Third Year

First Semester

Strategic
Management
Final Exam
Group: Q4F
Lecturer: Nino Kobaidze
Student: Tamuna Metreveli
 Strategic Management
What is strategy?
Strategy is the coordinated means by which an organization pursues its goals and
objectives.
Strategic management is a process by which a firm manages the formulation and
implementation of a strategy.
Business level – strategy type and way of successfully executing them, must be developed
for each business unit;
Corporate level – determining corporate mission and objectives, business portfolio and
entire future directions;
Functional level – level of operating division and departments, functional level strategies in
marketing, HR, R&D, Finance involve coordination of resources through which the business
level strategies can be executed effectively

What is strategy formulation and strategy implementation?

Strategy Formulation – Process of deciding what to do.
Strategy Implementation – Process of performing all the activities necessary to do what has
been planned.
Explain strategic diamond and 5 elements of strategy;
o Arenas – Where will we be active?
o Vehicles – How will we get there?
o Differentiators – How will we win in the marketplace?
o Staging – What will be our speed and sequence of moves?
o Economic logic – How will we obtain our returns?

What is competitive advantage of strategy?

A firm’s ability to create value in the way that its rivals can’t do. A competitive advantage is
an advantage over competitors gained by offering consumers greater value, either by
means of lower prices or by providing greater benefits and service that justifies higher
prices.

Explain vision and mission.

Vision – Simple statement or understanding of what the firm will be in the future. It
sometimes called a picture of your company in the future. Your vision statement is your
inspiration, the framework for all your strategic planning;
Mission – Defines what an organization is, why it exists, its reason for being. At a minimum,
mission statement should define who primary customers are, identify the products and
services produce, and describe the geographical location in which it operates;
Explain goals and objectives;

Goal setting is the process of deciding what company wants to accomplish and devising a
plan to achieve the result it desire. This goal setting definition emphasizes that goal setting
is a two part process. For effective goal setting, company need to do more than just decide
what it wants to do; Company also have to work at accomplishing whatever goal it has set
for itself.

An objective statement is an explanation of company goals, including what the company

would like to achieve and the overall ideals of the organization. Objective statements can
vary in length and detail depending on the complexity of the company's goals.
Organizations can set objectives to improve customer service, enhance worker productivity
and increase profits. Each objective statement should include information about how the
company plans to achieve business goals.
Who are stakeholder and what is stakeholder analysis?

Stakeholder – Person, group or organization that has interest or concern in an organization.

Stakeholders can affect or be affected by the organization's actions, objectives and policies.
Some examples of key stakeholders are creditors, directors, employees, government (and
its agencies), owners (shareholders), suppliers, unions, and the community from which the
business draws its resources. Not all stakeholders are equal. A company's customers are
entitled to fair trading practices but they are not entitled to the same consideration as the
company's employees.

Stakeholder Analysis – Managerial step taken to identify each stakeholder's level of interest
or involvement in a given project and how that involvement can influence the project.
Based on this analysis, project managers may alter how a project will be executed or decide
the necessary steps that must be taken in order to limit a stakeholder's influence over the
project.

Explain what ethics, biases, strategic decision-making is;

Organization ethics includes various guidelines and principles which decide the way
individuals should behave at the workplace. It also refers to the code of conduct of the
individuals working in a particular organization. The effectiveness of strategic decision
making is threatened when manager act unethically or without being fully aware of biases
influencing their judgment. In general strategy is defined as "the long term direction of an
organization". However to be more specific and based on characteristic , it involves ,
strategy may be defined as the long term direction and scope of an organization to achieve
competitive advantage through the configuration of resources within a changing
environment for the fulfillment of stakeholders aspirations and expectations. It also refers
to the code of conduct of the individuals working in a particular organization.
What is strategic leadership?

Strategic leadership provides the vision and direction for the growth and success of an
organization. To successfully deal with change, all executives need the skills and tools for
both strategy formulation and implementation. The main objective of strategic leadership
is strategic productivity. Another aim of strategic leadership is to develop an environment
in which employees forecast the organization’s needs in context of their own job. Strategic
leaders encourage the employees in an organization to follow their own ideas. Strategic
leaders make greater use of reward and incentive system for encouraging productive and
quality employees to show much better performance for their organization.
Explain the internal context of strategy.

Firms facing similar industry conditions achieve different levels of competitive advantage
and performance based on their internal characteristics and managerial choices. Although
firms must always take the external context into account when formulating and
implementing strategy, the internal perspectives stress the differences among firm in terms
of the unique resources and capabilities that they own or control. These perspectives offer
important models and analytical tools that will help you to analyze and formulate
competitive strategies.
Identify a firm’s resources and capabilities and explain their role in its performance.

Resources are either tangible or intangible. Resources and capabilities that help firms
establish a competitive advantage and secure higher levels of performance are those that
are valuable, rare, and costly to imitate.
The VRINE model helps you analyze resources and capabilities.
o Value: A resource or capability is valuable if it allows a firm to take advantage of
opportunities or to fend off threats in its environment
o Rare: A useful resource or capability that is scarce relative to demand. Valuable
resources that are available to most competitors (i.e., that are not rare) simply allow
firms to achieve parity
o Inimitability: A resource or capability is inimitable if competitors cannot acquire the
valuable and rare resource quickly, or face a disadvantage in doing so
o Non-sustainable: It is non-substitutable if
a competitor cannot achieve the same benefit using different combinations of
resources and capabilities
o Exploitability: A resource of capability that the organization has the capability to
exploit (i.e., the capability to generate value from)
A resource or capability is said to be valuable if it enables the firm to exploit opportunities
or negate threats in the environment. In addition, the firm must have complementary
organizational capabilities to exploit resources and capabilities that meet these three
conditions. Rare resources enable firms to exploit opportunities or negate threats in ways
that those lacking the resource cannot. Competitor will try to find ways to imitate valuable
and rare resources; a firm can generate an enduring competitive advantage if competitors
face a cost disadvantage in acquiring or substituting the resource that is lacking. Unique
historical conditions that have led to resource or capability development, time-
compression diseconomies, and causal ambiguity all make imitation more difficult. Firms
often use alliances, acquisitions, and substitution with less costly resources as mechanisms
to gain access to difficult-to-imitate resources.
Define dynamic capabilities and explain their role in both strategic change and a firm’s
performance;

The process of development, accumulation, and possible loss of resources and capabilities
is inherently dynamic. The resource-accumulation process and dynamic capabilities are
fundamentally different from the static possession of a stock of resources and capabilities.
Dynamic capabilities are processes that integrate, reconfigure, acquire, or divest resources
in order to use the firms’ stocks of resources and capabilities in new ways. The ability to
adapt to changing conditions or to proactively initiate a change in the competitive
environment is particularly important in industries in which time-to-market is critical,
technological change is rapid, and future competition is difficult to forecast.

Explain how value-chain activities are related to firm performance and competitive
advantage;

Firms produce products or offer services by engaging in many activities. The basic structure
of firm activities is illustrated by the firm’s value chain. The value chain is divided into
primary and support activities. One way a company can outperform the activities
altogether. Selective outsourcing of some value-chain activities is one way to perform
activities differently. Competitive advantage through strategic configuration of value-chain
activities only comes about if the firm can either deliver greater value than rivals or deliver
comparable value at lower cost. The essence of the activity-based value-chain perspective
of competitive advantage is to choose value-chain activities that are different from those of
rivals and to configure these activities in a way that are internally consistent and that
requires significant tradeoffs should a competitor want to imitate them.
Explain the role of managers with respect to resources, capabilities, and value-chain
activities;
Managers make decisions about how to employ resources in the formulation and
implementation of strategy. Managers are the decision agents that put into motion the use
of all other firm resources and capabilities; they are key to the success of a firm’s strategy.
Managers with specific experiences and backgrounds may be more qualified to work with a
specific bundle of resources owned by a firm. The influence of managers is more
pronounced in contexts such as entrepreneurial phases, turnarounds, and competitive
turmoil.
Explain the importance of the external context for strategy and firm performance;

In order to understand the threats and opportunities facing an organization, you need a
thorough understanding of its external context, including not only its industry, but the
larger environment in which it operates. The proper analysis of the external context,
together with the firm-level analysis you learned in chapter 3 (e.g., VRINE, value chain),
allow you to complete a rigorous analysis of a firm and its options. You could say that with
these tools you can now perform a thorough and systematic (rather than intuitive) SWOT
analysis that is, an assessment of a firm’s strengths, weaknesses, opportunities, and
threats.
Use PESTEL to identify the macro characteristics of the external context.
PESTEL analysis and an understanding of the drivers of globalization can be used to
characterize the macro characteristics of the firm’s external environment. PESTEL is an
acronym for the political, economic, socio-cultural, technological, environmental, and legal
contexts in which a firm operates.

PESTEL Analysis:
o Political factors. These refer to government policy such as the degree of intervention
in the economy.
o Economic factors. These include interest rates, taxation changes, economic growth,
inflation and exchange rates.
o Social factors. Changes in social trends can impact on the demand for a firm's
products and the availability and willingness of individuals to work.
o Technological factors: new technologies create new products and new processes.
o Environmental factors: environmental factors include the weather and climate
change. Changes in temperature can impact on many industries including farming,
tourism and insurance.
o Legal factors: these are related to the legal environment in which firms operate. The
introduction of age discrimination and disability discrimination legislation, an
increase in the minimum wage and greater requirements for firms to recycle are
examples of relatively recent laws that affect an organization’s actions. Legal
changes can affect a firm's costs (e.g. if new systems and procedures have to be
developed) and demand (e.g. if the law affects the likelihood of customers buying
the good or using the service).
Managers can use PESTEL analysis to gain a better understanding of the opportunities and
threats faced by the firm. By knowing the firm’s opportunities and threats, managers can
build a better vision of the future business landscape and identify how the firm may
compete profitably. By examining the drivers of globalization, managers can identify how
market, cost, governments, and competition work to favor the globalization of an industry.
Identify the major features of an industry and the forces that affect industry profitability;

The major factors to be analyzed when examining an industry are rivalry, the power of
suppliers, the power of buyers, the threat of substitutes, and the threat of new entrants.
When suppliers and buyers have significant power, they tend to be able to negotiate away
some of the profit that would otherwise be available to industry rivals. Thus, profits tend to
be lower than average in industries that face high levels of supplier and buyer power.
Likewise, as the threat of new entrants and the availability of substitutes increases, the
ability of rivals in the industry to keep prices high is reduced. Rivalry within an industry
decreases profitability. High levels of rivalry are reduced when products are differentiated.
Strategic-group analysis is used to gain a better understanding of the nature of rivalry.
Whereas industry profits tend to be reduces when any of the five forces are strong. The
presence of complementors results in the opposite; they increase the ability of firms to
generate profits. Finally, an analysis of competitors’ objectives, current strategies,
assumptions, and resources and capabilities can help managers predict the future
behaviors of their competitors.
Understand the dynamic characteristics of the external context;
The various models and analytical tools presented can provide an excellent snapshot of a
firm’s external context. In some industries, such a snapshot view gives an accurate
portrayal of what the business landscape will look life for the foreseeable future. Not only
do the five forces of industry structure change, and very rapidly in some industries; other
drivers of change in which managers must be attuned to include the stage and pace of
transition in the industry life cycle and technological discontinuities.
Show how industry dynamics may redefine industries;

In some cases, one industry becomes two or more distinct, but often related, industries.
Industries may also divide when the market for a particular product becomes large enough
that firms can economically justify dedicating a distribution channel to it. Whereas some
changes lead to industry division, others result in new industry definitions that consolidate
two or more separate industries into one. Industry convergence and division happen over
time, and firms that identify such changes and initiate early changes have a better
opportunity to create value.
Use scenario planning to predict the future structure of the external context;
Scenario planning helps firms develop detailed and internally consistent pictures of a range
of plausible outcomes as an industry evolves over time. It can be used to help formulate
effective strategies. Scenarios are complex, dynamic, interactive stories told from a future
perspective, making it easier to identify and challenge questionable assumptions. Scenario
planning also exposes areas of vulnerability, underscores the interplay of environmental
factors and the impact of change, allows for robust planning and contingency preparation,
and makes it possible to test and compare strategic options.

Define generic strategies and explain how they relate to a firm’s strategic position;
Strategic positioning is the concept of how executives situate or locate their firm relative to
rivals along important competitive dimensions. The strategic-positioning model – Porter’s
generic strategy model – is an enduring classic in the field of strategic management.
Porter’s strategy model uses two dimensions: the potential source of strategic advantage
and the breadth of the strategic target market. The four generic strategies are low-cost
leader, differentiation, focused low-cost, and focused differentiation.

Describe the drivers of low-cost, differentiation, and focused strategic positions;

Low-cost leaders must have resources or capabilities that enable them to produce a
product at a significantly lower cost than rivals. Successful low-cost leaders generally have
superior economies of scale, are farther down the learning curve, or have superior
production or process technologies than their rivals. However, to substantially reduce costs
over rivals, low-cost leaders generally have to be willing to make tradeoffs – they cannot
offer all the features, attributes, and quality that a successful differentiator can.
Likewise, successful differentiators will normally have to accept higher costs than low-cost
leaders. To make a differentiation strategy pay off, firms must segment the market so that
customer needs are well understood, products are designed to uniquely satisfy those
needs, and the products offered drive up a customers’ willingness to pay. Firms that
attempt to straddle both positions generally do not perform well along either dimension.

However, some firms have been successful at integrating basic features of both low-cost
and differentiation. Those that do, typically perfect one set of economic drivers before
trying to complement those with the seemingly inconsistent drivers associated with the
other economic logic. A focused strategy is generally the application of a low-cost or
differentiation approach to a narrowly defined arena.
Identify and explain the risks associated with each generic strategic position;

Successful strategic positions are still vulnerable. Threats to low-cost leadership include not
having the resources necessary to implement the position, having low-cost drivers imitated
by firms with better products, and not having sufficient quality to attract buyers. Threats to
a differentiation strategy include increasing costs significantly to differentiate a product
only to misperceive customer preferences, excessive cost to provide the targeted
differentiation, and differentiating in ways that are easily imitated. A firm relying on a focus
strategy risks growing too large, trying to meet too many needs, and then being out-
focused by a more specialized company. An integrated position runs the risk of
unsuccessfully straddling the logic of seemingly inconsistent economic drivers, resulting in
neither a low cost position nor a differentiated one.
Show how different strategic positions fit with various stages of the industry life cycle;

During embryonic stages, primary demand is just beginning, and customers lack good
information on the relative quality of products. Thus, building a strong foothold and the
capacity to meet growing demand are more important than aggressively differentiating
products. During growth stages, building on early foothold provides incumbents with an
opportunity to gain market share and move down the learning curve and establish low-cost
positions. Maturity stages bring lower levels of growth, and information is widely available
to customers. Differentiation can reduce competitive threats and result in higher prices.
During industry decline, price competition intensifies and cost containment becomes more
important.
Evaluate the quality of the firm’s strategy;

The quality of a firm’s strategy can be assessed by answering a few questions that can be
answered by the basic tools of strategy, including the strategy diamond, the VRINE model,
the industry structure model, and the strategic-positioning model. First, you must
determine whether the strategy and competitive position exploit the firm’s resources and
capabilities. Strategic positions such as low-cost leadership and differentiation have
economic assumptions that cannot be satisfied in the absence of complementary resources
and capabilities. Second, a quality strategy will also fit with the external environment – the
current environment and the anticipated environment in dynamic contexts. Third, a firm’s
differentiators must be sustainable. Fourth, all of the elements of the strategy diamond
must be internally consistent and aligned with the current or desired strategic position.
Finally, a quality strategy is one that can be implemented by the firm. Brilliant plans are of
little value if the firm is unable to execute them.
Identify the challenges to sustainable competitive advantage in dynamic contexts;

Dynamism can undermine competitive advantage – sometimes with blinding speed, but
more typically over some extended period of time. Indeed, as noted in the opening
vignette, although it may seem that the music industry has changed overnight, many of the
seed for that dramatic change were sown and nourished over an extended period of time.
Technological discontinuities can alter the basis of competition and the requisite resources
and capabilities for competitive advantage. The speed of change in an industry itself is a
significant factor; it can either complement or compound the effects of industry evolution,
technological discontinuities, and globalization.
Understand the fundamental dynamics of competition;

Firms do not generate and implement strategies in a vacuum. Competitive interaction can
be characterized by four phases, starting with the discovery by the focal firm of a new
competitive action. The following two phases involve some combination of customer and
competitor reaction. The final phase involves competitor interaction evaluation.
Competitive interaction theory has shown that the way a competitor initiates these actions
can determine its effectiveness. Actions that are aggressive, complex, unpredictable, and
can delay a competitor’s response usually result in the greatest competitive gains for the
attacker. Specific tactics for hypercompetitive markets include containment, shaping,
absorption, neutralization, and annulment.

Evaluate the advantages and disadvantages of choosing a first-mover strategy;

First movers are firms that initiate a strategic action before rivals, such as the introduction
of a new product or service of dramatically higher quality or at a lower price, or both.
Second movers are relatively early movers (because they are still not last-movers), but
delayed enough to learn from first movers. Effective second movers are sometimes
referred to as fast followers. They are distinguished from late movers, whose tardiness
penalizes them when the market grows. First movers do not always have an advantage
because there are significant risks associated with being the first to introduce new
products, services, and business models.
Define international strategy and identify its implications for the strategy diamonds;

An international strategy is a strategy through which the firm sells its goods or services
outside its domestic market. One of the primary reasons for implementing an international
strategy is that international markets yield potential new opportunities. Organizations must
be able to determine what products or services they intend to sell, where and how they will
make these products or services, where they will sell them, and how the organization will
acquire the necessary resources for these tasks. Even more importantly an organization
must have a strategy on how it expects to outperform its competitors.

o Staging – Is about when will company go to international; how quickly will company
expand into international markets and in what sequence will it implements its entry
tactics;
o Arenas – Geographic areas where company enters. Which channels will it use in
those areas;
o Vehicles – International market-entry strategy which will be used in business
development: alliances, acquisitions;
o Differentiators – is about how does being international make company products
more attractive to its customers;
 o Economic logic – International strategy makes lower/higher costs, raise the prices
that company can charge, or create synergies between business;

Understand why firm would expand internationally and explain the relationship between
international strategy and competitive advantages;

Large companies routinely take advantage of the enormous potential of international

markets. They simply budget for the expansion, spending whatever it takes to build the
infrastructure to support future revenue. So, when they go global, they need to be
convinced (dajereba) that they are doing the right thing. The causes of getting international
are: (1) Domestic markets in developed countries have slow growth, while capital markets
expect high growth. The pressure for cost reductions and efficiency continues to grow; (2)
Knowledge is not uniformly distributed around the world (opportunities); (3) Customers are
becoming global (both consumers and corporations); (4) Competitors are globalizing;

COMPETITIVENESS – Companies sometimes expand to protect themselves against

competitors. All companies have to compete with international companies. A well-designed
global strategy can help a firm to gain a competitive advantage. This advantage can arise
from the following sources: efficiency, strategic, risk, learning and reputation. So, a global
industry can be defined as an industry in which a firm's competitive advantage depends on
economies of scale and economies of scope gained across markets.

Describe different vehicles for international expansions;

FDI – Foreign direct investment (FDI) plays an extraordinary and growing role in global
business. It can provide a firm with new markets and marketing channels, cheaper
production facilities, access to new technology, products, skills and financing. For a host
country or the foreign firm which receives the investment, it can provide a source of new
technologies, capital, processes, products, organizational technologies and management
skills, and as such can provide a strong impetus to economic development. Foreign direct
investment, in its classic definition, is defined as a company from one country making a
physical investment into building a factory in another country.

Alliances – A global strategic alliance is usually established when a company wishes to edge
into a related business or new geographic market particularly one where the government
prohibits imports in order to protect domestic industry. Typically, alliances are formed
between two or more corporations, each based in their home country, for a specified
period of time. Their purpose is to share in ownership of a newly formed venture and
maximize competitive advantages in their combined territories. The cost of a global
strategic alliance is usually shared equitably among the corporations involved, and is
generally the least expensive way for all concerned to form a partnership.

Franchising – Arrangement where one party (the franchiser) grants (chuqeba) another
party (the franchisee) the right to use its trademark or trade-name as well as certain
business systems and processes, to produce and market a good or service according to
certain specifications. The franchisee usually pays a one-time franchise fee plus a
percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried
and tested products, (3) standard building design and décor, (4) detailed techniques in
running and promoting the business, (5) training of employees, and (6) ongoing help in
promoting and upgrading of the products. The franchiser gains rapid expansion of business
and earnings at minimum capital outlay.

Define different international strategy configurations;

Multinational Configuration – Build flexibility to respond to national difference through

strong, resourceful, entrepreneurial, and somewhat independent national or regional
operations. Requires decentralized and relatively self-sufficient units; Example: MTV
initially adopted an international configuration (using only American programming in
foreign markets) but then changed its strategy to a multinational one. It now tailors its
Western European programming to each market, offering eight channels, each in a
different language

International Configuration – Exploit parent-company knowledge and capabilities through

worldwide diffusion, local marketing, and adaptation. The most valuable resources and
capabilities are centralized; others, such as local marketing and distribution, are
decentralized; Example: When Wal-Mart initially set up its operations in Brazil; it used its
U.S. stores as a model for international expansion.

Transnational Configuration
Develop global efficiency, flexibility, and worldwide learning. Requires dispersed,
interdependent, and specialized capabilities simultaneously; Example: Nestle has taken
steps to move in this direction, starting first with what might be described as a
multinational configuration. Today, Nestle aims to evolve from a decentralized, profit-
center configuration to one that operates as a single, global company. Firms like Nestle
have taken lessons from leading consulting firms such as McKinsey and Company, which
are globally dispersed but have a hard-driving, one-firm culture at their core.
Global Configuration
Build cost advantages through centralized, global-scale operations. Requires centralized
and globally scaled resources and capabilities; Example: Companies such as Merck and
Hewlett-Packard give particular subsidiaries a worldwide mandate to leverage and
disseminate their unique capabilities and specialized knowledge worldwide.

Show how boards of directors are structured and explain the roles they play in corporate
governance;

Board of Directors has overall responsibility for the company’s organization and
administration through regular monitoring of the business and by ensuring the
appropriateness of the organization, management team, guidelines and internal control.
The board approves strategies and targets, and decides on major investments, acquisitions
and divestments of operations. BOD 3 Main Roles

o Monitor Chief Executives (CEO, CFO, COO)

o Use their power (responsibilities)
o Give useful information (experiences, capabilities)

Explain the design of executive incentives as a corporate governess devise;

Stock Ownership – Stock ownership provides us not only with a glimpse (yuradReba) into
the major shareholders of a company, but also the recent changes in shares held by those
same institutions or individuals;

Stock Bonus – A bonus paid to corporation executives and employees in shares of stock;

Stock Options - A privilege, sold by one party to another, that gives the buyer the right, but
not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain
period or on a specific date;

What are the difference between stock options and restricted stocks?

Restricted stock also known as letter stock or restricted (SesRuduli) securities, refers to
stock of a company that is not fully transferable until certain conditions have been met.
Upon satisfaction of those conditions, the stock becomes transferable by the person
holding the award.

With restricted stocks, you actually own the stock. You are limited, until the restrictions
come off, in disposal of the stock. But you are a shareholder and have all the rights of a
shareholder. And the stock will have value, unless the company goes belly up. Options are
the right to buy the shares at a certain price. You do not have any other shareholder rights.
In addition, when the market price is below your strike price, it's worthless. Plus there's a
time-limit on when the options are good usually 10 years.

What are advantages and disadvantages of stock options and restricted stocks?

Advantages of restricted stock

Since restricted stock shares are often given as awards to particular employees, they offer
several advantages to employees and employers. Restricted stocks can be used as
incentives for employees to reach specific performance targets. Shares often include voting
rights for employees in company decisions. Restricted stocks always have some value, even
if the share price drops lower than the price on the date they were granted to you. The
advantage of retaining value means you need fewer shares to enjoy a similar level of
benefit as compared to stock options.

Disadvantages of restricted stock

If an employee is awarded restricted stock but cannot actually take possession of those
shares until the restrictions are lifted, it may not seem like an attractive benefit or
motivator to employees. Additionally, restricted stock shares are forfeited by an employee
who fails to meet the requirements needed to lift the restrictions. Restricted stock does not
guarantee voting rights or receipt of dividends. A further disadvantage of restricted stocks
is their inability to possess any value if a market for the shares fails to open at some point.
When compared to other employee ownership plans, restricted stocks present a more
complex approach and potential financial risks for the stockholder.

Advantages of Stock Option

As stock options are granted to all employees, loyalty and commitment to the company is
growing at rapid rate. Employees become the owner of the share, so there is a good chance
for the employee to take more responsibility and regarding performance they put up more
effort to get the upper hand. In order to reap the future reward, the company attracts the
talented employees to stay for longer period. To business man stock options provide an
additional offer that is tax advantage which help them from paying tax. Until options are
exercised, it is shown as worthless on company's book. Technically speaking, stock options
are in form of deferred employee compensation but as far as keeping record option
pending should be excluded from recording under expense. Stock option helps in showing
healthy bottom line and increases the growth of a company. When the employees exercise
the option, tax deduction is allowed to the company in form of compensation expense
which is the difference between strike price and the market price.
Disadvantages of Stock Option
After exercising the option to buy, many employees cash out their shares at once as they
diversify their personal holdings or lock in gains. Some of them never hold their share for
longer period which is the cause for losing the motivational value of option. Some
employees, as soon as they cash in their option, disappear when they come across a new
wealth awaiting another quick score with a new growth company. Another disadvantage is
that the management encourages the employees to take high risk. As far as employees are
concerned stock option in form of compensation is an undue risk. In case of unstable
company, if large number of employees tries to exercise the option to get profit in the
market then there is a chance of collapse in the whole equity structure of a company.
When company issues additionally a new share to the other investors, there is no chance
for the other investors to get the upper hand as it increases the outstanding shares. In such
case the company must either repurchase stock or increase its earnings which may help in
forestalling the dilution of value.

Explain why strategic alliances are important strategic vehicles?

An alliance is the partnership of different companies for getting the same objective. A
participant of this alliance involves sharing investments and rewards, at same time reduce
risk factors and other extreme conditions. Because of their collectiveness, they will get new
resources and capabilities to create new advantages for their joint venture. Those benefits
includes: growth opportunities, rapid time in market, and opportunities to reach cost
efficiently.

o Share investments and rewards

o Reduce risk
o Reduce uncertainty
o Focus resources on what each
partner does best
o Foster economics of scale and scope

Explain the various forms and structures of strategic alliances?

There are four types of strategic alliances: joint venture, equity strategic alliance, non-
equity strategic alliance, and global strategic alliances.

Joint venture is a strategic alliance in which two or more firms create a legally independent
company to share some of their resources and capabilities to develop a competitive
advantage.
Equity strategic alliance is an alliance in which two or more firms own different percentages
of the company they have formed by combining some of their resources and capabilities to
create a competitive advantage.

Non-equity strategic alliance is an alliance in which two or more firms develop a

contractual-relationship to share some of their unique resources and capabilities to create
a competitive advantage.

Global Strategic Alliances working partnerships between companies (often more than two)
across national boundaries and increasingly across industries, sometimes formed between
company and a foreign government, or among companies and governments.

Describe the motivation behind the alliances and show how they have changed over the
time?

Firms search for economic of scale from alliances their objectives can contribute their
competitive objective. VRINE (Value, Rare, Inimitable, and Non- substitutable, Exploitable)
model can contribute to alliances sees that in one of the partner from alliances can provide
something valuable. It will benefit for corporation. Overtime the basis for alliance
advantage has shifts from simple efficiency and economic of scale and scope to a vehicle
organization. Over the time alliances are changing from product performance focus,
position focus and learning and capability focus. Product performance describes that
alliances wore focusing on latest technology beyond the national borders and sell products
in stressing performance. Position focus is about the strategy and the position its alliance
by building industry stature, consolidate position and gain economy of scale and scope. The
last stage of learning and capability focus is about all experiences and skills which company
achieve during this period like, maximize deliver values, optimize total cost by
product/consumer segments and getting new advantages to changing condition and
responsibilities.
Explain alliances as business and corporate level strategy vehicles?

Business level strategy alliances are using two types of alliances to create a competitive
advantage. Five forces and value chain is best tool for both identify potential partners and
find the related firms to work with.

Vertical strategy alliances – Cooperative relationship across value chain. Vertical is more
related to raw materials and others

Horizontal strategy alliances – Cooperative relationship in which firms at the same stages of
the value chain share resources and capabilities. Horizontal helps firm to make connection
Corporate level strategy is using in products line and are design to enhance firm growth.
From one segment into another strategic alliance are also useful vehicles for a firm,
corporate strategy cross boarder differ from domestic alliance.

Diversification by alliances – The fundamental role of diversification is for corporate

managers to create value for stockholders in ways stockholders cannot do better for
themselves. The additional value is created through synergetic integration of a new
business into the existing one thereby increasing its competitive advantage.

Synergy by analysis – partners sharing resources or integrate complementary capabilities to

build economy of scale.

Franchising – Arrangement where one party (the franchiser) grants another party (the
franchisee) the right to use its trademark or trade-name as well as certain business systems
and processes, to produce and market a good or service according to certain specifications.

Instead of all this Alliances Company should take in account 6 types of risks which they can
face to:

1. Poor contract management

2. Misrepresentation of resources and capabilities
3. Misappropriation of resources and capabilities
4. Failure to make complementary resources available
5. Being held hostage through specific investments
6. Misunderstanding a partner’s strategic intent

Understand the characteristics of alliances in stable and dynamic contact

o In stable contexts afford firms the luxury of managing many alliances.

o In dynamic contexts the stakes (risk) are much higher.

Summarize the criteria for successful alliances

o Understand the determinants of trust – one party’s confidence that the other party
in the exchange relationship will fulfill its promises and commitments and will not
exploit its vulnerabilities;
o Be able to manage knowledge and learning – establishing learning objectives for
each alliance and mechanism to realize them;
o Understand alliance evolution – alliances can be following to different pathways
because of initial position on partners relations. So, before choosing the direction
 every step of this evolution should be understands and realize clearly for its
establishment.
o Know how to measure alliance performance – Alliances experience high failure rates
– some lack a strong business case, or the fit between partners is inappropriate. Lack
of an effective measurement system also contributes to failures;
o Create a dedicated alliance function – alliance business case, partner assessment
and selection, Alliance negotiation and governance, Alliance management and
Assessment and termination.