerial decisions. 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. Since owners may not possess the specialized skill to run a large company. is composed of insiders. Ownership concentration is based on the number of largeblock shareholders & the percentage of shares they own. delegating these tasks to managers should produce higher returns for owners.. & there is a movement to more formally evaluate the performance of boards & their individual members.(top executives) to use decision-making skills. monitoring costs. related outsiders. elected by shareholders. a number of other factors affect firm performance. bonuses. Third. For instance. Because of this. effects on a company's strategic outcomes. there is a tendency to link the compensation of top-level managers to measurable outcomes such as financial performance. although performance-based compensation may provide incentives to managers to make decisions that best serve shareholders’ interests. & long-term incentives such as stock options are intended to reward top executives for aligning their goals with the interests of shareholders. take over) potentially undervalued firms to form a new division in an established firm or 13 . many external factors affect the performance of a firm. making it difficult to assess the effect of current decisions on the corporation’s performance. it is difficult to evaluate top executives’ performance. Although long-term performance-based incentives may reduce the temptation to underinvest in the short run. performance incentive plans can be subject to management manipulation. firms may have to overcompensate managers when they use long-term incentives. Supporting this conclusion.mechanism. such compensation plans alone are imperfect in their ability to monitor & control managers. Thus. In fact. rather than short-term. they are subject to managerial manipulation. Moreover. they increase executive exposure to risks associated with uncontrollable events. the strategic decisions made by top-level managers are typically complex & nonroutine. social. executive compensation is a far-from-perfect governance mechanism.. First. is complicated. especially long-term incentive compensation. annual bonuses may provide incentives to pursue short-run objectives at the expense of the firm’s long-term interests. or legal changes make it difficult to discern the effects of strategic decisions. But. Discuss the difficulties in establishing performance-based compensation plans for Executive compensation. which may affect the firm’s long-term strategic competitiveness. & 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. The market for corporate control is composed of individuals & firms who buy ownership positions in (e. Describe the market for corporate control & its implications for organizations. Salary.g. PTS: 1 DIF: Medium REF: 298-299 OBJ: 10-05 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Motivation Concepts | Dierdorff & Rubin: Managing administration & control 6. In addition. Long-term incentives may not be highly-valued by a manager: thus. direct supervision of executives is inappropriate for judging the quality of their decisions. A firm’s board of directors has the responsibility of determining the degree to which executive compensation succeeds in controlling managerial behavior. some research has found that bonuses based on annual performance were negatively related to investments in R&D. Although incentive compensation plans may increase firm value in line with shareholder expectations. Unpredictable economic. strategic decisions are more likely to have long-term. as such. PTS: 1 DIF: Medium REF: 292-295 | 297-298 OBJ: 10-04 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control 5. Consequently. Second. such as market fluctuations & industry decline. executives. an executive’s decision often affects a firm’s financial outcomes over an extended period of time. The German system has other unique features. the main-bank relationship of the firm is part of a keiretsu. & consensus. reincorporation in another state. nominating new board members).S. In addition. In many cases. For example. German firms with more than 2.S. 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. But. recent research shows that the compensation of top executives in Chinese companies is closely related to prior & current financial performance of the firm. & appointing three new independent directors. (e. the influence of banks in monitoring & controlling managerial behavior & firm outcomes is beginning to lessen & a minor market for corporate control is emerging.S. because private shareholders rarely have major ownership in German firms. Shareholders usually allow the banks to vote their ownership positions. the U. Historically. Germany. the market for corporate control should act as a control mechanism for corporate governance that leads to the replacement of under-performing executives. are typically triggered by poor performance. & greenmail. There has been a decline in equity held in state-owned enterprises. Briefly compare & contrast corporate governance in the U. Chinese corporate governance has become stronger in recent years.S. However. & Corporate governance structures used in Germany & Japan differ from each other & from the ones used in the U.g. the Chinese governance system has been moving towards the Western model in recent years. These defense tactics are controversial & the research on their effectiveness is inconclusive. groups of firms tied together by cross-shareholding..000 employees are required to have a two-tier board structure. 14 . & Japan. family.to merge the two previously-separate firms. governance structure has focused on maximizing shareholder value. The market for corporate control is (supposedly) triggered by low corporate performance by a firm relative to competitors in its industry. For example. the market for corporate control is not an efficient governance mechanism because in reality many of the firms taken over have above-average performance. banks become major shareholders in the firms. Those & other takeover defenses are intended to increase the costs of mounting a takeover & reducing the managers’ risk of losing their jobs. Historically. 7. Hostile takeovers. Japanese firms belong to keiretsu. German executives have not been dedicated to the maximization of shareholder value. nor do larger institutional investors play a significant role. separating the board’s management supervision function from other duties that it would normally perform in the U. Japan continues to follow a bank-based financial & corporate governance structure compared to the market-based financial & corporate governance structure in the United States. because as lenders. Attitudes toward corporate governance in Japan are affected by the concepts of obligation. 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. 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. YCT International recently announced that it was strengthening its corporate governance with the establishment of an audit committee within its board of directors. Banks have been at the center of the German corporate governance structure.. Examples of takeover defenses include asset restructuring. so banks have majority positions in many German firms. In addition. PTS: 1 DIF: Medium REF: 299-300 OBJ: 10-06 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Environmental Influence | Dierdorff & Rubin: Managing administration & control China. Thus. changes in the financial structure of the firm. In a broad sense. Most institutional investors oppose them. on the other hand. & host communities) & organizational stakeholders (e. holds considerable power over top-level executives & can set & enforce standards for ethical behaviors within the organization. The board of directors has the power & responsibility to enforce this expectation. & suggest corrective actions if there is an unacceptable difference. suppliers.g. employees will exit & seek another employer. Strategic & financial controls are both types of organizational controls that guide the use of strategy. Therefore..PTS: 1 DIF: Medium REF: 302-304 OBJ: 10-07 NOT: AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Managing administration & control 8.). shareholders. at least the minimal interests or needs of all stakeholders must be satisfied through the firm’s actions. Thus. are ultimately responsible for the development & support of an organizational culture that allows unethical decisions & behaviors. Discuss the difference between strategic & financial controls.g. managerial & nonmanagerial employees). as the agents who have been hired to make decisions that are in shareholders’ best interests. Top-level managers. dissatisfied stakeholders will withdraw their support from one firm & provide it to another (e. Top-level executives are monitored by the board of directors. Financial controls are largely objective criteria used to measure the firm’s performance against previously established quantitative standards. will be served. suppliers. The decisions & actions of a corporation’s board of directors can be an effective deterrent to unethical behaviors. customers. These stakeholders are important as well.g. Strategic controls are concerned with the fit between what the firm might do (opportunities) & what it can do (competitive advantages). which holds a position above the firm’s highest-level managers. All corporate stakeholders are vulnerable to unethical behaviors by the firm. If the image of the firm is tarnished. & board members is also tarnished.. The board has the power to hold top managers accountable for unethical actions as they can hire & fire these managers. But shareholders are just one stakeholder along with product market stakeholders (e. such as return on 15 . etc. 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. the image of customers. the most important stakeholder. the board of directors. customers seek other vendors. Accounting-based measures. indicate how to compare actual results with expected results. Otherwise. Some believe that ethically responsible companies design & use governance mechanisms to ensure that the interests of all stakeholders are served.. 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. PTS: 1 DIF: Medium REF: 306-307 OBJ: 10-08 NOT: AACSB: Ethics | Management: Ethical Responsibilities | Dierdorff & Rubin: Managing decision-making processes Chapter 11 Essay Questions: ESSAY 1. The cost leadership strategy requires a centralized functional structure. It employs objective financial criteria to evaluate each unit’s performance. one in which manufacturing efficiency & process improvements are emphasized. but the centers are unrelated to each other. such as economic value added. Discuss the organizational structures used to implement the different business-level Business-level strategies are usually implemented through the functional structure. Jobs are specialized. production. & human resources. Decision-making & authority are decentralized. PTS: 1 DIF: Medium REF: 320-321 OBJ: 11-01 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control 2. the functional structure is adopted. It is well-matched with focus strategies & business-level strategies. These characteristics allow employees to exchange ideas & to be more creative. All units compete for corporate resources. The organizational structure supporting the integrated cost leadership/differentiation strategy must be simultaneously centralized & decentralized. Each profit center may have divisions offering similar products. A professional CEO with a limited corporate staff & functional line managers is required. & unsophisticated information systems are characteristic of simple structures. Jobs are not highly specialized & procedures are informal. & rules & procedures are formal. Divisional incentives are linked to overall corporate performance. used to implement the related-constrained corporate-level strategy. The competitive multidivisional structure used to implement the unrelated diversification strategy is highly decentralized & makes little use of integrating mechanisms. The differentiation strategy’s functional structure focuses on marketing & research & development. Jobs are semi-specialized & procedures call for some formal & some informal job behavior.investment & return on assets. Firms typically have a simple structure when they are small & the owner-manager makes all the important decisions & monitors all activities. The related-linked SBU multidivisional structure establishes separate profit centers within the diversified firm. PTS: 1 DIF: Medium REF: 324-327 OBJ: 11-03 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Managing administration & control 16 . has a centralized corporate office & extensive integrating mechanisms. The cooperative multidivisional structure. are examples of financial controls. few rules. This allows for specialization of organizational functions such as accounting. A simple structure is appropriate for firms offering a single product line in a single geographic market. competitive. Describe the three major types of organizational structure & their appropriate use. they evolve to the multidivisional structure & one of its related forms (cooperative. limited task specialization. PTS: 1 DIF: Medium REF: 322-324 OBJ: 11-03 | 11-04 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control 3. Informal relationships. Coordination & communication systems are more complex in the functional structure than in the simple structure. & market-based measures. strategies. SBU). As firms grow larger & more complex. As firms diversify in products and/or geographic areas. The structure is highly decentralized. The intent is to share divisional competencies & create economies of scope. This allows employees to interact frequently & develop new ideas for products. Objective financial criteria are used to evaluate each unit’s performance. How do these dimensions vary in organizations implementing the cost-leadership.1) OBJ: 11-04 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control 6. The cost-leadership/differentiation strategy is difficult to implement because it requires decision-making that is centralized & decentralized. The cooperative form of the multidivisional structure is used to implement a related-constrained strategy. To realize the benefits of the efficient 17 . This results in efficiency. perhaps. which have three forms. The competitive form of the multidivisional structure is used to implement an unrelated diversification strategy. which compete for corporate resources. & low formalization. The differentiation strategy is best implemented with decentralized organizations. centralization. The SBU form of the multidivisional structure is used to implement a related-linked strategy. centralization.4. the unrelated diversified firm employs the competitive form of the multidivisional structure which emphasizes competition between separate units for corporate capital. An unrelated diversification strategy seeks to create value through the efficient internal allocation of capital or through the buying. A centralized corporate office facilitates cooperation among divisions. Define the three major dimensions of organizational structure: specialization. Formalization is the degree to which formal rules & procedures govern work in the organization. Discuss the organizational structures used to implement corporate-level strategies. Each strategic business unit is a profit center & divisions within an SBU are organized to achieve economies of scope and. PTS: 1 DIF: Medium REF: 324-327 OBJ: 11-03 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control 5. differentiation. PTS: 1 DIF: Medium REF: 327-328 | 330-334 | 334 (Table 11. temporary teams. Corporate headquarters focuses on long-range planning. such as liaisons. Therefore. jobs that are semi-specialized & rules & procedures that produce both formal & informal job behavior. but the divisions within each SBU may be integrated to share competencies. & selling of businesses. restructuring. & formalization. Rewards are linked to overall corporate performance & divisional performance. Centralization is the extent to which authority for decision-making is retained at higher managerial levels in the organization. unspecialized jobs. The SBUs are fairly independent. & the cost-leadership/differentiation strategies? Specialization is concerned with the number & types of jobs required to complete the work of the organization. economies of scale. & formalization. No integrating mechanisms are used. Controls emphasize competition between divisions for internal capital allocations. Corporate-level strategies involve multidivisional structures. Describe the organizational structure associated with a firm that pursues an unrelated diversification strategy. & task forces. The corporate headquarters is mainly involved in strategic planning for the whole portfolio of businesses. Cost-leadership strategies are best implemented with high specialization. although it also provides strategic help & training to the SBUs. The cooperative form emphasizes integrating mechanisms. giving attention to the role of the strategic center firm. Decision-making is centralized. Horizontal alliances group firms with competencies at the same stage of the value chain. financial controls are heavily used & integrating devices are not needed. the strategic center firm focuses on technology. The second function concerns competencies. The matrix structure involves multiple reporting relationships & promotes flexibility & response to customer needs. This structure uses no integrating mechanisms. Describe the organizational structures used to implement cooperative strategies. Headquarters audits operations & disciplines managers in divisions that do not meet those rate-of-return standards. 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). In this structure. There are two types of business level complementary alliances. the global matrix structure & the hybrid global design. are important. Generally. Because it must be simultaneously centralized & decentralized. & informal coordination among units. PTS: 1 DIF: Medium REF: 332-334 | 334 (Table 11. This facilitates the strategic objective of responding to local market differences. PTS: 1 DIF: Medium REF: 334-338 OBJ: 11-05 NOT: AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Managing administration & control 8. & it emphasizes decentralization. Integrating mechanisms. There are two combination structures. To facilitate the effectiveness of a strategic network. The worldwide product divisional structure is used to implement a global strategy. Third. the corporate headquarters sets rate-of-return expectations & maintains an arms-length relationship with the divisions. the strategic center firm guides participants in efforts to form network-specific competitive 18 . The strategic center firm also requires the alliance members to find opportunities for the network to create value through cooperative work. The transnational strategy is implemented with a combination structure. in a race to learn. this organizational structure emphasizes centralization to achieve economies of scale & scope. strategies. Vertical alliances group firms with competencies in different stages of the value chain. Finally. vertical & horizontal. Describe the organizational structures used to implement the three international A multidomestic strategy is implemented with a worldwide geographic area structure. managing the development & sharing of technology-based ideas among network partners. a strategic center firm may be necessary. the businesses must have separate & identifiable profit performances. First. integrated & nonintegrated. low formalization.1) OBJ: 11-04 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control 7. formalized & nonformalized. it uses strategic outsourcing to partner with firms other than just network members. There is a strong emphasis on cultural diversity.allocation of capital. The strategic center firm performs four critical functions. Since this type of firm offers standardized products across the globe. Thus. such as liaison roles & teams. The strategic center firm seeks ways to support each member’s efforts to create core competencies that can benefit the network. The hybrid global design combines some divisions which are product oriented & some which are oriented to particular geographic markets. the combination structure is difficult to organize. Vertical alliances are much more common than horizontal alliances. 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. heterogeneous teams are less cohesive than homogeneous teams because of communication difficulties. PTS: 1 DIF: Medium REF: 338 | 340-342 OBJ: 11-06 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control Chapter 12 Essay Questions: ESSAY 1. But. the top management team & divisional general managers. What is a top management team. & education. In particular. who has primary responsibility for strategic leadership. envision. PTS: 1 DIF: Medium REF: 356 OBJ: 12-02 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Managing decision-making processes 3. PTS: 1 DIF: Medium REF: 352 | 354 | 362 (Figure 12. & 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. & establishing balanced organizational controls. a heterogeneous top management team must be managed effectively to use the diversity in a positive way. which is shared with the board of directors. Typically. emphasizing ethical practices. 19 . The five key strategic leadership actions are: determining a strategic direction. Discuss how the managerial succession process & the composition of the top management team interact to affect strategy. sustaining an effective organizational culture. heterogeneous top management teams have been shown to positively affect performance. & empower others to create strategic change. & leadership 2. A heterogeneous team is more likely to formulate an effective strategy because of its varied expertise & knowledge. Additionally. What is strategic leadership.4) OBJ: 12-01 | 12-04 | 12-05 | 12-06 | 12-07 | 12-08 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Learning.advantages through friendly rivalry to develop skills needed to form capabilities that create value for the network. A heterogeneous top management team is composed of individuals with varied functional backgrounds. maintain flexibility. Consequently. motivation. effectively managing the firm’s resource portfolio. heterogeneous teams positively affect innovation & strategic change in firms. The CEO has primary responsibility for strategic leadership. experiences. & it is more difficult for heterogeneous teams to implement strategies. & what are the five key strategic leadership actions? Strategic leadership is the ability to anticipate. A homogeneous team’s members are similar to one another in characteristics & experiences. Team characteristics have been shown to affect the strategy of the organization. External CEO succession is considered a sign that the board of directors wants change. motivation. & core values that is shared throughout the organization & that influences the way the firm conducts its business. other top managers. but innovation will be encouraged. Sometimes radical changes are used to support strategies that differ from the firm’s historical pattern. 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. & middle management. effective performance appraisals focused on goals reflecting the new culture. Effective strategic leaders view human capital as a capital resource that requires investment rather than as a cost to be minimized. & reward systems that reward behaviors reflecting the new core values. Not only must future leaders be trained. It is thought that people are the organization’s only truly sustainable source of competitive advantage. Define human capital & its importance to the firm’s success. if the top management team is heterogeneous & an external CEO is chosen. but the entire workforce must be able to learn continuously to build skills & knowledge that lead toward innovation. symbols. but an external CEO is chosen. it will probably continue the current strategy. An organization’s culture can be a source of competitive advantage. But effective strategic leadership recognizes when a change in a firm’s culture is necessary. strategic change is likely. effective human resource management practices are necessary to successfully select & use people to attain the firm’s goals. 20 . CEOs may be selected from internal or external candidates. Incremental changes to the firm’s culture are typically used to implement strategies. leaving remaining employees unable to perform their tasks effectively. Internal CEO selection is preferred by employees & by those who wish the firm to continue in its present strategies.3) OBJ: 12-03 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Managing decision-making processes 4.Internal labor markets represent the opportunities for employees to take managerial positions (including the position of CEO) within a firm. Change occurs only when it is actively supported by the CEO. Shaping & reinforcing change in an organization’s culture require communication & problem solving. It is more difficult to change a firm’s culture than to sustain it. the situation will be ambiguous. selection processes that find people with the right values. So. Internal CEOs are less likely to seek change in the firm’s strategy than external CEOs. Layoffs can be disastrous because they strip skills & knowledge from the firm. PTS: 1 DIF: Medium REF: 358-359 | 359 (Figure 12. Finally. & leadership 5. If the firm employs a new internal CEO but has a heterogeneous top management team. What is organizational culture? What must strategic leaders do to develop & sustain an effective organizational culture? Organizational culture is the set of ideologies. The external labor market is the collection of career opportunities for managers in firms outside of the one for which they currently work. If a firm hires a new internal CEO & has a homogeneous top management team. If the top management team is homogeneous. it is unlikely that the firm’s strategy will change. PTS: 1 DIF: Medium REF: 364 OBJ: 12-05 NOT: AACSB: Business Knowledge & Analytical Skills | Management: HRM | Dierdorff & Rubin: Learning. Human capital represents the knowledge & skills of the firm’s entire workforce. PTS: 1 DIF: Medium REF: 356-357 OBJ: 12-08 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing decision-making processes Chapter 13 Essay Questions: ESSAY 21 .. 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.g. (3) disseminating the code of conduct to all stakeholders to inform them of the firm’s ethical standards & practices. A formal program to manage ethics can act as a control system to inculcate ethical values throughout the organization. For example.g. based on inputs from people throughout the firm & from other stakeholders (e.. In contrast. (2) continuously revising & updating the code of conduct. Emphasizing either financial or strategic controls has important implications for the strategic management process.. as well as forming guidelines for corrective actions when adjustments are required. Financial controls focus on short-term financial outcomes. use of internal auditing practices that are consistent with the standards). (5) creating & using explicit reward systems that recognize acts of courage (e. Strategic controls focus on the drivers of the firm’s future performance.PTS: 1 DIF: Medium REF: 365 OBJ: 12-06 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Learning. 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. Financial controls give feedback about the outcomes of past actions. what actions could you take to establish & emphasize ethical practices in your firm? Ethical practices should be institutionalized within the organization. As a strategic leader. ethical practices should become the set of behavior commitments & actions accepted by the firm’s employees & other stakeholders. That is. Controls provide the parameters within which strategies are to be implemented. & leadership 7.. developing & disseminating a code of conduct). & leadership 6. (4) developing & implementing methods & procedures to use in achieving the firm’s ethical standards (e.g. motivation. information-based procedures used by managers to maintain or alter patterns in organizational activities. There are two main types of controls: financial & strategic.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. customers & suppliers). motivation. Strategic leaders can shape ethical practices in a firm by: (1) establishing & communicating specific goals to describe the firm’s ethical standards (e. Strategic controls focus on the content of strategic actions. PTS: 1 DIF: Medium REF: 355-356 OBJ: 12-07 NOT: AACSB: Ethics | Management: Ethical Responsibilities | Dierdorff & Rubin: Learning. What are organizational controls? Why are strategic controls & financial controls important aspects of the strategic management process? Organizational controls are the formal. Acquisition of other companies represents the third approach firms use to produce & manage innovation. Which is the most critical activity for U. Invention is the act of creating & developing a new product or process. In addition. Frequently. Discuss the differences between autonomous strategic behavior & induced strategic behavior. What is the importance of international entrepreneurship? In general. Internal corporate venturing is the set of activities a firm uses to create inventions & innovations through internal means. PTS: 1 DIF: Medium REF: 384 | 386-388 | 390-393 OBJ: 13-06 | 13-07 | 13-08 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills 4. (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). which enhances their performance. In the cooperative strategy approach to innovation. Innovation is the process of commercializing the products or processes that surfaced through invention. internationally diversified firms are generally more innovative than domestic-only firms. cooperative strategies. Imitation is the adoption of an innovation by similar firms. Research shows that new ventures that enter international markets increase their learning of new technological knowledge. There are two forms of internal corporate venturing. The ideal partners have complementary assets with the potential to lead to future innovations. The success of innovation is judged by commercial criteria. firms? Firms engage in three types of innovative activity. internationalization leads to improved firm performance. firms using the acquisition strategy may lose the ability to innovate internally. Innovation is the most critical activity because commercializing inventions is difficult. & acquisitions. Imitation usually leads to product or process standardization. 22 . The success of an invention is judged by technical criteria. firms may choose to share their knowledge & skills sets with other organizations through strategic alliances. PTS: 1 DIF: Medium REF: 383 OBJ: 13-05 NOT: AACSB: Multicultural & Diversity | Management: Creation of Value | Dierdorff & Rubin: Managing strategy & innovation 3. However. offering the product at a lower price without as many features. Define the 3 types of innovative activity. entrepreneurial firms with new technical knowledge. Because of the learning & the economies of scale & scope afforded by operating in international markets. Describe the three strategic approaches used to produce & manage innovation: internal corporate venturing. established firms exchange investment capital & distribution capabilities with newer.1.S. PTS: 1 DIF: Medium REF: 382 OBJ: 13-03 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills 2. firms are often stronger competitors in their domestic markets as well. Acquiring another firm rapidly extends the firm’s product line & increases the firm’s revenues. a firm can become involved in too many alliances. which can harm its innovative capabilities. promotes unity & supports cross-functional integration. 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. PTS: 1 DIF: Medium REF: 386-388 OBJ: 13-06 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Managing strategy & innovation 5. PTS: 1 DIF: Medium REF: 393 OBJ: 13-08 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills 23 . Acquisitions are a means to rapidly extend the firm’s product lines & increase revenues. A strategic alliance in those cases offers an excellent means to obtain the needed knowledge & resources. Discuss the potential benefits & disadvantages of innovation through cooperative strategies. A high-quality communication system allows team members to share knowledge. Additionally. However.Autonomous strategic behavior & induced strategic behavior are the two processes of internal corporate venturing. Discuss the benefits & risks of acquiring another firm to gain access to innovations. 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. Autonomous strategic behavior is a bottom-up process through which a product champion facilitates the commercialization of an innovative good or service. Through acquisition an organization can gain another firm’s innovations & innovative capabilities. PTS: 1 DIF: Medium REF: 389 OBJ: 13-06 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Strategic & systems skills 6. Buying innovation. PTS: 1 DIF: Medium REF: 390-391 OBJ: 13-07 NOT: AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills 7. however. based on its vision & mission. Strategic leaders set goals & allocate resources for cross-functional teams. The firm’s culture. Discuss the methods an organization can use to facilitate cross-functional integration. comes with the risk of reducing a firm’s internal invention & innovative capabilities. A firm may not have the knowledge & capabilities necessary to be entrepreneurial & innovative. Shared values & effective leadership support cross-functional integration. Effective communications helps create synergy & gains team members’ commitment to innovation.