BUS F370 Study Guide (2013-14 Rearick)
- Indiana University-Bloomington
- Business F370
- BUS F370 Study Guide (2013-14 Rearick)
Last Modified: 2013-11-20
- on x-axis
- past returns on the S&P 500 over a set of time (usually 60 months)
- rm (stands for market portfolio)
- a stock's sensitivity factor
- it tells how sensitive the stock's returns are to "macro" news events
- but the sensitivity is relative to the sensitivity of the overall market to those same news events
- if >1.0 then it is more sensitive, and if <1.0 then less sensitive
- on y-axis
- past returns of the stock (usually 60 months)
- The variance in the S&P during the period that explains the percentage of the variance observed in the stock
- The average reaction of the stock as S&P changes
- The price will be up this percentage for a 1% change in S&P
- Theory of the relationship between risk and return which states that the expected risk premium on any security equals its beta times the market risk premium.
- r = rf + β (rm - rf)
- Securities market line
- the line connecting the rf (T-Bill) and rm (Market Portfolio)
- a type of risk premium (constant)
- rm - rf
- aka Market-wide News
- unexpected events that impact many or all sectors of the economy. has economic significance for most or all stocks.
- aka Firm-focused News
- unexpected events that impact one or just a few companies at a time
- the unexpected ups and downs in a stock's price caused by major economic news events
- the unexpected ups and downs in a stock's price caused by company specific economic news events
- same as corporate bond, but issued by the government
- Bonds that have maturities between 1-5 years are usually called notes
In a(n) _____, a firm, typically working with an investment banker, sells its equity to the public at large.
2. Managers tend to see more risk in a project than shareholders do...and will assign higher discount rates..much more firm-foucsed, can't diversify
3. Older managers (who typically make the most significant decisions for a firm) tend to become more conservative and averse to taking risk as they gain stronger reputations..only takes 1 bad project to ruin your reputation
4) Managers can sometimes be biased towards accepting negative-NPV projects with substantial ICF's.. larger budgets, more power and influence, longer length can delay resolution if project turns out a winner or a loser
-little risk = little return
-decrease in the investment's industry
-idea of pre-building an avg. positive return into the price of a financial contract
-g=growth, and must be constant
2. Internal Monitoring: other part of company to do your audit of NPV
3. Performance Incentives: tie stock share or stock options to performance level
The downside risks associated of investing in a strategic alliance are unknown but fixed.
A firm's vertical integration strategy can only be rare when it is the only firm that is able to vertically integrate efficiently.
A firm's ability to conceive of and implement vertical integration strategies tends to be highly susceptible to direct duplication.
While the functional or U-form structure is used to implement a cost leadership or product differentiation strategy, a matrix structure is most often used to implement a vertical integration strategy.
From a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy rarely involves conflict resolution.
Importing and exporting are examples of a somewhat vertically integrated international strategy.
When a firm operates in multiple industries simultaneously it is said to be implementing a geographic market diversification strategy.
When a firm operates in multiple geographic markets simultaneously it is said to be implementing a product diversification strategy.
A dominant-business firm is pursuing a related diversification strategy and has between 70 and 95 percent of firm revenues from a single business.
When less than 90 percent of a firm's revenues are generated in a single product market, and when a firm's business share few, if any, common attributes, then that firm is pursuing a strategy of unrelated corporate diversification.
In order for corporate diversification to be economically viable there must either be some valuable economy of scope among the multiple businesses in which a firm is operating or it must be less costly for managers in a firm to realize these economies of scope than for an outside equity holder on his or her own.
Currently, most scholars believe that when a firm implements a corporate diversification strategy it destroys about 25% of its market value.
Operational economies of scope include shared activities and risk reduction.
Shared activities that can provide the basis for operational economies of scope are quite common among related-constrained and related-linked diversified firms, as well as firms following an unrelated diversification strategy.
Over the last decade, more and more diversified firms have been abandoning efforts at managing each business's activities independently in favor of increased activity sharing.
A firm that diversifies by exploiting its resources and capability advantages in its original business will have higher costs than firms that begin new business without these revenues and capability advantages, or lower revenues than firms lacking these advantages, or both.
Firms that may appear to be unrelated diversified firms, but that are, in fact, related diversified firms without any shared activities are referred to as seemingly related firms.
The businesses within a diversified firm always gain cost-of-capital advantages by being part of a diversified firm's portfolio.
Predatory pricing is a type of cross-subsidization in which a firm uses revenues from other businesses to set its prices in a particular business so that the prices are substantially more than the subsidized business's costs.
Overall, related diversification is less likely to be consistent with the interests of a firm's equity holders than is unrelated diversification.
Diversification per se is usually not a rare firm strategy regardless of how rare the particular economies of scope associated with that diversification are.
Shared activities and risk reduction are usually difficult to duplicate bases for corporate diversification but tax advantages and employee compensation are usually relatively easy to duplicate.
Strategic alliances are generally viewed as a poor substitute for diversification since the economies of scope in diversification can be found in strategic alliances.
Government changes are virtually always bad for international firms, but at the micro level, politics in a country can affect the fortunes of particular firms in particular industries in a positive way.
Political scientists that have attempted to quantify the political risk that firms seeking to implement international strategies are likely to face in different countries have generally been unable to agree on a common set of criteria firms should use to evaluate the political and economic conditions in a country.
Similar to financial risks, there are a number of tools for managing political risks associated with pursuing an international strategy.
A strategic alliance exists whenever three or more independent organizations cooperate in the development, manufacture, or sale of products or services.
In a nonequity alliance firms create a legally independent firm in which they invest and from which they share any profits that are created.
In general, due to the intangible nature of knowledge, firms are not able to use alliances to learn from their competitors.
Network industries are characterized by decreasing returns to scale.
Learning race dynamics are particularly common in relations among large, well-established firms.
In network industries with increasing returns to scale where standards are unimportant, strategic alliances can be used to create a more favorable competitive environment.
Explicit collusion exists when firms directly communicate with each other to coordinate their levels of production or their prices and is legal in most countries.
Research shows that joint ventures between firms in the same industry may have collusive implications and that these kinds of joint ventures are relatively common.
Alliances to facilitate entry into new industries are only valuable when the skills needed in these industries are complex and difficult to learn.
Research shows that as many as two-thirds of strategic alliances do not meet the expectations of at least one alliance partner.
In general, the less tangible the resources and capabilities that are to be brought to a strategic alliance, the less costly it will be to estimate their value before an alliance is created, and the more likely it is that adverse selection will occur.
The existence of moral hazard in a strategic alliance proves that at least one of the parties is either malicious or dishonest.
Research on international joint ventures suggests that the existence of transaction-specific investments in their relationships makes these agreements relatively immune to holdup problems.
The rarity of strategic alliances depends solely on the number of competing firms that have already implemented an alliance.
Successful strategic alliances are often based on socially complex relations among alliance partners but virtually every firm in a given industry is likely to have the organizational and relationship-building skills required for alliance building making the possibility of direct duplication of strategic alliances very high.
When there is low uncertainty about the future value of an exchange, an alliance will be preferred to going it alone.
In general, contracts are sufficient to resolve all the problems associated with cheating in an alliance.
While it is often the case that there will be important information asymmetries between firms in an alliances these asymmetries are likely to be much less when alliance partners come from different countries.
When firms begin to explore international operations they tend to do so first by engaging in alliances, then in market-based forms of exchange followed by equity investments and vertical integration if it makes economic sense to do so.
For a firm to gain a controlling share in an acquisition, it must purchase more than 51% of the acquired firm's assets.
When the management of a target firm wants the firm to be acquired this is known as a hostile takeover.
In an acquisition a tender offer can only be made with the support of the management of the acquired firm.
Worldwide, the total value of announced merger and acquisition activities was over $10 trillion in 2000, 2001, and 2002 and increased substantially in 2003.
In 2003 over 50% of the acquisitions in the United States were in high-technology industries.
The acquisition of strategically unrelated targets will generate substantial economic profits for both the bidding and the target firms.
In principle, the Federal Trade Commission will allow any acquisition involving firms with headquarters in the United States that could have the potential for generating monopoly or oligopoly profits in an industry.
According to the Federal Trade Commission a firm engages in a horizontal merger when it acquires former suppliers or customers.
Despite the popularity of conglomerate mergers in the 1960s, most mergers and acquisitions among strategically related firms are divested shortly after they are completed.
Diversification economies are achieved by the ability of firms to dictate prices by exerting market power.
The existence of strategic relatedness between bidding and target firms is sufficient for the equity holders of bidding firms to earn economic profits from their acquisition strategies.
One study that reviewed 40 empirical merger and acquisition studies in the finance literature concluded that acquisitions, on average, increased the market value of bidding firms by about 25 percent and left the market value of the target firms unchanged.
In mergers and acquisitions the owners of the bidding firm appropriate the economic value created by the transaction.
Managerial hubris is the well founded belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm's current management.
The difference between the unexpected value of an acquisition actually obtained by a bidder and the price the bidder paid for the acquisition is a profit for the equity holders of the target firm.
One of the keys for a bidding firm to earn superior performance in an acquisition strategy is to make sure that multiple bidders are pursuing the same target.
When acquiring a publicly traded firm a bidder has to release all the information it has about the potential value of that target in combination with itself.
Mergers and acquisitions designed to create vertical integration should be managed through the M-form structure.
Employees in uncertainty acceptance firms are encouraged to reinforce the boundaries of traditional thinking while employees in uncertainty avoiding firms are encouraged to think outside the box.
A flexibility-based approach to vertical integration suggests that when the decision-making setting regarding a business activity is highly uncertain, firms should form a strategic alliance to enter this activity instead of vertically integrating.
A firm's vertical integration strategy is rare when few competing firms are able to create value by vertically integrating in the same way.
Outsourcing can help firms reduce costs and focus their efforts on those business functions that are central to their competitive advantage.
If a firm has capabilities that are valuable and rare, then vertically integrating into businesses that exploit these capabilities can enable the firm to gain at least a temporary competitive advantage.
A firm may be able to gain an advantage from vertically integrating when it resolves some uncertainty it faces sooner than its competition.
Strategic alliances are the major substitute for vertical integration.
Foreign direct investment is a fully vertically integrated international strategy.
A firm implements a corporate diversification strategy when it operates in multiple industries or markets simultaneously.
A firm has implemented a strategy of limited corporate diversification when all or most of its business activities fall within a single industry and geographic market.
The analysis of limited corporate diversification is logically equivalent to the analysis of business-level strategies.
If all the businesses in which a firm operates share a significant number of inputs, production technologies, distribution channels, similar customers, and so forth, this corporate diversification strategy is called related-constrained diversification.
If the different businesses that a single firm pursues are linked on only a couple of dimensions, or if different sets of businesses are linked along very different dimensions, that corporate diversification strategy is called related-linked diversification.
Economies of scope exist in a firm when the value of the products or services it sells increase as a function of the number of businesses in which the firm operates.
Shared activities can increase the revenues in diversified firms' businesses and failure to exploit shared activities across businesses can lead to out-of-control costs.
One of the limits of activity sharing is that sharing activities may limit the ability of a particular business to meet its specific customers' needs.
Core competencies are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience, and wisdom.
A firm's dominant logic is common way of thinking about strategy across different businesses.
For an internal capital market to create value for a diversified firm, it must offer some efficiency advantages over an external capital market.
Multipoint competition exists when two or more diversified firms simultaneously compete in multiple markets and multipoint competition can serve to facilitate a particulate type of tacit collusion called mutual forbearance.
Both shared activities and internal capital allocation are examples of economies of scope that have the potential for generating positive returns for a firm's equity holders.
The only two economies of scope that do not have the potential for generating positive returns for a firm's equity holders are diversification in order to maximize the size of a firm, and diversification to reduce risk.
A firm's stakeholders include all of those groups or individuals who have an interest in how a firm performs.
Core competencies and multipoint competition are usually costly-to-duplicate bases for corporate diversification.
One substitute for diversification that exists is that instead of obtaining cost or revenue advantages from exploiting economies of scope across businesses in a diversified firm, a firm may decide to simple grow and develop each of its businesses separately.
While currency fluctuations can significantly affect the value of a firm's international investments, it is now possible for firms to hedge most of these risks through the use of a variety of financial instruments and strategies.
Firms can use international operations to avoid taxes by establishing operations in a country that charges little or no corporate tax, known as a tax haven.
Regardless of how skilled a firm is in negotiating entry conditions, a change in government or changes in laws can quickly nullify any agreements.
Currently alliances account for 35% of the revenue of the largest 1,000 firms in the United States.
In an equity alliance cooperating firms supplement contracts with equity holdings an alliance partners.
When a firm cannot realize the cost savings from economies of scale all by itself, it may join in a strategic alliance with other firms so that together, both firms will have sufficient volume to be able to gain the cost advantages of economies of scale.
When both parties to an alliance are seeking to learn something from that alliance, a learning race can evolve.
Firms with high levels of absorptive capacity will learn at higher rates than firms with low levels of absorptive capacity, even if these two firms are trying to learn exactly the same things in an alliance.
Tacit collusion exists when firms coordinate their pricing decisions not by directly communicating with each other, but by exchanging signals with other firms about their intent to cooperate.
Strategic alliances can help create the social setting within which tacit collusion may develop.
When information asymmetry exists between firms that currently own assets and firms that may want to purchase these assets, the selling firm will often have difficultly obtaining the full economic value of these assets.
In new and uncertain environments it is not unusual for firms to develop numerous strategic alliances.
When potential cooperative partners misrepresent the skills, abilities, and other resources that they will bring to an alliance, this is a form of cheating known as adverse selection.
Moral hazard occurs when partners in an alliance possess high-quality resources and capabilities of significant value in an alliance but fail to make those resources and capabilities available to alliance partners.
In an alliance a holdup occurs when a firm that has not made significant transaction-specific investments demands returns from an alliance that are higher than what the partners agreed to when they created the alliance.
Although holdup is a form of cheating in strategic alliances, the threat of holdup can also be a motivation for creating an alliance.
For a strategic alliance to be a source of sustained competitive advantage it must be valuable in that it exploits an opportunity but avoids a threat and it must also be rare and costly to imitate.
In the short-run firms can gain some advantages by cheating their alliance partners but research suggests that cheating does not pay in the long run.
In general, firms will prefer to go it alone rather than enter into a strategic alliance when the level of transaction-specific investment required to complete an exchange is low.
Capabilities theory suggests that an alliance will be preferred over “going it alone” when an exchange partner possesses valuable, rare, and costly-to-imitate resources and capabilities.
Transaction cost economics suggests that going it alone is not a substitute for strategic alliances since they are best chosen only when other alternatives are not viable.
An alliance will be preferred to an acquisition when there are legal constraints on acquisitions.
The primary purpose of organizing a strategic alliance is to enable partners in the alliance to gain all the benefits associated with cooperation while minimizing the probability that cooperating firms will cheat on their cooperative agreements.
Sometimes the value of cheating in a joint venture is sufficiently large that a firm cheats even though doing so hurts the joint venture and forecloses future opportunities.
A firm engages in an acquisition when it purchases a second firm.
A privately held firm has not sold any shares on the public stock market.
When the assets of two similar-sized firms are combined, this is known as a merger.
While mergers typically begin as a transaction between equals, that is, between firms of equal size and profitability, they often evolve after a merger such that one firm is more dominant in the management of the merged firm than the other.
The price of each of a firm's shares multiplied by the number of shares outstanding is known as the firm's current market value.
In all acquisitions bidding firms will be willing to pay a price for a target up to the value that the firm adds to the bidder once it is acquired.
If there is any hope that mergers and acquisitions will be a source of superior performance for bidding firms, it must be because of some sort of strategic relatedness between bidding and target firms.
In a product extension merger a firm acquires complementary products through merger and acquisition activities.
To be economically valuable, links between bidding and target firms must meet the same criteria as diversification strategies.
If bidding and target firms are strategically related, then the economic value of these two firms combined is greater than their economic value as separate entities.
Firms should pursue merger and acquisition strategies only to obtain valuable economies of scope that outside investors find too costly to create on their own.
In an initial public offering, a firm (typically working with an investment banker) sells its equity to the public at large.
Strategy researchers have found that in mergers and acquisitions, the more strategically related bidding and target firms are, the more economic value these mergers and acquisitions create.
The cumulative abnormal return for a merger or acquisition can be positive or negative depending on whether the stock in question performs better or worse than what was expected without an acquisition.
Free cash flow is simply the amount of cash a firm has to invest after all positive net present-value investments in its ongoing businesses have been funded.
The market for corporate control is the market that is created when multiple firms actively seek to acquire one or several firms.
One of the main reasons why bidding firms do not obtain competitive advantages from acquiring strategically related target firms is that several other bidding firms value the target firm the same way.
A thinly traded market is a market where there are only a small number of buyers and sellers, where information about the opportunities in this market is not widely known, and where interests besides purely maximizing the value of a firm can be important.
Perhaps the most significant challenge in integrating bidding and target firms has to do with cultural differences.
The integration of merged firms in an international context is often confounded by the need to discover how different country cultures can work together.
An individualistic firm has individually oriented compensation policies while the collectivist firm has group-based compensation policies.
Vertical integration is a type of
The number of steps in a firm's value chain that it accomplishes within its boundaries describes the firm's level of
When Gateway computers opened retail stores to sell their computers and computer peripherals, this was an example of
If Dell computers were to open its own factory to manufacture the LCD televisions it sells at its online store, this would be an example of
If Digipics were to begin manufacturing lenses for the cameras they assembled, this would be an example of
If Digipics were to begin selling the cameras they assembled directly to customers through a website operated by the company, this would be an example of
A firm's ________________ measures the percentage of a firm's sales that is generated by activities done within the boundaries of a firm.
Which of the following is not used to determine a firm's level of vertical integration using the value added as a percentage of sales approach?
A firm with a _________ ratio between value added and sales has brought _______ of the value-creating activities associated with its business inside its boundaries, consistent with a high level of vertical integration.
In 1937, which Nobel Prize-winning economist first articulated the question of vertical integration, which stages of the value chain should be included within a firm's boundaries and why?
_________ exists when a firm is unfairly exploited in an exchange.
If one of the suppliers that Digipics purchases its components from purposefully delivered a batch of their product that was substandard but did not inform Digipics of this, this would be an example of
A(n) _______________ is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.
If Digipics were to agree to spend a significant amount of money to establish a new assembly line for a large client, PicPro, that has unique needs that would make this assembly line largely useless for any other customer, the funds Digipics spent in establishing this line would be an example of
According to _____________ of when vertical integration creates value, vertical integration is valuable when it reduces threats from a firm's suppliers or buyer due to any transaction-specific investments a firm has made.
TerraLoc's decision to manufacture the battery in-house is most consistent with which explanation of vertical integration?
The essence of the ________________ to vertical integration is that if a firm possesses valuable, rare, and costly-to-imitate resources in a business activity, it should vertically integrate into that activity otherwise it should not vertically integrate into that activity.
To the extent that other firms may have competitive advantages in business activities that a firm is considering to enter through vertical integration, vertically integrating into these activities could put the firm at a
_________ refers to how costly it is for a firm to alter its strategic and organizational decisions.
Research suggests that, in general, vertically integrating is __________ than not vertically integrating.
The fact that it would be very costly for Digipics to alter its operations if the large customer referred to in the previous question decided to stop doing business with Digipics suggests that Digipics has ___________ in this situation.
A decision-making setting is _________ when the future of an exchange cannot be known when investments in that exchange are being made.
Strategic alliances are particularly valuable in facilitating market entry and exit when the value of market entry or exit is
A(n) _____________ approach to vertical integration suggests that, rather than vertically integrating into a business activity whose value is highly uncertain, firms should not vertically integrate, and, instead should form a strategic alliance to manage this exchange.
If a firm decided to maintain relationships with several different call center management companies, each of whom have adopted different technological solutions to the problem of how to use call center employees to assist customers who are using very complex products to reduce the uncertainty of whether the people staffing the phone can help the firm's customers, this would be consistent with which explanation of vertical integration?
Which of the explanations of vertical integration is the oldest and has received the greatest empirical support?
If a computer company decided to open its own call centers to provide technical support to its corporate customers because the employees in these call centers need a significant level of in-depth training that was highly specialized to the computer company's products, this would be consistent with which explanation of vertical integration?
Between 1997 and 2000, the size of the outsourced services market
A firm is likely to be among the first in its industry to vertically dis-integrate an exchange when
A firm's valuable and rare vertical integration choices may be subject to direct duplication and substitutes.
Which of the following statements regarding direct duplication and substitutes for vertical integration is accurate?
The major substitute for vertical integration is
Which of the following would be considered a somewhat vertically integrated international strategy?
In 2001, if Peach Computers did not want to employ a diversification strategy to enter the personal electronics industry, they could use which substitute for diversification?
A(n) _________ exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services.
Which organizational structure is used to implement a vertical integration strategy?
TerraLoc is most likely to use the _____________ organizational structure.
From a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy almost always involves
work with Tom in an open and participative process to develop the budget based on the economic reality facing Tom’s function and use both quantitative and qualitative evaluations of the performance of Tom’s function.
If Brenda Thompson, Tom Mix’s supervisor, wanted to use a budgeting process to help evaluate Tom’s performance but wanted to ensure that using a budget did not encourage Tom to focus on short-term behaviors at the expense of long-term results she should
the process used in developing budgets is open and participative.
Evaluating a functional manager’s performance relative to budgets can be an effective control when
Which committee in a U-form organization meets monthly and usually consists of the CEO and each of the heads of the functional areas included in a firm?
Which committee in a U-form organization meets weekly and reviews the performance of the firm on a weekly basis and typically consists of a CEO and two or three functional senior managers?
Investments made by employees that have more value in a particular company than in alternative companies are known as
According to the opportunism-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?
According to the capabilities-based explanations of vertical integration which of the following would be the most appropriate type of compensation to support strategy implementation?
According to the flexibility-based explanations of vertical integration, which of the following would be the most appropriate type of compensation to support strategy implementation?
firms to reduce their level of vertical integration by outsourcing functions that used to be within their boundaries to independent foreign operations.
Currently, the trend in vertical integration decisions in an international context seems to be for
Which of the following international strategy options would be considered to be the least vertically integrated?
As firms begin to explore international operations they generally begin to do so by
Which of the following international strategy options would be considered the most vertically integrated?
If TerraLoc wanted to expand internationally and wanted to do so through a highly vertically integrated strategy, TerraLoc should consider expanding through
If a domestic firm grants a firm in a nondomestic market the right to use its products and brand names to sell products in that nondomestic market, this is best described as an example of a(n)
Integration tends to be less costly and risky than other international strategies such as exporting, licensing or joint ventures.
Which one of the following is not one of the advantages of vertical integration in international operations?
Digipic is an assembler of digital cameras. As an assembler, Digipic's operations are limited to purchasing all of the components necessary to assemble the cameras and then selling these cameras to wholesalers who, in turn, sell them through online stores and in retail electronics stores.
Digipic is an assembler of digital cameras. As an assembler, Digipic's operations are limited to purchasing all of the components necessary to assemble the cameras and then selling these cameras to wholesalers who, in turn, sell them through online stores and in retail electronics stores.
TerraLoc competes in the market for global positioning devices and services. The company manufac