BUSINESS LEVEL

COST LEADERSHIP
Purpose Sources of Goal Reducing its cost below those of all its competitors
Size Difference and Economies Of Scale Specialized Machines Cost of Plant and Equipment Specialized Labour Force Overhead Costs Size Difference and Diseconomies Of Scale Physical Limits Managerial Diseconomies Worker De-Motivation Distance to Markets/Suppliers Experience Differences/LearningCurve

COROPARTE LEVEL
VERTICAL INTEGRATION
Number of Steps in the Value Chain that a Firm accomplishes within its boundaries
TYPES

INTERNATIONA L STRATEGIES
STRATEGIC ALLIANCES
Whenever two or more independent organisations cooperate in development, manufacture or sales of products or services
TYPES

DIFFFERNTIATION
Increasing the perceived Value of firms product and services
Firms Product and Services Product Features Product Complexity Timing of Production Location Relationship bet. Firms and Customer Product Customization Consumer Marketing Location Links within and between Firms Links between Functions (Architectural Competence) Links with other Firms Product Mix Distribution Channels Service and Support CREATITIVITY

CORPORATE DIVERSIFICATION
Firm operated in multiple industries and markets simultaneously
TYPES Limited Diversification o Single-Business

MERGERS AND AQUISITIONS

ACQUISITION: When a firm purchases a second firm
Un/Friendly Acquisitions/Hostile Takeovers Tender Offer = Market Price + Acquisition Premium

ALL COPERATE STRATEGIES

Firms that operate in multiple countries simultaneously are implementing International Strategies. Market Governance Exporting Intermediate Market Governance Hierarchal Governance

Backward Vertical Integration Raw Materials Forward Vertical Integration

o o o

Dominant-Business (75-

Non-Equity Alliance (do not take equity positions) o Licensing Agreements o Supply Agreements o Distribution Agreements Equity Alliance (supplement contracts)

95% Single Business)

MERGER: When assets of two equalsized (Probability/Size) firms are combined

Using Cash/Stock for purchase a % of other firms assets One firm purchases some % of 2nd firms assets and vice versa

Final Customer MEASUREMENT OF THE LEVEL OF VERTICAL INTEGRATION

Related Diversification (<75% Single Business) Related-Constrained -

numerous links Related-Linked

Joint Venture (legally independent firm)

Learning Curve vs. Eco. Of Scale

LEARNING CURVE FORMULA Cost Advantages Competitive Advantage Diff. Low-Cost Access to Productive Inputs Technology Adv. Independent Of Scale Policy Choices

few/different links

Unrelated Diversification (<75% OPPORTUNITIES Improving Current Operations Economies of Scale Learning from Competitor o Learning Race Sharing Costs and Risks Creating Favourable Competitive Environment Set technological standards network industries (increasing returns to scale) Facilitate Tacit Collusion not explicit collision illegal Facilitating Entry and Exits Entry in New Market Exit from a Market/Industry (with potential buyer) Manage Uncertainty (Real Options) THREATS Adverse Selection Moral Hazards Hold Up The Unrelated Case Gain Access to new customer for current products/services Gain Access to low-cost factors of production To develop new core competencies To leverage current core competencies in new ways To manage Corporate Risks

VRIO

Value 5 Forces Model

FIVE FORCES MODEL Threat of Entry Cost-based barriers of Entry Threat of Rivalry Pricing Strategies Threat of Substitution More attractive with lowest price Threat of Suppliers Flexibles, taking high-cost supplier Threat if Buyers Reduce revenue, still make profit

FIVE FORCES MODEL Threat of Entry Cost-based barriers of Entry Threat of Rivalry Unique product niche monopoly Threat of Substitution Appear more attractive Threat of Suppliers Reduce revenue, +customer loyalty Threat if Buyers Unique product niche monopoly

Threat of Opportunism Exists when a firm is unfairly exploited in an exchange reduces eco value Transaction-Specific Investment Firm Capabilities Only vertically integrate into business with r&c with competitive advantage Flexibility Flexibility only valuable in uncertainty Strategic Alliances makes f. inflexible

Single Business) Valuable Economies of Scope Operational Economies of Scope Shared Activities o Reducing diversified firms Costs o Increasing diversified firms Revenue Product Bundles Positive Reputation o Limits of Activity Sharing Shared Core Competencies Financial Economies of Scope Internal Capital Markets (- Escalation of Commitment) Risk Reduction (if cash flows are not correlated) Tax Advantages Anti Competitive Economies of Scope Multipoint Competition (Tacit Collusion, Mutual Forbearance) Market Power (Predatory Pricing, DeepPocked Model)

Value of Target Firm = Value

combined Value of bidding firm alone (Price <, >, = economic loss, (zero) economic profit) The Related Case TYPES Vertical Merger, Horizontal Merger, Product Extension Merger (Complementors), Market Extension Merger, Conglomerate Merger (unrelated) Valuable Criteria same Diversification Strategy Possible Motivation to engage in A&M: To Ensure Survival (Comp. Parity) Free Cash Flow (C.P. better than other Investments)

Agency Problems (Firm size ,

Rare

Likely-to-be-Rare Sources Learning Curve Economies Low-Cost Access to Productive Inputs Technology Software Less- Likely-to- be Rare Sources Economies of Scale (exp. when Efficient Size = Industry Demand) Diseconomies of Scale

Rarity depends on the ability to be creative in finding new ways to differentiate products.

Depends on the number firms implementing vertical integration efficiently. Rare transaction-specific investments Rare capabilities Rare uncertainties Rare Vertical De-Integrations

Depends on how rare the particular economy of scope is

Depends on the number of firms implementing it Depend on whether the benefits that firms obtain from their alliances are common across firms competing

Compensation) Managerial Hubris - Misbelief The Potential of Above-Normal Profits Evaluating Performance Effects of Acquisitions Event Study Analaysis: Calculate CAR (Cumulative Abnormal Return) Unexpected Performance around the Acquisition being announced Private Economies of Scope Costly-to-Imitate Economies of Scope Unexpected Valuable Economies of Scope Implications for Bidding Firm Search for Rare Economies of Scope Keep Information Away from other Bidders/Target Avoid Winning Bidding Wars Close The Deal Quickly Complete Acquisition in Thinly Traded Markets Implication for Target Firms Seek Information from Bidders Invite other Bidders Delay Geh Sterb an Pest! Schlauer Protest gegen die Kronen Lawyer! White Knight Bidding Actions, Golden Parachutes -

Imitability
DUBLICATION H =History U= Uncertainty S= Social Complexity

Hardware Easy-to-Duplicate Sources Economies of Scale Diseconomies of Scale May-be-costly-Duplicate Sources

(Open-market) Technological Easy-to-Duplicate Sources Product Features May-be-costly-Duplicate Sources DIRECT DUPLICATION Depends on the level of r&c are rare and creating c.a. May-be-costly-Duplicate Sources Shared Activities Risk Reduction Tax Advantages Employee Compensation Usually-costly-to Duplicate Core Competencies International Capital Allocation Multipoint Competition Exploiting Market Power SUBSTITUTES Develop separate businesses Strategic Alliances may be able to gain economies of scale across its businesses DIRECT DUPLICATION trusting essential: hard to duplicate SUBSTITUTES Going Alone develop all r&c neutralize threats and create opportunities Choose Strategic Alliances over going alone, when: o Level of transaction-specific investment is moderate o Exchange Partner possesses Vrio - r&c o Great uncertainty about future value of exchange Acquisitions Choose Strategic Alliances over Acquisitions, when: o Legal Constraints

SUBSTITUTION

Learning Curve Economies H

Technological Hardware U, S

Policy Choices - H

Usually-costly-to Duplicate

Product Mix H, U, S

Highly imitable not always successful

Links with other Firms H, S**

SUBSITUTES Strategic Alliances

Product Customization H, S**

Product Complexity H, S

Low-Cost Access to Productive I. H***, S** Technological Software H***, U**, S***

Consumer Marketing U**

Usually-costly-to Duplicate Links between Functions H, U, S**

Timing H***, U

Location H***

Organisation Structure Functional U-Form Vertical integration decisions are incorporated into one of the functions in a functional organisational structures CEO formulation of Strategy and resolve conflicts between vertical integrated functions Management Control System Budgeting Process Management Committee Oversight Process

o o

Limit Flexibility Unwanted Baggage

Reputation H***, U**, S***

o o

Executive Committee

(avoid functional conflicts before) Operation Committee

Distribution Channels H**, U*, S**

Service and Support H, U, S**

(solve afterwards) Compensation Policies

Organisation

Organisational Structures Few Layers in the Reporting Structure Simple Reporting relationships Small Corporate Staff Focus on narrow range of business functions Management Control System Tight Cost Control Systems Quantitative Cost Goals Close Supervision of Labour, raw material, inventory, and other costs A cost leadership philisophy Compensation Policies Reward for cost reduction Incentives for all employees to be involved in cost reduction

Organisational Structures Cross-Functional/Divisional Product Development Teams Complex Matrix Structures Skunk Works Management Control System Broad decision-making guidelines Managerial Freedom within guidelines A policy of experimentation Compensation Policies Reward for Risk-Taking, no punishment for failures Rewards for creative Flair Multidimensional Performance Measurement

Opportunism-based (Firm-specific investments) Capabilities-based (groups) Flexibility

M-Form Managed through divisions = profit-and-loss centres; have U-form structure Board of Directors Institutional Investors Senior Executive Corporate Staff Divisional General Managers Shared Activity Managers

1. 2. 3. 4. 5.

Explicit Contracts and Legal Sanctions Equity Investments (+Cross-Equity Investments) Firm Reputations Joint Ventures Trust

M&A designed to create Diversification Strategy M-Form Structure Management Control and Compensation Policies Systems same as in a Differentiation Strategy M&A designed to create Vertical Integration U-Form Management Control and Compensation Policies Systems same as in a Vertical Integration Post-Merger Integration Try to close the gap between organisational differences Discover new sources of value