CHAPTER 6 Define vertical integration and differentiate between forward vertical integration and backward vertical integration. Identify the three fundamental explanations of how vertical integration can create value and discuss how value is created under each. Discuss the opportunism-based explanation of vertical integration value creation and identify when, under this explanation firms should vertically integrate. In your answer be sure to clearly define opportunism, and the role that transaction-specific investments play in the opportunism-based explanation. Discuss the firm capabilities based explanation of how vertical integration can create value. In your discussion identify the two broad implications of this approach and when, under this approach, firms should engage in vertical integration. Discuss the flexibility based explanation of vertical integration. In discussing this explanation be sure to define flexibility, the role of uncertainty in this explanation, and identify when, under this explanation, firms should engage in vertical integration. Within the flexibility-based approach to vertical integration when should firms engage in strategic alliances, instead of vertical integration, and what are the advantages of alliances under these conditions? Identify the organizational structure that is used to implement a vertical integration strategy and why from a CEO's perspective, coordinating functional specialists to implement a vertical integration strategy almost always involves conflict resolution and how this conflict can be resolved. Discuss the role of the budgeting process as a control mechanism in vertically integrated U-Form organizations, the potential unintended negative consequence budgets can have, and three things CEOs can do to counter this potential consequence. PS2: What is the level of transaction specific investment for each firm in the following transactions? Who in these transactions is at a greater risk of being taken unfair advantage of? Firm I has built a plant right next door to Firm II. Firm I?s plant is worth $5 million if it supplies Firm II. It is worth $200,000 if it does not supply Firm II. Firm II has three alternative suppliers. If it receives supplies from Firm I, it is worth $10 million. If it does not receive supplies from Firm I, it is worth $9.8 million. CQ2: You are about to purchase a used car. What kinds of threats do you face in this purchase? What can you do to protect yourself from these threats? How is buying a car like and unlike vertical integration decisions? CQ4: Common conflicts between sales and manufacturing are mentioned in the text. What conflicts might exist between R&D and manufacturing? Between finance and manufacturing? Between marketing and sales? Between accounting and everyone else? What could a CEO do to help resolve these conflicts? CHAPTER 7 Discuss when a firm is implementing a corporate diversification strategy and differentiate between a product diversification strategy, a geographic market diversification strategy and a product-market diversification strategy. Identify and distinguish between the five different levels of diversification discussed in Chapter 7. Specify the two conditions that a corporate diversification strategy must meet in order to create economic value. Define the concept of economies of scope, discuss when they are valuable and identify and differentiate between four of the eight potential economies of scope a diversified firm might try to exploit. Discuss shared activities as a potential source of economies of scope for diversified firms and identify the potential benefits and limits of activity sharing. Identify and discuss the two economies of scope that do not have the potential for generating positive returns for a firm's outside equity investors. Discuss the conditions under which a firm's diversification strategy will be rare. Identify which economies of scope are more likely to be subject to low-cost imitation and which are less likely to be subject to low-cost imitation and discuss why each is either costly or less-costly to duplicate. Identify two potential substitutes for corporate diversification and discuss how each can provide benefits similar to corporate diversification. CQ1. One simple way to think about relatedness is to look at the products or services a firm manufactures. The more similar these products or services are, the more related is the firm?s diversification strategy. However, will firms that exploit core competencies in their diversification strategies always produce products or services that are similar to each other? Why or why not? CQ2. A firm implementing a diversification strategy has just acquired what it claims is a strategically related target firm but announces that it is not going to change this recently acquired firm in any way. Will this type of diversifying acquisition enable the firm to realize any valuable economies of scope that could not be duplicated by outside investors on their own? Why or why not? CQ4: A particular firm is owned by members of a single family. Most of the wealth of this family is derived from the operations of this firm, and the family does not want to ?go public? with the firm by selling its equity position to outside investors. Will this firm pursue a highly related diversification strategy or a somewhat less related diversification strategy? Why? CHAPTER 8 1. Describe the multi-divisional, or M-form structure and how it is used to implement a corporate diversification strategy. 2. At one time, Hewlett-Packard was a confederation of 83 autonomous product units reporting through four groups. When Carly Fiorina took over in 1999, she revamped the structure into two back-end divisions (one for printers, scanner, and the like and the other for computers). These back-end units report to two front-end units: corporate sales and consumer sales. Draw the before and after structures Discuss the pros and cons of this change 3. Define what constitutes an agency relationship, the roles of the principal and the agent, and discuss how the agency relationship is reflected in the context of corporate diversification, when the agency relationship can be effective, and identify two common agency problems. 4. Describe the nature and role of the board of directors in an M-form organization, discuss who generally serves on the board, the role of outside members on a board of directors and when the roles of CEO and Chairman of the Board should be combined or separated. 5. Discuss the role of institutional investors in an M-form organization. In addressing this question be sure to identify who institutional investors are, discuss trends in institutional ownership, and the whether institutional investors encourage managers to act in ways that are consistent with the interests of equity holders, or if institutional investors are overly myopic. 6. Identify the responsibilities of the senior executive in an M-form organization and discuss the three different roles in the office of the president and the responsibilities of each role. 7. Discuss the role of division general managers in an M-form organization and compare and contrast this role with that of senior executives in U-form organizations. 8. Discuss the importance of compensation policies in diversified firms and identify the CEO compensation package that most closely aligns the interests of the CEO with those of stockholders. 9. Discuss the three different standards of comparison that can be used when evaluating divisional performance. 10. Identify the difficulties faced by M-form organizations in setting optimal transfer-pricing mechanisms. CHAPTER 9 1) Define a strategic alliance and identify and differentiate between three broad categories of strategic alliances. 2) Identify and discuss the three ways alliances can create economic value by helping firms improve the performance of their current operations. 3) Discuss the concept of a learning race and identify three reasons why firms in an alliance may differ in the rate they learn from each other. 4) Define the three fundamental forms of cheating in strategic alliances and discuss the short- and long-term implications of cheating in a strategic alliance. 5) Identify the conditions under which a strategic alliance can be rare and discuss the role that complimentary resources can play in the rarity of strategic alliances. 6) Discuss when strategic alliances may be costly to directly duplicate. 7) Discuss when firms go it alone and identify three conditions under which alliances will be preferred to going it alone and going it alone is not an attractive substitute for an alliance. 8) Discuss to what extent acquisitions can be a substitute for alliances and identify four conditions under which alliances will be preferred to acquisitions. 9) Describe five tools that firms can use to reduce the threat of cheating in strategic alliances. 10) In one of the articles earlier, you learned how the new CEO of Yahoo, Ms. Carol Bartz, manages ?by asking questions.? Imagine that a divisional manager comes to her with the idea of forming an alliance with some other technology company. What questions do you think she would ask in this formative stage of the alliance process? 11) What should a company look for while selecting a partner for a strategic alliance? 12) How is trust developed between partner firms? CQ1: One reason why firms might want to pursue a strategic alliance strategy is to exploit economies of scale. Exploiting economies of scale should reduce a firm?s costs. Does this mean that a firm pursuing an alliance strategy to exploit economies of scale is actually pursuing a cost leadership strategy? Why or why not? CQ2: Consider the joint venture between General Motors and Toyota. GM has been interested in learning how to profitably manufacture high-quality small cars from its alliance with Toyota. Toyota has been interested in gaining access to GM?s U.S. distribution network and in reducing the political liability associated with local content laws. Which of these firms do you think is more likely to accomplish its objectives, and why? What implications, if any, does your answer have for a ?learning race? in this alliance? CQ5: If adverse selection, moral hazard, and holdup are such significant problems for firms pursuing alliance strategies, why do firms even bother with alliances? Why don?t they instead adopt a ?go it alone? strategy to replace strategic alliances? CHAPTER 10 1. Discuss the differences between mergers and acquisitions and differentiate between friendly and unfriendly acquisitions. 2. Describe and discuss five reasons why bidding firms might still engage in acquisitions even if, on average, they do not create value for a bidding firm's stockholders. 3. Identify and discuss six rules that firms bidding on a target firm in an acquisition should follow to increase the possibility that an acquisition strategy will earn superior performance. 4. Identify and discuss the three rules that target firm managers should follow to maximize the probability of earning economic profits from their merger and acquisition strategies. 5. Describe the special challenges that firms integrating acquisitions are likely to face. PS1: For each of the following scenarios, estimate how much value an acquisition will create, how much of that value will be appropriated by each of the bidding firms, and how much of that value will be appropriated by each of the target firms. In each of these scenarios, assume that firms do not face significant capital constraints. a) A bidding firm, A, is worth $27,000 as a stand alone entity. A target firm, B, is worth $12,000 as a stand alone entity, but $18,000 if it is acquired and integrated with Firm A. Several other firms are interested in acquiring Firm B, and Firm B is also worth $18,000 if it is acquired by these other firms. If A acquired B, would this acquisition create value? If yes, how much? How much of this value would the equity holders of A receive? How much would the equity holders of B receive? b) The same scenario as in a, except that the value of B if it is acquired by the other firms interested in it is only $12,000. c) The same scenario as in a, except that the value of B if it is acquired by the other firms interested in it is $16,000. VIDEO: AOL-TIME WARNER (Time permitting)
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