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 U.S. dollar increased the interest of firms from other nations to acquire U.S. companies.

PTS:1DIF:MediumREF:188OBJ:07-01NOT:AACSB: Business Knowledge & Analytical Skills | Management: Environmental Influence | Dierdorff & Rubin: Managing strategy & innovation

2.How difficult is it for merger and acquisition strategies to create value and which firms benefit the most from M & A activity?

ANS:Evidence suggests that using merger and 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 two-thirds of all acquisitions, the acquiring firms stock price falls immediately after the intended transaction is announced. This negative response reflects investors skepticism about the likelihood that the acquirer will be able to achieve the synergies required to justify the premium.

PTS:1DIF:MediumREF:189OBJ:07-01NOT:AACSB: Business Knowledge & Analytical Skills | Management: Environmental Influence | Dierdorff & Rubin: Managing strategy & innovation

3.Identify and explain the seven reasons firms engage in an acquisition strategy.

ANS:(1) Increased market power. Market power allows a firm to sell its goods or services 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 and the firms resources and capabilities to compete in the marketplace. Firms use horizontal, vertical, and related acquisitions to increase their size and 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. In addition, acquisitions can often overcome barriers to entry into international markets. (3) Reducing the cost of new product development and increasing speed to market. Developing new products and ventures internally can be very costly and time consuming without any guarantee of success. Acquiring firms with products new to the acquiring firm avoids the risk and 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, and 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 and quicker to buy firms with different product lines than to develop new product lines independently. (6) Reshaping the firms 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 and developing new capabilities. By gaining access to new knowledge, acquisitions can help companies gain capabilities and technologies they do not possess. Acquisitions can reduce inertia and help a firm remain agile.

PTS:1DIF:MediumREF:190-198 | 199 (Figure 7.1)OBJ:07-02NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation

4.Describe the seven problems in achieving a successful acquisition.

ANS:Acquisition strategies present many potential problems. (1) Integration difficulties. It may be difficult to effectively integrate the acquiring and acquired firms due to differences in corporate culture, financial and control systems, management styles, and 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, and 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 and development, training of employees and marketing that are required for long-term success. High debt also increases the risk of bankruptcy and can lead to downgrading of the firms credit rating. (4) Inability to achieve synergy. Private synergy occurs when the acquiring and target firms assets are complementary in unique ways, making this synergy difficult for rivals to understand and imitate. Private synergy is difficult to create. Transaction costs are incurred when firms seek private synergy through acquisitions. Direct transaction costs include legal fees and investment banker charges. Indirect transaction costs include managerial time to evaluate target firms, time to complete negotiations, and the loss of key managers and employees following an acquisition. Firms often underestimate the indirect transaction costs of an acquisition. (5) Too much diversification. A high level of diversification can have a negative effect on the firms long-term performance. For example, 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 and strategies. The focus on financial controls creates a short-term outlook among managers and they forego long-term investments. Additionally, acquisitions can become a substitute for innovation, which can be negative in the long run. (6) Managers overly focused on acquisitions. Firms that become heavily involved in acquisition activity often create an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing additional acquisitions. This detracts from other important activities, such as identifying and taking advantage of other opportunities and interacting with importance external stakeholders. Moreover, during an acquisition, the managers of the target firm are hesitant to make decisions with long-term consequences until the negotiations are completed. (7) Growing too large. Acquisitions may lead to a combined firm that is too large, requiring extensive use of bureaucratic controls. This leads to rigidity and lack of innovation, and can negatively affect performance. Very large size may exceed the efficiencies gained from economies of scale and the benefits of the additional market power that comes with size.

PTS:1DIF:MediumREF:198-203 | 199 (Figure 7.1) OBJ:07-03NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation

5.Describe how an acquisition program can result in managerial time and energy absorption.

ANS:Typically, a substantial amount of managerial time and energy is required for acquisition strategies if they are to contribute to a firms strategic competitiveness. Activities with which managers become involved include those of searching for viable acquisition candidates, completing effective due diligence processes, preparing for negotiations and managing the integration process after the acquisition is completed. Company experience shows that participating in and overseeing the acquisition activities can divert managerial attention from other matters that are linked with long-term competitive success (e.g., identifying and acting on other opportunities, interacting effectively with external stakeholders).

PTS:1DIF:MediumREF:202OBJ:07-03NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation

6.What are the attributes of a successful acquisition program?

ANS:Acquisitions can contribute to a firms competitiveness if they have the following attributes: (1) The acquired firm has assets or resources that are complementary to the acquiring firms core business. (2) The acquisition is friendly. (3) The acquiring firm conducts effective due diligence to select target firms and evaluates the target firms health (financial, cultural, and human resources). (4) The acquiring firm has financial slack. (5) The merged firm maintains low to moderate debt. (6) The acquiring firm has sustained and consistent emphasis on R&D and innovation. (7) The acquiring firm manages change well and is flexible and adaptable.

PTS:1DIF:MediumREF:204-205 | 204 (Table 7.1)OBJ:07-04NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation

7.What is restructuring and what are its common forms?

ANS:Restructuring refers to changes in a firms portfolio of businesses and/or financial structure. There are three general forms of restructuring: (1) Downsizing involves reducing the number of employees, which may include decreasing the number of operating units. (2) Downscoping entails divesting, spinning-off, or eliminating businesses that are not related to the core business. It allows the firm to focus on its core business. (3) A leveraged buyout occurs when a party (managers, employees, or an external party) buys all the assets of a (publicly traded) business, takes it private, and finances the buyout with debt. Once the transaction is complete, the companys stock is no longer publicly traded.

PTS:1DIF:MediumREF:205-207 OBJ:07-05NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation

8.What are the differences between downscoping and downsizing and why are each used?

ANS:Downsizing is a reduction in the number of employees. It may or may not change the composition of businesses in the companys portfolio. In contrast, the goal of downscoping is to reduce the firms level of diversification. 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. Downscoping is accomplished by divesting unrelated businesses. Downscoping is used to make the firm less diversified and allow its top-level managers to focus on a few core businesses. A firm that downscopes often also downsizes at the same time.

PTS:1DIF:MediumREF:205-206OBJ:07-05NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation

9.What is an LBO and what have been the results of such activities?

ANS:Leveraged buyouts (LBOs) are a restructuring strategy. Through a leveraged buyout, a (publicly-traded) firm is purchased so that it can be taken private. In this manner, the companys stock is no longer publicly traded. LBOs usually are financed largely through debt, and the new owners usually sell off a number of assets. There are three types of LBOs: management buyouts (MBOs), employee buyouts (EBOs), and whole-firm buyouts. Because they provide managerial incentives, MBOs have been the most successful of the three leveraged buyout types. MBOs tend to result in downscoping, an increased strategic focus, and improved performance.

PTS:1DIF:MediumREF:207OBJ:07-05NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation

10.What are the results of the three forms of restructuring?

ANS:Downsizing usually does not lead to higher firm performance. The stock markets tend to evaluate downsizing negatively, as investors assume downsizing is a result of problems within the firm. In addition, the laid-off employees represent a significant loss of knowledge to the firm, making it less competitive. The main positive outcome of downsizing is accidental, since many laid-off employees become entrepreneurs, starting up new businesses. In contrast, downscoping generally improves firm performance through reducing debt costs and concentrating on the firms core businesses. LBOs have mixed outcomes. The resulting large debt increases the financial risk and may end in bankruptcy. The managers of the bought-out firm often have a short-term and risk-averse focus because the acquiring firm intends to sell it within five to eight years. This prevents investment in R&D and other actions that would improve the firms core competence. But, if the firms have an entrepreneurial mindset, buyouts can lead to greater innovation if the debt load is not too large.

PTS:1DIF:MediumREF:207-208 | 207 (Figure 7.2)OBJ:07-06NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing strategy & innovation

Chapter 8 Essay Questions:

ESSAY

1.What are the motives for firms to pursue international diversification? What are the four basic benefits firms can derive by moving into international markets?

ANS:One of the primary reasons for implementing an international strategy is to gain potential new opportunities. Traditional motives include extending the product life cycle, securing needed resources and having access to low-cost factors of production. In addition, companies may diversify internationally to gain access to the large demand potential of other countries. There is also pressure for global integration of operations, driven by growing universal product demand. Companies can achieve economies of scale by expanding beyond their domestic markets. Companies also wish to distribute their operations across many countries to reduce the effect of currency fluctuations and to reduce the risk of devaluation.

When firms successfully move into international markets, they can experience: increased market size, greater returns on major investments, greater economies of scope, scale, or learning, and a competitive advantage through location.

PTS:1DIF:MediumREF:219-220OBJ:08-01NOT:AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

2.What are the four factors that provide a basis for international business-level strategies?

ANS:An international strategy is commonly designed primarily to capitalize on four business level benefits: (1) increased market size, (2) earning a return on large investments, (3) economies of scale and learning, and (4) advantages of location. These factors are interrelated. Increased market size is achieved by expansion beyond the firms home country. International expansion increases the number of potential customers a firm may serve. As the number of potential customers increases, the return on a large investment increases. Leveraging a technology beyond the home country allows for more units to be sold and initial investments recovered more quickly. The development of some products, such as major new aircraft like the Airbus A380, require such large amounts of R&D that development of the product would not be feasible at the scale of the local market alone. Projects such as these require global scale to be feasible. Lastly, advantages of location can be realized through internationalization. These advantages include access to low-cost labor, critical resources, or customers.

PTS:1DIF:EasyREF:221-223OBJ:08-02 TYPE: knowledgeNOT:AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

3.Discuss the three international corporate-level strategies. On what factors are these strategies based?

ANS:International corporate strategy focuses on the scope of a firms operations through both product and geographic diversification. The three basic international corporate-level strategies vary on the need for local responsiveness to the market and the need for global integration. The multidomestic strategy focuses on competition within each country in which the firm operates. Firms employing a multidomestic strategy decentralize strategic and operating decisions to the strategic business units operating in each country so business units can customize their goods and services to the local market. The use of global integration in this strategy is low. The global strategy assumes more standardization of product demand across country boundaries. Therefore, competitive strategy is centralized and controlled by the home office, placing high emphasis on global integration of operations. The strategic business units in each country are interdependent and the home office integrates these businesses. The firm offers standardized products across country markets. It emphasizes economies of scale and the opportunity to use innovations developed in one nation to other markets. The transnational strategy seeks to achieve both global efficiency (through global integration) and local responsiveness. This strategy is difficult to implement. One goal requires global coordination while the other requires local flexibility. Flexible coordination builds a shared vision and individual commitment through an integrated network. The effective implementation of the transnational strategy often produces higher performance than either of the other corporate-level strategies.

PTS:1DIF:MediumREF:225-229OBJ:08-04NOT:AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

4.Identify and describe the modes of entering international markets. What are their advantages and disadvantages?

ANS:Firms may enter international markets in any of five ways: exporting, licensing, forming strategic alliances, making acquisitions, and establishing new, wholly owned subsidiaries (greenfield ventures). Most firms, particularly small ones, begin with exporting (marketing and distributing their products abroad). This involves high transportation costs and possibly tariffs. An exporter has less control over the marketing and distribution of the product than in other methods of entering the international market. In addition, the exporter must pay the distributor or allow the distributor to add to the product price in order to offset its costs and earn a profit. In addition, the strength of the dollar against foreign currencies is a constant uncertainty. But, the advantages are that the company does not have the expense of establishing operations in the host countries. The Internet makes exporting easier than in previous times. Licensing (selling the manufacturing and distribution rights to a foreign firm) is also popular with smaller firms. The licenser is paid a royalty on each unit sold by the licensee. The licensee takes the risks and makes the financial investments in manufacturing and distributing the product. It is the least costly way of entering international markets. It allows a firm to expand returns based on a previous innovation. But there are disadvantages. Licensing provides the lowest returns, because they must be shared between the licensee and the licensor. Licensing gives the licenser less control over the manufacturing and marketing process. There is the risk that the licensee will learn the technology and become a competitor when the original license expires. If the licenser later wishes to use a different ownership arrangement, the licensing arrangement make create some inflexibility. Strategic alliances involve sharing risks and resources with another firm in the host-country. The host country partner knows the local conditions; the expanding firm has the technology or other capabilities. 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 and avoid paying tariffs. The host-country firm gains access to new technology and innovative products. Equity-based alliances are more likely to produce positive gains. Alliances work best in the face of high uncertainty and where cooperation is needed between partners and strategic flexibility is important. But, many alliances fail due to incompatibility and conflict between the partners. Cross-border acquisitions provide quick access to a new market, but they are expensive and involve complex negotiations. Cross-border acquisitions have all the problems of domestic acquisitions with the complication of a different culture, legal system and regulatory requirements. Acquisitions are expensive and usually involve debt-financing. The most expensive and risky means of entering a new international market is through the establishment of a new, wholly owned subsidiary or greenfield venture. Alternatively, it provides the advantages of maximum control for the firm and, if successful, potentially the greatest returns as well. This alternative is suitable for firms with strong intangible capabilities and/or proprietary technology. The risks are high because of the challenges of operating in an unfamiliar environment. The company must build new manufacturing facilities, establish distribution networks, and learn and implement new marketing strategies.

PTS:1DIF:MediumREF:231-236 | 232 (Table 8.1)OBJ:08-06NOT:AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

5.Discuss the effect of international diversification on a firms returns.

ANS:Research shows that returns vary as the level of diversification increases. At first, returns decrease, then as the firm learns to manage the diversification, returns increase. But, as diversification increases past some point, returns level off and become negative. Firms that are broadly diversified in international markets usually receive the most positive stock returns, especially when they diversify geographically into core business areas. International diversification can lead to economies of scale and experience, location advantages, increased market size, and the potential to stabilize returns (which reduces the firms overall risk). International diversification improves a firms ability to increase returns from innovation before competitors can overcome the initial competitive advantage. In addition, as firms move into international markets, they are exposed to new products and processes that stimulate further innovation. The amount of international diversification that can be managed varies from firm to firm and according to the abilities of the firms managers. The problems of central coordination and integration are mitigated if the firm diversifies into more friendly countries that are geographically and culturally close.

PTS:1DIF:MediumREF:237 | 242OBJ:08-07 | 08-08NOT:AACSB: Multicultural & Diversity | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills

6.Identify and describe the major risks of international diversification.

ANS:International diversification carries multiple risks. The major risks are political and economic. Political risks are related to governmental instability and to war. Instability in a government creates economic risks and uncertainty created by government regulation. Governmental instability can result in the existence of many potentially conflicting legal authorities, corruption, and the risk of nationalization of company assets. Economic risks are related to political risks. Economic risks include the increased trend of counterfeit products and the lack of global policing of these products. 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. In addition, differences in and fluctuations of the value of different currencies is another economic risk. The security risk created by terrorism prevents U.S. firms from investing in some regions. The relative strength or weakness of the dollar affects international firms competitiveness in certain markets and their returns.

PTS:1DIF:MediumREF:240OBJ:08-08NOT:AACSB: Multicultural & Diversity | Management: Environmental Influence | Dierdorff & Rubin: Strategic & systems skills

Chapter 9 Essay Questions:ESSAY

1.Identify and define the different types of strategic alliances.

ANS:Strategic alliances are cooperative strategies between firms whereby resources and capabilities are combined to create a competitive advantage. All strategic alliances require firms to exchange and share resources and capabilities to co-develop or distribute goods or services. The three basic types of strategic alliances are: (1) joint ventures, where a legally independent company is created by at least two other firms, with each firm usually owning an equal percentage of the new company; 2) equity strategic alliances, whereby partners own different percentages of equity in the new company they have formed; and (3) nonequity strategic alliances, which are contractual relationships between firms to share some of their resources and capabilities. The firms do not establish a separate organization, nor do they take an equity position. Because of this, nonequity strategic alliances are less formal and demand fewer partner commitments than joint ventures and equity strategic alliances. Typical forms are licensing agreements, distribution agreements and supply contracts.

PTS:1DIF:MediumREF:256-257OBJ:09-02NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

2.Explain the rationales for a cooperative strategy under each of the three types of basic market situations (i.e., slow, standard, and fast cycles).

ANS:In slow-cycle markets (markets that are near-monopolies), firms cooperate with others to gain entry into restricted markets or to establish franchises in new markets. Slow-cycle markets are rare and diminishing. Cooperative strategies can help firms in (presently) slow-cycle markets make the transition from this relatively sheltered existence to a more competitive environment. In standard-cycle markets (which are often large and oriented toward economies of scale), firms try to gain access to partners with complementary resources and capabilities. Through the alliance, the firms try to increase economies of scale and market power. In fast-cycle markets (characterized by instability, unpredictability, and complexity), sustained competitive advantages are rare, so firms must constantly seek new sources of competitive advantage. In fast-cycle markets, alliances between firms with excess resources and capabilities and firms with promising capabilities who lack resources help both firms to rapidly enter new markets.

PTS:1DIF:MediumREF:257-260 | 258 (Table 9.1)OBJ:09-02NOT:AACSB: Business Knowledge & Analytical Skills | Management: Environmental Influence | Dierdorff & Rubin: Managing the task environment

3.Identify the four types of business-level cooperative strategies and the advantages and disadvantages of each.

ANS:Through vertical and horizontal complementary alliances, companies combine their resources and capabilities in ways that create value. Vertical complementary strategic alliances result when firms creating value in different parts of the value chain combine their assets to create a competitive advantage. Vertical complementary strategies have the greatest probability of being successful compared with other types of cooperative strategies. But firms using this type of alliance need to be wise in how much technology they share with their partners. Vertical complementary alliances rely heavily on trust between partners to succeed. Horizontal complementary strategic alliances are developed when firms in the same stage of the value chain combine their assets to create additional value. Usually they are formed to improve long-term product development and distribution opportunities. Horizontal complementary strategies can be unstable because they often join highly rivalrous competitors. In addition, even though partners may make similar investments, they rarely benefit equally from the alliance.

The competition response strategy involves alliances formed to react to competitors actions. Usually they respond to strategic, rather than tactical, actions because the alliances are difficult to reverse and expensive to operate. The uncertainty-reducing strategy is used to hedge against risk and uncertainty, such as when entering new product markets or in emerging economies. Both of these strategies are less effective in the long-run than the complementary alliances which are focused on creating value.

Competition reducing (collusive) strategies are often illegal. There are two types of collusive competition reducing strategies: explicit collusion and tacit collusion. Explicit collusion exists when firms directly negotiate production output and pricing agreements to reduce competition. These are illegal in the U.S. and in most developed economies. Tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each others competitive actions and responses. Both types of collusion result in lower production levels and higher prices for consumers.

PTS:1DIF:MediumREF:260-261 | 263-265OBJ:09-03NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

4.Identify the three types of corporate-level cooperative strategies.

ANS:A diversifying strategic alliance allows firms to share some of their resources and capabilities to diversify into new product or market areas. A synergistic strategic alliance allows firms to share some of their resources and capabilities to create economies of scope. These alliances create synergy across multiple functions or multiple businesses between partner firms. Franchising is a strategy in which the franchisor uses a contractual relationship to describe and control the sharing of its resources and capabilities with franchisees. A franchise is a contract between two independent organizations whereby the franchisor grants the right to the franchisee to sell the franchisors product or do business under its trademarks in a given location for a specified period of time.

PTS:1DIF:MediumREF:266-268OBJ:09-04NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

5.Why are cooperative strategies often used when firms pursue international strategies? What are the advantages and disadvantages of international cooperative strategies?

ANS:A cross-border strategic alliance is an international cooperative strategy in which firms headquartered in different nations combine some of their resources and capabilities to create a competitive advantage. The typical reasons follow: 1) In general, multinational firms outperform firms operating only on a domestic basis. Firms may be able to leverage core competencies developed domestically in other countries. 2) Limited domestic growth opportunities push firms into international expansion. 3) Some governments require local ownership in order for foreign firms to invest in businesses in their countries, which requires foreign firms to ally with local firms. 4) Local partners often have significantly more information about factors contributing to competitive success such as local markets, sources of capital, legal procedures, and politics, which makes an alliance useful for a foreign firm. 5) Cross-border alliances can help firms transform themselves or better use their competitive advantages surfacing in the global economy. On the negative side, cross-border alliances are more complex and risky than domestic strategic alliances.

PTS:1DIF:MediumREF:268-270OBJ:09-05NOT:AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Managing the task environment

6.Identify and define the two different types of network strategies.

ANS:A network cooperative strategy is a cooperative strategy wherein several firms form multiple partnerships to achieve shared objectives. Stable alliance networks (primarily found in mature industries) usually involve exploitation of economies of scale or scope. In this type of network, the firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core industries. 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 and successful market entries. Dynamic alliance networks explore new ideas and typically generate frequent product innovations with short product life cycles.

PTS:1DIF:MediumREF:270-271OBJ:09-04NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

7.Identify the competitive risks associated with cooperative strategies.

ANS:Cooperative strategies are not risk free strategy choices; as many as 70% fail. If a contract is not developed appropriately and fails to avert opportunistic behavior, or if a potential partner firm misrepresents its competencies or fails to make available promised complementary resources, failure is likely. Furthermore, a firm may make investments that are specific to the alliance while the partner does not. This puts the investing firm at a disadvantage in terms of return on investment. The core of many failures is the lack of trustworthiness of the partner(s) who act opportunistically.

PTS:1DIF:MediumREF:271-272OBJ:09-06NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Strategic & systems skills

8.Describe the two strategic management approaches to managing alliances.

ANS:The ability to effectively manage competitive strategies can be one of a firms core competencies. There are two basic approaches to managing competitive alliances. Cost minimization leads firms to develop protective formal contracts and effective monitoring systems to manage alliances. Its focus is to prevent opportunistic behavior by the partner(s). Opportunity maximization is intended to maximize value creation opportunities. It is less formal and places fewer constraints on partner behaviors. But, identifying trustworthy partners is the key to this second approach. If (well-founded) trust is present, monitoring costs are lowered and opportunities will be maximized. Trust is more difficult to establish between international partners. Ironically, the cost minimization approach is more expensive to implement and to use than the opportunity maximization approach.

PTS:1DIF:MediumREF:272 | 274OBJ:09-07NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

Chapter 10 Essay Questions:ESSAY

1.What is corporate governance and how is it used to monitor and control managers' decisions?

ANS:Corporate governance is the relationship among stakeholders that is used to determine and control the firms strategic direction and its performance. Effective governance that aligns top-level managers interests with shareholders interests can produce a competitive advantage for the firm. Corporate governance includes oversight in areas where there are conflicts of interest among major stakeholders, including the election of directors, supervision of CEO pay, and the organizations overall structure and strategic direction. Three internal governance mechanisms (ownership concentration, the board of directors, and executive compensation) and an external mechanism (the market for corporate control) are used in U.S. corporations. Unfortunately, corporate governance mechanisms are not always successful.

PTS:1DIF:MediumREF:286-287OBJ:10-01NOT:AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing administration & control

2.Discuss the effect of the separation of ownership and control in the modern corporation.

ANS:Ownership is typically separated from control in the large U.S. corporation. Owners (principals) hire managers (agents) to make decisions that maximize the value of their firm. As risk specialists, owners diversify their risk by investing in an array of corporations. As decision-making specialists, top executives are expected by owners to make decisions that will result in earning above-average returns for which they are compensated. Thus, the typical corporation is characterized by an agency relationship that is created when one party (the firms owners) hires and pays another party (top executives) to use decision-making skills. Since owners may not possess the specialized skill to run a large company, delegating these tasks to managers should produce higher returns for owners.

PTS:1DIF:MediumREF:287-288OBJ:10-02NOT:AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing administration & control

3.Define the agency relationship and managerial opportunism and discuss their strategic implications.

ANS:The separation of owners and managers creates an agency relationship. An agency relationship exists when a principal hires an agent as a decision-making specialist to perform a service. Some problems that result from the agency relationship between owners and managers include the potential for a divergence of interests and a lack of direct control of the firm by shareholders. Managerial opportunism is the seeking of self-interest with guile. It is both an attitude and a set of behaviors, which cannot be perfectly predicted from the agents reputation. Top executives may make strategic decisions that maximize their personal welfare and minimize their personal risk, such as excessive product diversification. Decisions such as these prevent the maximization of shareholder wealth, which is supposed to be the top executives priority. Although shareholders implement corporate governance mechanisms to protect themselves from managerial opportunism, these mechanisms are imperfect. Agency costs include the costs of managerial incentives, monitoring costs, enforcement costs, and the individual financial losses incurred by principals (owners of the firm) because governance mechanisms cannot guarantee total compliance by the agents (managers).

PTS:1DIF:MediumREF:288OBJ:10-03NOT:AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Managing administration & control

4.Define the three internal corporate governance mechanisms and how they may be used to control and monitor managerial decisions.

ANS:The three internal corporate governance mechanisms are: ownership concentration, the board of directors, and executive compensation. Ownership concentration is based on the number of large-block shareholders and the percentage of shares they own. With significant ownership percentage, institutional investors, such as mutual funds and pension funds, are often able to influence top executives strategic decisions and actions. Thus, unlike diffuse ownership, which tends to result in relatively weak monitoring and control of managerial decisions, concentrated ownership produces more active and effective monitoring of top executives. An increasingly powerful force in corporate America, institutional owners are actively using their positions of concentrated ownership in individual companies to force managers and boards of directors to make decisions that maximize a firms value. These owners (e.g., CalPERS) have caused poorly-performing CEOs to be ousted from the firm. The board of directors, elected by shareholders, is composed of insiders, related outsiders, and outsiders. The board of directors is a governance mechanism shareholders expect to run the firm in such a ways as to maximize shareholder wealth. Outside directors are expected to be more independent of a firms top executives than are those who hold top management positions within the firm. A board with a significant percentage of insiders tends to be weak in monitoring and controlling management decisions. Boards of directors have been criticized for being ineffective, and there is a movement to more formally evaluate the performance of boards and their individual members. Executive compensation is a highly visible and often criticized governance mechanism. Salary, bonuses, and long-term incentives such as stock options are intended to reward top executives for aligning their goals with the interests of shareholders. A firms board of directors has the responsibility of determining the degree to which executive compensation succeeds in controlling managerial behavior. But, it is difficult to evaluate top executives performance, and so executive compensation tends to be linked to financial measures which do not necessarily reflect the effectiveness of the executives decision on long-term shareholder outcomes. In addition, many external factors affect the performance of a firm. Moreover, performance incentive plans can be subject to management manipulation. Consequently, executive compensation is a far-from-perfect governance mechanism.

PTS:1DIF:MediumREF:292-295 | 297-298OBJ:10-04NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

5.Discuss the difficulties in establishing performance-based compensation plans for executives.

ANS:Executive compensation, especially long-term incentive compensation, is complicated. First, the strategic decisions made by top-level managers are typically complex and nonroutine; as such, direct supervision of executives is inappropriate for judging the quality of their decisions. Because of this, there is a tendency to link the compensation of top-level managers to measurable outcomes such as financial performance. Second, an executives decision often affects a firms financial outcomes over an extended period of time, making it difficult to assess the effect of current decisions on the corporations performance. In fact, strategic decisions are more likely to have long-term, rather than short-term, effects on a company's strategic outcomes. Third, a number of other factors affect firm performance. Unpredictable economic, social, or legal changes make it difficult to discern the effects of strategic decisions. Thus, although performance-based compensation may provide incentives to managers to make decisions that best serve shareholders interests, such compensation plans alone are imperfect in their ability to monitor and control managers.

Although incentive compensation plans may increase firm value in line with shareholder expectations, they are subject to managerial manipulation. For instance, annual bonuses may provide incentives to pursue short-run objectives at the expense of the firms long-term interests. Supporting this conclusion, some research has found that bonuses based on annual performance were negatively related to investments in R&D, which may affect the firms long-term strategic competitiveness. Although long-term performance-based incentives may reduce the temptation to underinvest in the short run, they increase executive exposure to risks associated with uncontrollable events, such as market fluctuations and industry decline. Long-term incentives may not be highly-valued by a manager: thus, firms may have to overcompensate managers when they use long-term incentives.

PTS:1DIF:MediumREF:298-299OBJ:10-05NOT:AACSB: Business Knowledge & Analytical Skills | Management: Motivation Concepts | Dierdorff & Rubin: Managing administration & control

6.Describe the market for corporate control and its implications for organizations.

ANS:The market for corporate control is composed of individuals and firms who buy ownership positions in (e.g., take over) potentially undervalued firms to form a new division in an established firm or to merge the two previously-separate firms. The target firms top management team is usually replaced because it is assumed to be partly responsible for formulating and implementing the strategy that led to poor firm performance. The market for corporate control is (supposedly) triggered by low corporate performance by a firm relative to competitors in its industry. Thus, the market for corporate control should act as a control mechanism for corporate governance that leads to the replacement of under-performing executives. But, the market for corporate control is not an efficient governance mechanism because in reality many of the firms taken over have above-average performance. Hostile takeovers, on the other hand, are typically triggered by poor performance. 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. Those and other takeover defenses are intended to increase the costs of mounting a takeover and reducing the managers risk of losing their jobs. Examples of takeover defenses include asset restructuring, changes in the financial structure of the firm, reincorporation in another state, and greenmail. These defense tactics are controversial and the research on their effectiveness is inconclusive. Most institutional investors oppose them.

PTS:1DIF:MediumREF:299-300OBJ:10-06NOT:AACSB: Business Knowledge & Analytical Skills | Management: Environmental Influence | Dierdorff & Rubin: Managing administration & control

7.Briefly compare and contrast corporate governance in the U.S., Germany, and Japan, and China.

ANS:Corporate governance structures used in Germany and Japan differ from each other and from the ones used in the U.S. Historically, the U.S. governance structure has focused on maximizing shareholder value. Banks have been at the center of the German corporate governance structure, because as lenders, banks become major shareholders in the firms. Shareholders usually allow the banks to vote their ownership positions, so banks have majority positions in many German firms. The German system has other unique features. For example, German firms with more than 2,000 employees are required to have a two-tier board structure, separating the boards management supervision function from other duties that it would normally perform in the U.S. (e.g., nominating new board members). Historically, German executives have not been dedicated to the maximization of shareholder value, because private shareholders rarely have major ownership in German firms, nor do larger institutional investors play a significant role.

Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus. Japan continues to follow a bank-based financial and corporate governance structure compared to the market-based financial and corporate governance structure in the United States. In addition, Japanese firms belong to keiretsu, groups of firms tied together by cross-shareholding. In many cases, the main-bank relationship of the firm is part of a keiretsu. However, the influence of banks in monitoring and controlling managerial behavior and firm outcomes is beginning to lessen and a minor market for corporate control is emerging.

Chinese corporate governance has become stronger in recent years. There has been a decline in equity held in state-owned enterprises, but the state still dominates the strategies employed by most firms. Firms with higher state ownership tend to have lower market value and more volatility in those values over time. In a broad sense, the Chinese governance system has been moving towards the Western model in recent years. For example, YCT International recently announced that it was strengthening its corporate governance with the establishment of an audit committee within its board of directors, and appointing three new independent directors. In addition, recent research shows that the compensation of top executives in Chinese companies is closely related to prior and current financial performance of the firm.

PTS:1DIF:MediumREF:302-304OBJ:10-07NOT:AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Managing administration & control

8.How does corporate governance foster ethical strategic decisions and how important is this to top-level executives?

ANS:Governance mechanisms focus on the control of managerial decisions to ensure that the interest of shareholders, the most important stakeholder, will be served. But shareholders are just one stakeholder along with product market stakeholders (e.g., customers, suppliers, and host communities) and organizational stakeholders (e.g., managerial and nonmanagerial employees). These stakeholders are important as well. Therefore, at least the minimal interests or needs of all stakeholders must be satisfied through the firms actions. Otherwise, dissatisfied stakeholders will withdraw their support from one firm and provide it to another (e.g., employees will exit and seek another employer, customers seek other vendors, etc.). Some believe that ethically responsible companies design and use governance mechanisms to ensure that the interests of all stakeholders are served.

Top-level executives are monitored by the board of directors. All corporate stakeholders are vulnerable to unethical behaviors by the firm. If the image of the firm is tarnished, the image of customers, suppliers, shareholders, and board members is also tarnished. Top-level managers, as the agents who have been hired to make decisions that are in shareholders best interests, are ultimately responsible for the development and support of an organizational culture that allows unethical decisions and behaviors. The board of directors has the power and responsibility to enforce this expectation.

The decisions and actions of a corporations board of directors can be an effective deterrent to unethical behaviors. The board has the power to hold top managers accountable for unethical actions as they can hire and fire these managers. Thus, the board of directors, which holds a position above the firms highest-level managers, holds considerable power over top-level executives and can set and enforce standards for ethical behaviors within the organization.

PTS:1DIF:MediumREF:306-307OBJ:10-08NOT:AACSB: Ethics | Management: Ethical Responsibilities | Dierdorff & Rubin: Managing decision-making processes

Chapter 11 Essay Questions:

ESSAY

1.Discuss the difference between strategic and financial controls.

ANS:Strategic and financial controls are both types of organizational controls that guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions if there is an unacceptable difference. Strategic controls are largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the companys competitive advantages. Strategic controls are concerned with the fit between what the firm might do (opportunities) and what it can do (competitive advantages). Financial controls are largely objective criteria used to measure the firms performance against previously established quantitative standards. Accounting-based measures, such as return on investment and return on assets, and market-based measures, such as economic value added, are examples of financial controls.

PTS:1DIF:MediumREF:320-321OBJ:11-01NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

2.Describe the three major types of organizational structure and their appropriate use.

ANS:Firms typically have a simple structure when they are small and the owner-manager makes all the important decisions and monitors all activities. Informal relationships, few rules, limited task specialization, and unsophisticated information systems are characteristic of simple structures. A simple structure is appropriate for firms offering a single product line in a single geographic market. It is well-matched with focus strategies and business-level strategies. As firms grow larger and more complex, the functional structure is adopted. A professional CEO with a limited corporate staff and functional line managers is required. This allows for specialization of organizational functions such as accounting, production, and human resources. Coordination and communication systems are more complex in the functional structure than in the simple structure. As firms diversify in products and/or geographic areas, they evolve to the multidivisional structure and one of its related forms (cooperative, competitive, SBU). The cooperative multidivisional structure, used to implement the related-constrained corporate-level strategy, has a centralized corporate office and extensive integrating mechanisms. Divisional incentives are linked to overall corporate performance. The related-linked SBU multidivisional structure establishes separate profit centers within the diversified firm. Each profit center may have divisions offering similar products, but the centers are unrelated to each other. The competitive multidivisional structure used to implement the unrelated diversification strategy is highly decentralized and makes little use of integrating mechanisms. It employs objective financial criteria to evaluate each units performance. All units compete for corporate resources.

PTS:1DIF:MediumREF:322-324OBJ:11-03 | 11-04NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

3.Discuss the organizational structures used to implement the different business-level strategies.

ANS:Business-level strategies are usually implemented through the functional structure. The cost leadership strategy requires a centralized functional structure, one in which manufacturing efficiency and process improvements are emphasized. Jobs are specialized, and rules and procedures are formal. The differentiation strategys functional structure focuses on marketing and research and development. Decision-making and authority are decentralized. Jobs are not highly specialized and procedures are informal. These characteristics allow employees to exchange ideas and to be more creative. The organizational structure supporting the integrated cost leadership/differentiation strategy must be simultaneously centralized and decentralized. Jobs are semi-specialized and procedures call for some formal and some informal job behavior.

PTS:1DIF:MediumREF:324-327OBJ:11-03NOT:AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Managing administration & control

4.Define the three major dimensions of organizational structure: specialization, centralization, and formalization. How do these dimensions vary in organizations implementing the cost-leadership, differentiation, and the cost-leadership/differentiation strategies?

ANS:Specialization is concerned with the number and types of jobs required to complete the work of the organization. Centralization is the extent to which authority for decision-making is retained at higher managerial levels in the organization. Formalization is the degree to which formal rules and procedures govern work in the organization. Cost-leadership strategies are best implemented with high specialization, centralization, and formalization. This results in efficiency. The differentiation strategy is best implemented with decentralized organizations, unspecialized jobs, and low formalization. This allows employees to interact frequently and develop new ideas for products. The cost-leadership/differentiation strategy is difficult to implement because it requires decision-making that is centralized and decentralized, jobs that are semi-specialized and rules and procedures that produce both formal and informal job behavior.

PTS:1DIF:MediumREF:324-327OBJ:11-03NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

5.Discuss the organizational structures used to implement corporate-level strategies.

ANS:Corporate-level strategies involve multidivisional structures, which have three forms. The cooperative form of the multidivisional structure is used to implement a related-constrained strategy. The cooperative form emphasizes integrating mechanisms, such as liaisons, temporary teams, and task forces. The intent is to share divisional competencies and create economies of scope. A centralized corporate office facilitates cooperation among divisions. Rewards are linked to overall corporate performance and divisional performance. The SBU form of the multidivisional structure is used to implement a related-linked strategy. Each strategic business unit is a profit center and divisions within an SBU are organized to achieve economies of scope and, perhaps, economies of scale. The SBUs are fairly independent, but the divisions within each SBU may be integrated to share competencies. The corporate headquarters is mainly involved in strategic planning for the whole portfolio of businesses, although it also provides strategic help and training to the SBUs. The competitive form of the multidivisional structure is used to implement an unrelated diversification strategy. The structure is highly decentralized. Controls emphasize competition between divisions for internal capital allocations. No integrating mechanisms are used. Objective financial criteria are used to evaluate each units performance, which compete for corporate resources. Corporate headquarters focuses on long-range planning.

PTS:1DIF:MediumREF:327-328 | 330-334 | 334 (Table 11.1)OBJ:11-04NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

6.Describe the organizational structure associated with a firm that pursues an unrelated diversification strategy.

ANS:An unrelated diversification strategy seeks to create value through the efficient internal allocation of capital or through the buying, restructuring, and selling of businesses. Therefore, the unrelated diversified firm employs the competitive form of the multidivisional structure which emphasizes competition between separate units for corporate capital. To realize the benefits of the efficient allocation of capital, the businesses must have separate and identifiable profit performances. In this structure, the corporate headquarters sets rate-of-return expectations and maintains an arms-length relationship with the divisions. Headquarters audits operations and disciplines managers in divisions that do not meet those rate-of-return standards. Thus, financial controls are heavily used and integrating devices are not needed.

PTS:1DIF:MediumREF:332-334 | 334 (Table 11.1)OBJ:11-04NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

7.Describe the organizational structures used to implement the three international strategies.

ANS:A multidomestic strategy is implemented with a worldwide geographic area structure. This structure uses no integrating mechanisms, and it emphasizes decentralization, low formalization, and informal coordination among units. This facilitates the strategic objective of responding to local market differences. The worldwide product divisional structure is used to implement a global strategy. Since this type of firm offers standardized products across the globe, this organizational structure emphasizes centralization to achieve economies of scale and scope. Decision-making is centralized. Integrating mechanisms, such as liaison roles and teams, are important. The transnational strategy is implemented with a combination structure. Because it must be simultaneously centralized and decentralized, integrated and nonintegrated, formalized and nonformalized, the combination structure is difficult to organize. There is a strong emphasis on cultural diversity. There are two combination structures, the global matrix structure and the hybrid global design. The matrix structure involves multiple reporting relationships and promotes flexibility and response to customer needs. The hybrid global design combines some divisions which are product oriented and some which are oriented to particular geographic markets.

PTS:1DIF:MediumREF:334-338OBJ:11-05NOT:AACSB: Multicultural & Diversity | Management: Strategy | Dierdorff & Rubin: Managing administration & control

8.Describe the organizational structures used to implement cooperative strategies, giving attention to the role of the strategic center firm.

ANS:Generally, 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 and alliances). There are two types of business level complementary alliances, vertical and horizontal. Vertical alliances group firms with competencies in different stages of the value chain. Horizontal alliances group firms with competencies at the same stage of the value chain. Vertical alliances are much more common than horizontal alliances. To facilitate the effectiveness of a strategic network, a strategic center firm may be necessary. The strategic center firm performs four critical functions. First, it uses strategic outsourcing to partner with firms other than just network members. The strategic center firm also requires the alliance members to find opportunities for the network to create value through cooperative work. The second function concerns competencies. The strategic center firm seeks ways to support each members efforts to create core competencies that can benefit the network. Third, the strategic center firm focuses on technology, managing the development and sharing of technology-based ideas among network partners. Finally, in a race to learn, the strategic center firm guides participants in efforts to form network-specific competitive advantages through friendly rivalry to develop skills needed to form capabilities that create value for the network.

PTS:1DIF:MediumREF:338 | 340-342OBJ:11-06NOT:AACSB: Business Knowledge & Analytical Skills | Management: Strategy | Dierdorff & Rubin: Managing administration & control

Chapter 12 Essay Questions:ESSAY

1.What is strategic leadership, who has primary responsibility for strategic leadership, and what are the five key strategic leadership actions?

ANS:Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change. The CEO has primary responsibility for strategic leadership, which is shared with the board of directors, the top management team and divisional general managers. The five key strategic leadership actions are: determining a strategic direction, effectively managing the firms resource portfolio, sustaining an effective organizational culture, emphasizing ethical practices, and establishing balanced organizational controls.

PTS:1DIF:MediumREF:352 | 354 | 362 (Figure 12.4)OBJ:12-01 | 12-04 | 12-05 | 12-06 | 12-07 | 12-08NOT:AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Learning, motivation, & leadership

2.What is a top management team, and how does it affect a firms performance and its abilities to innovate and design and implement effective strategic changes?

ANS:The top management team is composed of the key managers in the organization who are responsible for selecting and implementing the firms strategy. Typically, 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. Team characteristics have been shown to affect the strategy of the organization. A heterogeneous top management team is composed of individuals with varied functional backgrounds, experiences, and education. A homogeneous teams members are similar to one another in characteristics and experiences. A heterogeneous team is more likely to formulate an effective strategy because of its varied expertise and knowledge. Additionally, heterogeneous top management teams have been shown to positively affect performance. In particular, heterogeneous teams positively affect innovation and strategic change in firms. But, heterogeneous teams are less cohesive than homogeneous teams because of communication difficulties, and it is more difficult for heterogeneous teams to implement strategies. Consequently, a heterogeneous top management team must be managed effectively to use the diversity in a positive way.

PTS:1DIF:MediumREF:356OBJ:12-02NOT:AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Managing decision-making processes

3.Discuss how the managerial succession process and the composition of the top management team interact to affect strategy.

ANS:Internal labor markets represent the opportunities for employees to take managerial positions (including the position of CEO) within a firm. The external labor market is the collection of career opportunities for managers in firms outside of the one for which they currently work. CEOs may be selected from internal or external candidates. Internal CEO selection is preferred by employees and by those who wish the firm to continue in its present strategies. External CEO succession is considered a sign that the board of directors wants change. Internal CEOs are less likely to seek change in the firms strategy than external CEOs. It is important to note that the source of the CEO (from the internal or external labor market) and the top management teams composition interact to affect the likelihood of strategic change. If a firm hires a new internal CEO and has a homogeneous top management team, it is unlikely that the firms strategy will change. If the firm employs a new internal CEO but has a heterogeneous top management team, it will probably continue the current strategy, but innovation will be encouraged. If the top management team is homogeneous, but an external CEO is chosen, the situation will be ambiguous. Finally, if the top management team is heterogeneous and an external CEO is chosen, strategic change is likely.

PTS:1DIF:MediumREF:358-359 | 359 (Figure 12.3)OBJ:12-03NOT:AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Managing decision-making processes

4.Define human capital and its importance to the firms success.

ANS:Human capital represents the knowledge and skills of the firms entire workforce. Effective strategic leaders view human capital as a capital resource that requires investment rather than as a cost to be minimized. It is thought that people are the organizations only truly sustainable source of competitive advantage. So, effective human resource management practices are necessary to successfully select and use people to attain the firms goals. Not only must future leaders be trained, but the entire workforce must be able to learn continuously to build skills and knowledge that lead toward innovation. Layoffs can be disastrous because they strip skills and knowledge from the firm, leaving remaining employees unable to perform their tasks effectively.

PTS:1DIF:MediumREF:364OBJ:12-05NOT:AACSB: Business Knowledge & Analytical Skills | Management: HRM | Dierdorff & Rubin: Learning, motivation, & leadership

5.What is organizational culture? What must strategic leaders do to develop and sustain an effective organizational culture?

ANS:Organizational culture is the set of ideologies, symbols, and core values that is shared throughout the organization and that influences the way the firm conducts its business. An organizations culture can be a source of competitive advantage. It is more difficult to change a firms culture than to sustain it. But effective strategic leadership recognizes when a change in a firms culture is necessary. Incremental changes to the firms culture are typically used to implement strategies. Sometimes radical changes are used to support strategies that differ from the firms historical pattern. Shaping and reinforcing change in an organizations culture require communication and problem solving, selection processes that find people with the right values, effective performance appraisals focused on goals reflecting the new culture, and reward systems that reward behaviors reflecting the new core values. Change occurs only when it is actively supported by the CEO, other top managers, and middle management.

PTS:1DIF:MediumREF:365OBJ:12-06NOT:AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Learning, motivation, & leadership

6.As a strategic leader, what actions could you take to establish and emphasize ethical practices in your firm?

ANS:Ethical practices should be institutionalized within the organization. That is, ethical practices should become the set of behavior commitments and actions accepted by the firms employees and other stakeholders. A formal program to manage ethics can act as a control system to inculcate ethical values throughout the organization. Strategic leaders can shape ethical practices in a firm by: (1) establishing and communicating specific goals to describe the firms ethical standards (e.g., developing and disseminating a code of conduct), (2) continuously revising and updating the code of conduct, based on inputs from people throughout the firm and from other stakeholders (e.g., customers and suppliers), (3) disseminating the code of conduct to all stakeholders to inform them of the firms ethical standards and practices, (4) developing and implementing methods and procedures to use in achieving the firms ethical standards (e.g., use of internal auditing practices that are consistent with the standards), (5) creating and using explicit reward systems that recognize acts of courage (e.g., rewarding those who use proper channels and procedures to report observed wrongdoing), and (6) creating a work environment in which all people are treated with dignity.

PTS:1DIF:MediumREF:355-356OBJ:12-07NOT:AACSB: Ethics | Management: Ethical Responsibilities | Dierdorff & Rubin: Learning, motivation, & leadership

7.What are organizational controls? Why are strategic controls and financial controls important aspects of the strategic management process?

ANS:Organizational controls are the formal, information-based procedures used by managers to maintain or alter patterns in organizational activities. Controls provide the parameters within which strategies are to be implemented, as well as forming guidelines for corrective actions when adjustments are required. There are two main types of controls: financial and strategic. Financial controls focus on short-term financial outcomes. Strategic controls focus on the content of strategic actions. Financial controls give feedback about the outcomes of past actions. Strategic controls focus on the drivers of the firms future performance. Emphasizing either financial or strategic controls has important implications for the strategic management process. For example, emphasizing financial controls often produces more short-term and risk-averse managerial actions because financial outcomes may be caused by events beyond the managers direct control. In contrast, strategic control encourages lower-level managers to make decisions that incorporate moderate and acceptable levels of risk because outcomes are shared between the business-level executives making strategic proposals and the corporate-level executives evaluating them.

PTS:1DIF:MediumREF:356-357OBJ:12-08NOT:AACSB: Business Knowledge & Analytical Skills | Management: Leadership Principles | Dierdorff & Rubin: Managing decision-making processes

Chapter 13 Essay Questions:

ESSAY

1.Define the 3 types of innovative activity. Which is the most critical activity for U.S. firms?

ANS:Firms engage in three types of innovative activity. Invention is the act of creating and developing a new product or process. Innovation is the process of commercializing the products or processes that surfaced through invention. The success of an invention is judged by technical criteria. The success of innovation is judged by commercial criteria. Imitation is the adoption of an innovation by similar firms. Imitation usually leads to product or process standardization, offering the product at a lower price without as many features. Innovation is the most critical activity because commercializing inventions is difficult.

PTS:1DIF:MediumREF:382OBJ:13-03NOT:AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills

2.What is the importance of international entrepreneurship?

ANS:In general, internationalization leads to improved firm performance. Research shows that new ventures that enter international markets increase their learning of new technological knowledge, which enhances their performance. Because of the learning and the economies of scale and scope afforded by operating in international markets, firms are often stronger competitors in their domestic markets as well. In addition, internationally diversified firms are generally more innovative than domestic-only firms.

PTS:1DIF:MediumREF:383OBJ:13-05NOT:AACSB: Multicultural & Diversity | Management: Creation of Value | Dierdorff & Rubin: Managing strategy & innovation

3.Describe the three strategic approaches used to produce and manage innovation: internal corporate venturing, cooperative strategies, and acquisitions.

ANS:Internal corporate venturing is the set of activities a firm uses to create inventions and innovations through internal means. There are two forms of internal corporate venturing, (1) autonomous strategic behavior (a bottom-up process employing product champions) and (2) induced strategic behavior (a top-down process whereby product innovations are fostered by the current strategy and structure of the firm). In the cooperative strategy approach to innovation, firms may choose to share their knowledge and skills sets with other organizations through strategic alliances. The ideal partners have complementary assets with the potential to lead to future innovations. Frequently, established firms exchange investment capital and distribution capabilities with newer, entrepreneurial firms with new technical knowledge. Acquisition of other companies represents the third approach firms use to produce and manage innovation. Acquiring another firm rapidly extends the firms product line and increases the firms revenues. However, firms using the acquisition strategy may lose the ability to innovate internally.

PTS:1DIF:MediumREF:384 | 386-388 | 390-393OBJ:13-06 | 13-07 | 13-08NOT:AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills

4.Discuss the differences between autonomous strategic behavior and induced strategic behavior.

ANS:Autonomous strategic behavior and induced strategic behavior are the two processes of internal corporate venturing. Autonomous strategic behavior is a bottom-up process through which a product champion facilitates the commercialization of an innovative good or service. Induced strategic behavior is a top-down process in which a firms current strategy and structure facilitate product or process innovations that are associated with them.

PTS:1DIF:MediumREF:386-388OBJ:13-06NOT:AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Managing strategy & innovation

5.Discuss the methods an organization can use to facilitate cross-functional integration.

ANS:Shared values and effective leadership support cross-functional integration. The firms culture, based on its vision and mission, promotes unity and supports cross-functional integration. Strategic leaders set goals and allocate resources for cross-functional teams. A high-quality communication system allows team members to share knowledge. Effective communications helps create synergy and gains team members commitment to innovation.

PTS:1DIF:MediumREF:389OBJ:13-06NOT:AACSB: Business Knowledge & Analytical Skills | Management: Group Dynamics | Dierdorff & Rubin: Strategic & systems skills

6.Discuss the potential benefits and disadvantages of innovation through cooperative strategies.

ANS:A firm may not have the knowledge and capabilities necessary to be entrepreneurial and innovative. A strategic alliance in those cases offers an excellent means to obtain the needed knowledge and resources. However, strategic alliances are not without risks. The strategic alliance partner can appropriate a firms technology or knowledge and use these to enhance its own competitive abilities. Additionally, a firm can become involved in too many alliances, which can harm its innovative capabilities.

PTS:1DIF:MediumREF:390-391OBJ:13-07NOT:AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills

7.Discuss the benefits and risks of acquiring another firm to gain access to innovations.

ANS:Through acquisition an organization can gain another firms innovations and innovative capabilities. Acquisitions are a means to rapidly extend the firms product lines and increase revenues. Buying innovation, however, comes with the risk of reducing a firms internal invention and innovative capabilities.

PTS:1DIF:MediumREF:393OBJ:13-08NOT:AACSB: Business Knowledge & Analytical Skills | Management: Creation of Value | Dierdorff & Rubin: Strategic & systems skills