UNDERSTANDING_BUSINESS_CYCLES.pdf

👩🏻‍💼 UNDERSTANDING BUSINESS CYCLES Chapter 8: Corporate Strategy - Vertical Integration and Diversification 💬 Corporate Strategy= Decisions made by leaders to gain competitive advantage. Key Concepts in Corporate Strategy:...

👩🏻‍💼 UNDERSTANDING BUSINESS CYCLES Chapter 8: Corporate Strategy - Vertical Integration and Diversification 💬 Corporate Strategy= Decisions made by leaders to gain competitive advantage. Key Concepts in Corporate Strategy: Core Competencies: Unique strengths (Chapter 4). Economies of Scale/Scope: Lower costs or increase value by operating on a larger scale (Chapter 6). Transaction Costs: The cost of economic exchanges Transaction Costs: Make or Buy Decision: External Transaction Costs: Costs in dealing Firms decide based on cost: vertically integrate with external parties (e.g., negotiating if in-house production is cheaper; buy if contracts). outsourcing is more cost-effective. Internal Transaction Costs: Costs of managing Principal-Agent Problem: internal business (e.g., hiring employees). Occurs when management (agent) does not act in the best interest of shareholders (principal). Solution: Offer stock options to align interests. Firms Need to Grow in order to Increase profits, lower costs (economies of scale), gain market power, reduce risks, and motivate management. Focus on three main dimensions: Vertical Integration: Extent of firm ownership along its value chain. Diversification: Expanding into new products, markets, or geographies. Geographic Scope: Spanning markets across different regions or countries. Vertical Integration: = The ownership of inputs or distribution channels. “What percentage of a firm’s sales is generated within the firm’s boundaries? UNDERSTANDING BUSINESS CYCLES 1  Backward Integration: Owning input production. Forward Integration: Owning activities closer to the customer Benefits of Vertical Integration: Lower costs, improve quality, ensure supply chain reliability, and facilitate planning. Risks of Vertical Integration: Can increase costs, reduce flexibility, and reduce quality. Alternatives to Vertical Integration: Taper Integration: Use both in-house production and external suppliers. Strategic Outsourcing: Outsource certain functions like HR Diversification: Product Diversification: Expanding the range of products/services. Geographic Diversification: Expanding into new geographic markets. Product-Market Diversification: Combining both strategies. The Diversification-Performance Relationship The Core Competence–Market Matri Boston Consulting Group (BCG) Growth-Share Matrix= Tool to manage a portfolio of business units, guiding strategic decisions. UNDERSTANDING BUSINESS CYCLES 2  Chapter 9: Corporate Strategy - Strategic Alliances, Mergers, and Acquisitions How Firms Achieve Growth: Build: Internal organic growth through development. Borrow: External growth through a contract/strategic alliance. Buy: External growth through acquiring new resources, capabilities, and competencies. Guiding Corporate Strategy: Build-Borrow-or-Buy Framework This framework helps guide decisions on how a firm should grow. It poses four key questions: Relevancy = How relevant are the firm’s existing Tradability = How tradable are the targeted internal resources to solving the resource gap? resources that may be available externally? Internal resources are relevant if: Tradability involves creating a contract to transfer ownership or allow the use of a resource. They are similar to those the firm needs to develop. Contracts support borrowing resources (e.g., licensing, franchising, or contracts). They are superior to those of competitors in the targeted area. UNDERSTANDING BUSINESS CYCLES 3  If the firm’s internal resources are highly relevant, it should develop the resources internally. Closeness = How close do you need to be to your Integration = How well can you integrate the external resource partner? targeted firm should you determine to acquire? Closeness can be achieved through alliances such Conditions for integrating the target firm: as equity alliances and joint ventures. Low relevancy. Mergers & Acquisitions (M&As) are complex and Low tradability. costly and are used only when extreme closeness is necessary. High need for closeness. Consider other options first, as examples of post- integration failures abound. Strategic Alliances 💬 A strategic alliance is a voluntary arrangement between firms involving the sharing of knowledge, resources, and capabilities to develop processes, products, or services. Alliance Governance Mechanisms: Strategic alliances can be governed by: Non-Equity Alliances: Partnerships based on contracts. Equity Alliances: One partner takes partial ownership in the other. Joint Ventures: A standalone organization owned jointly by two or more companies. Alliance Management Capability: Firms need to develop alliance management capability 1. Partner Selection and Alliance Formation: Expected benefits must exceed costs. Compatibility and commitment are essential. 2. Alliance Design and Governance: Governance mechanisms include contractual agreements, equity alliances, and joint ventures. Trust is critical for alliance success. UNDERSTANDING BUSINESS CYCLES 4  3. Post-Formation Alliance Management: To achieve competitive advantage, partnerships must create VRIO (valuable, rare, inimitable, and organized) resource combinations. Firms must make relation- specific investments, establish knowledge-sharing routines, and build interfirm trust. Mergers and Acquisitions (M&A): Merger: The joining of two independent companies to form a combined entity. Mergers tend to be friendly. Acquisition: The purchase of one company by another. Acquisitions can be friendly or hostile. A hostile takeover occurs when the target firm does not wish to be acquired. M&A and Competitive Advantage: In most cases, mergers and acquisitions: Do not create competitive advantage; Do not realize anticipated synergies; Result in destroyed shareholder value. Why M&As still occur: Principal-Agent Problems: Managers may act in their own interest (e.g., building a larger empire for prestige, power, and pay). Managerial Hubris: A form of self-delusion, leading to ill-fated business deals. Chapter 10: Global Strategy - Competing Around the World 💬 Globalization is the process of closer integration and exchange between countries and peoples worldwide. The CAGE Distance Framework CAGE is an acronym for Cultural, Administrative, Geographic, and Economic distances, which guide MNEs’ decisions on which countries to enter. Cultural distance: Differences in social norms, beliefs, and values (e.g., individualism vs. collectivism). UNDERSTANDING BUSINESS CYCLES 5  Administrative and political distance: Includes factors like shared political associations, tariffs, and weak legal institutions. Geographic distance: Not just physical distance, but also topography, time zones, infrastructure, and access to waterways. Economic distance: Differences in consumer wealth and income Modes of Foreign-Market Entry along the Investment and Control Continuum: Companies can choose different entry modes depending on the level of control and investment they want. Exporting → Strategic alliances (e.g., franchising, licensing) → Joint ventures → Acquisitions. Cost Reductions vs. Local Responsiveness Global firms must balance between two opposing forces: Cost reductions: Achieving economies of scale, often with a global-standardization strategy. Local responsiveness: Tailoring products to fit local consumer preferences (requires a multidomestic strategy). Globalization Hypothesis: Assumes that consumer preferences are converging worldwide (e.g., McDonald's, Coca-Cola). The Integration-Responsiveness Framework: The framework describes how MNEs position themselves in global competition: UNDERSTANDING BUSINESS CYCLES 6  International strategy: Selling the same products in domestic and foreign markets. Multidomestic strategy: Tailoring products to local markets (high local responsiveness). Global-standardization strategy: Achieving low-cost leadership (high cost reductions, low local responsiveness). Transnational strategy: Balancing both cost reductions and local responsiveness ("think globally, act locally"). Porter’s Diamond of National Competitive Advantage Porter’s framework explains why certain industries are competitive in particular nations: 1. Factor conditions: A country’s endowments (natural, human, capital, and infrastructure resources). 2. Demand conditions: Characteristics of demand in a firm’s domestic market. 3. Competitive intensity: The level of competition in a domestic industry (e.g., Germany’s strong car industry). 4. Related and supporting industries: Strong industries in a country support competitive advantage in related industries (e.g., Italy’s fashion industry). Chapter 11: Organizational Design - Structure, Culture, and Control 💬 Organizational Design= The process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization. It is the key to translating strategy into realized actions. Structure → Culture → Control UNDERSTANDING BUSINESS CYCLES 7  Organizational Inertia Inertia = the resistance to change within organizations. It often leads to the failure of established firms to respond to changes in their external or internal environment. Organizational Structure = Determines how the work efforts of individuals and teams are orchestrated. Describes how resources are distributed. Four key building blocks: Specialization Formalization Describes the degree to which a task is divided The extent to which employee behavior is guided into separate jobs. by rules and procedures Larger firms tend to have a high degree of Pros: Ensures consistent and predictable specialization. results. Increases safety and reliability. Smaller firms have a low degree of Cons: Can lead to slower decision-making, specialization, requiring a trade-off between reduced innovation, and hindered customer depth and breadth of knowledge. service. Centralization: Hierarchy: The degree to which decision-making is The formal, position-based reporting lines that concentrated at the top of the organization. define who reports to whom. Correlates with slower response time and reduced Span of control: The number of employees customer satisfaction. who directly report to a manager In highly centralized organizations, top-down strategic planning takes place. In decentralized organizations, planned emergence occurs. Mechanistic vs. Organic Organizations: Mechanistic Organization: High degree of specialization and formalization + Tall hierarchies and centralized decision-making. Organic Organization: Low degree of specialization and formalization + Flat organizational structure and decentralized decision-making. UNDERSTANDING BUSINESS CYCLES 8  Firm Strategy and Structure The relationship between a firm’s strategy and structure is interdependent and dynamic. The chosen structure must evolve as the firm grows in size and complexity. Firms that fail to adapt their structure as they grow often experience performance declines. Changing Organizational Structures and Increasing Complexity as Firms Grow Simple Structure: Common in small firms with low organizational complexity. he founders usually make all the strategic decisions and run day-to-day operations + Has a low degree of formalization and specialization. Functional Structure: Employees are grouped into functional areas based on domain expertise. Leaders of functional areas report to the CEO, who coordinates and integrates their work. Works well when the firm has a narrow focus and a small geographic footprint. Works well for firms pursuing a cost-leadership strategy (focused on efficiency) or a differentiation strategy (focused on innovation). Multidivisional Structure (M-Form): UNDERSTANDING BUSINESS CYCLES 9  Used by diversified firms to manage different product lines and geographies. Widely adopted by large firms. Each division operates independently and has its own profit-and-loss (P&L) responsibility. The CEOs of each strategic business unit (SBU) report to the corporate office. M-Form and Corporate Strategy: Related Diversification: Uses a cooperative M-form with centralized decision-making and cooperation among SBUs. Unrelated Diversification: Uses a competitive M-form with decentralized decision-making and competition among SBUs for resources. Disadvantages: Adds another layer of corporate hierarchy, leading to bureaucracy… Turf wars and competition for resources between SBUs can become issues Matrix Structure: Combines the benefits of the M-form and functional structure. Suitable for firms that pursue both local responsiveness and global efficiency. Different strategies fit with different structures: International strategy: Uses a functional structure. Multi-domestic strategy: Uses a multidivisional structure. Global standardization strategy: Uses a multidivisional structure. Transnational strategy: Uses a matrix structure Disadvantages: Difficult to implement due to organizational complexity + Leads to unclear reporting structures and principal-agent problems. + slow down decision-making Organizational Culture: UNDERSTANDING BUSINESS CYCLES 10  Where Do Organizational Cultures Come From? Culture often originates from founder imprinting (e.g., Steve Jobs, Walt Disney). Company values are usually linked to the reward system. Groupthink: Occurs when individuals do not challenge a leader's opinions, leading to poor decisions. Culture Can Help a Firm’s Competitive Advantage If: It makes a positive contribution to economic value creation. It meets the VRIO (Valuable, Rare, Inimitable, Organized) framework. 💬 Strategic Control and Reward Systems= Internal-governance mechanisms that align the incentives of shareholders (principals) and employees (agents). Allow managers to specify goals, measure progress, and provide performance feedback. Input Controls = Define employee behavior through explicit, codified rules and standard operating procedures (e.g., budgets). Output Controls = Guide employee behavior by defining expected results, allowing flexibility in how results are achieved. Intrinsic motivation is highest when employees have: Autonomy: Freedom in what to do. Mastery: Skills to execute tasks. Purpose: Understanding why they are doing the task. Chapter 12: Corporate Governance and Business Ethics 💬 Corporate Governance = Corporate governance consists of mechanisms to direct and control an enterprise. Ensures that it pursues strategic goals successfully and legally. Offers checks and balances, attempts to address the principal-agent problem Public Stock Company: Four Benefits: Limited liability for investors: Shareholders are only liable for the money they invest. UNDERSTANDING BUSINESS CYCLES 11  Transferability of investor ownership: Ownership can be transferred through the trading of shares. Legal personality: The firm has rights and obligations separate from its owners. Separation of legal ownership and management control: Shareholders own the firm, but professional managers control and run it. Milton Friedman’s Philosophy "The social responsibility of business is to increase its profits." Results of a global survey show various attitudes toward business responsibility, differing based on societal values. The Shared Value Creation Framework= Provides guidance to managers on how to reconcile gaining and sustaining competitive advantage with corporate social responsibility (CSR Reconnecting Economic and Societal Needs = Firms should focus on creating shared value: Expand the customer base to bring in non-consumers. Expand traditional firm value chains to include non-traditional partners. Focus on creating new regional clusters (e.g., Silicon Valley). Corporate Governance: 💬 Corporate gouvernance = Mechanisms are designed to direct and control an enterprise to ensure that strategic goals are pursued both legally and successfully. These mechanisms offer checks and balances to align the interests of shareholders (principals) with managers (agents). The Principal-Agent Problem Occurs when the goals of the principal (shareholders) differ from the goals of the agent (managers), leading to conflicts of interest. Managers may pursue their own interests, such as corporate perks, at the expense of shareholders. Agency Theory: UNDERSTANDING BUSINESS CYCLES 12  Views the firm as a nexus of legal contracts. Conflicts arise from information asymmetry and are resolved legally. Information asymetry: Adverse Selection: When one party takes advantage of another's lack of information, leading to the selection of inferior alternatives. Moral Hazard: When one party is incentivized to take undue risks or shirk responsibilities, and the costs are incurred by the other party The Board of Directors: = The centerpiece of corporate governance, representing shareholders' interests. Board members consist of inside directors (usually senior executives such as the CEO, CFO) and outside directors (senior executives from other firms). Other Governance Mechanisms: 1. Executive Compensation: Stock options often form part of executive pay to align incentives with shareholders. However, the average CEO-to-employee pay ratio is 300:1, and linking pay too closely to performance can have negative effects. 2. The Market for Corporate Control: An external mechanism where activist investors seek to take control of underperforming corporations through stock purchases and hostile takeovers. A way for outsiders to influence governance and drive change. 3. Auditors, Regulators, and Industry Analysts: External-governance mechanisms include auditing financial statements (to ensure they follow GAAP), regulatory oversight, and industry analysts who assess firms' financial health and performance. 💬 Business Ethics= A code of conduct agreed upon in business to guide behavior. Training is provided to align behavior with societal norms, fairness, honesty, and reciprocity. These norms can differ between cultures, but basic standards like fairness and honesty are universal. UNDERSTANDING BUSINESS CYCLES 13  Bad Apples vs. Bad Barrels: Bad Apples: Individuals who act opportunistically Bad Barrels: An organizational climate where or unethically unethical behavior is pervasive ⇒ Leaders must: Set clear ethical expectations, align formal and informal cultures, and adhere to company vision and values. The MBA Oath UNDERSTANDING BUSINESS CYCLES 14