Chapters 7 – 13 Essay Questions

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: 1
DIF: Medium
REF: 188 OBJ: 07-01
NOT: 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: 1
DIF: Medium
REF: 189 OBJ: 07-01
Influence | Dierdorff & Rubin: Managing strategy & innovation
3.
strategy.
Identify and explain the seven reasons firms engage in an acquisition
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: 1
DIF: Medium
REF: 190-198 | 199 (Figure 7.1)
OBJ: 07-02
NOT: 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: 1
DIF: Medium
REF: 198-203 | 199 (Figure 7.1)
OBJ: 07-03
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: 1
DIF: Medium
REF: 202 OBJ: 07-03
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: 1
DIF: Medium
REF: 204-205 | 204 (Table 7.1)
OBJ: 07-04
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: 1
DIF: Medium
REF: 205-207
OBJ: 07-05
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: 1
DIF: Medium
REF: 205-206
OBJ: 07-05
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: 1
DIF: Medium
REF: 207 OBJ: 07-05
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: 1
DIF: Medium
REF: 207-208 | 207 (Figure 7.2)
OBJ: 07-06
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: 1
DIF:
Medium
REF: 219-220
OBJ: 08-01
NOT: 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 lowcost labor, critical resources, or customers.
PTS: 1
DIF: Easy REF: 221-223
OBJ: 08-02 TYPE: knowledge
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: 1
DIF:
Medium
REF: 225-229
OBJ: 08-04
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 debtfinancing. 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: 1
DIF: Medium
REF: 231-236 | 232 (Table 8.1)
OBJ: 08-06
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: 1
DIF: Medium
REF: 237 | 242 OBJ: 08-07 | 08-08
NOT: 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: 1
DIF: Medium
REF: 240 OBJ: 08-08
NOT: AACSB: Multicultural & Diversity | Management: Environmental Influence |
Dierdorff & Rubin: Strategic & systems skills

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 codevelop 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: 1
DIF: Medium
REF: 256-257
OBJ: 09-02
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 fastcycle 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: 1
DIF: Medium
REF: 257-260 | 258 (Table 9.1)
OBJ: 09-02
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: 1
DIF: Medium
REF: 260-261 | 263-265
OBJ: 09-03
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: 1
DIF:
Medium
REF: 266-268
OBJ: 09-04

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: 1
DIF: Medium
REF: 268-270
OBJ: 09-05
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: 1
DIF: Medium
REF: 270-271
OBJ: 09-04
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: 1
DIF: Medium
REF: 271-272
OBJ: 09-06
8.
alliances.
Describe the two strategic management approaches to managing
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: 1
DIF: Medium
REF: 272 | 274 OBJ: 09-07
Dierdorff & Rubin: Managing administration & control
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: 1
DIF: Medium
REF: 286-287
OBJ: 10-01
NOT: 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: 1
DIF: Medium
REF: 287-288
OBJ: 10-02
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: 1
DIF: Medium
REF: 288 OBJ: 10-03
NOT: 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 poorlyperforming 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: 1
DIF: Medium
REF: 292-295 | 297-298
OBJ: 10-04
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 performancebased 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: 1
DIF: Medium
REF: 298-299
OBJ: 10-05
NOT: 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: 1
DIF: Medium
REF: 299-300
OBJ: 10-06
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: 1
DIF: Medium
REF: 302-304
OBJ: 10-07
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: 1
DIF: Medium
REF: 306-307
OBJ: 10-08
NOT: AACSB: Ethics | Management: Ethical Responsibilities | Dierdorff & Rubin:
Managing decision-making processes
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: 1
DIF: Medium
REF: 320-321
OBJ: 11-01
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 ownermanager 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: 1
DIF: Medium
REF: 322-324
OBJ: 11-03 | 11-04
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: 1
DIF: Medium
REF: 324-327
OBJ: 11-03
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 costleadership/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: 1
DIF: Medium
REF: 324-327
OBJ: 11-03
5.
Discuss the organizational structures used to implement corporatelevel 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: 1
DIF: Medium
REF: 327-328 | 330-334 | 334 (Table 11.1)
OBJ: 11-04
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-ofreturn standards. Thus, financial controls are heavily used and integrating devices
are not needed.
PTS: 1
DIF: Medium
REF: 332-334 | 334 (Table 11.1)
OBJ: 11-04
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: 1
DIF: Medium
REF: 334-338
OBJ: 11-05
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 networkspecific competitive advantages through friendly rivalry to develop skills needed to
form capabilities that create value for the network.
PTS: 1
DIF: Medium
REF: 338 | 340-342
OBJ: 11-06
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: 1
DIF: Medium
REF: 352 | 354 | 362 (Figure 12.4)
OBJ: 12-01 | 12-04 | 12-05 | 12-06 | 12-07 | 12-08
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: 1
DIF: Medium
REF: 356 OBJ: 12-02
NOT: 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: 1
DIF: Medium
REF: 358-359 | 359 (Figure 12.3)
OBJ: 12-03
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: 1
DIF: Medium
REF: 364 OBJ: 12-05
NOT: 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: 1
DIF: Medium
REF: 365 OBJ: 12-06
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: 1
DIF: Medium
REF: 355-356
OBJ: 12-07
NOT: 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 shortterm 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: 1
DIF: Medium
REF: 356-357
OBJ: 12-08
Principles | Dierdorff & Rubin: Managing decision-making processes
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: 1
DIF: Medium
REF: 382 OBJ: 13-03
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: 1
DIF: Medium
REF: 383 OBJ: 13-05
NOT: 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: 1
DIF: Medium
REF: 384 | 386-388 | 390-393
OBJ: 13-06 | 13-07 | 13-08
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: 1
DIF: Medium
REF: 386-388
OBJ: 13-06
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 crossfunctional integration. Strategic leaders set goals and allocate resources for crossfunctional 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: 1
DIF: Medium
REF: 389 OBJ: 13-06
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: 1
DIF: Medium
REF: 390-391
OBJ: 13-07
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: 1
DIF: Medium
REF: 393 OBJ: 13-08

Chapters 7 – 13 Essay Questions

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Chapters 7 – 13 Essay Questions

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Chapters 7 13 Essay Questions:

Identify and explain the seven reasons firms engage in an acquisition

Describe the seven problems in achieving a successful acquisition.

What are the attributes of a successful acquisition program?

What is restructuring and what are its common forms?

What are the results of the three forms of restructuring?

Discuss the effect of international diversification on a firms returns.

Identify and describe the major risks of international diversification.

Chapter 9 Essay Questions:

Identify and define the different types of strategic alliances.

Through vertical and horizontal complementary alliances, companies combine their

Identify the three types of corporate-level cooperative strategies.

NOT: AACSB: Business Knowledge & Analytical Skills | Management: Strategy |

Identify and define the two different types of network strategies.

Identify the competitive risks associated with cooperative strategies.

Describe the two strategic management approaches to managing

Discuss the difference between strategic and financial controls.

relationships, few rules, limited task specialization, and unsophisticated

decision-making is retained at higher managerial levels in the organization.

Define human capital and its importance to the firms success.

Organizational controls are the formal, information-based procedures used by

What is the importance of international entrepreneurship?

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