BUS-J 306 : EXAM 2
112 Cards in this Set
Front | Back |
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Perfect Competition
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A market structure in which a large number of firms all produce the same product; entry and exit costs are low
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Transaction-Specific Investment
any investment in an exchange that has significantly more value in the
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any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges
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Opportunism
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one firm can potentially take advantage of another
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Backward Vertical Integration
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When a firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to the beginning of the value chain; that is, closer to gaining access to raw materials
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Forward Vertical Integration
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When a firm incorporates more stages of the value chain within its boundaries and those stages bring it closer to the end of the value chain; that is, closer to interacting directly with the final customers
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Vertical integration
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the number of stages in an industry's value chain that a firm accomplishes within its boundaries
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Vertical integration can create value in 3 ways:
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1) reduce opportunistic threats from buyers/suppliers due to transaction-specific investments the firm has made
2) enable a firm to exploit its valuable, rare, & costly-to-imitate resources and capabilities
3) under conditions of low certainty
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2 ways vertical integration can be rare:
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1) the firm is vertically integrated and competing firms are not
2) when a firm isn't vertically integrated while most competing firms are
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2 committees that implement vertical integration strategies and resolve functional conflicts:
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1) budgeting process committee
2) management oversight committee
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Types of compensation policies:
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-opportunism-based
-capabilities-based
-flexibility-based
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Opportunism-based compensation policy:
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individual-based compensations (salaries, cash bonus, stock grants based on individual performance)
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Capabilities-based compensation policy:
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group-based compensation (cash bonuses and stock grants based on corporate/group performance)
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Flexibility-based compensation policy
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based on individual, group, or corporate performance
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Types of General Level corporate diversification
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-product diversification
-geographic market diversification
-product-market diversification
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Product Diversification Strategy
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firm operates in multiple industries simultaneously
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Geographic Market Diversification Strategy
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When a firm operates in multiple geographic markets simultaneously
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Product-market Diversification Strategy
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corporate strategy in which a firm is active several different product markets and several different countries.
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Specific Level type of corporate diversification
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-limited diversification
-related diversification
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Limited Diversification
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All or most of its businesses fall within a single industry and geographical market.
Single-Business Firms- Greater than 95% of sales in a single-product market
Dominant-Business Firms- Between 70-95% of total sales in a single-product market
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Unrelated diversification
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creating or acquiring companies in completely unrelated businesses
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2 criteria for the value of diversification
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1) must be some economy of scope
2) focal firm must have a cost advantage over outside equity holders in exploiting any economies of scope
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economies of scope
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value of a firm's products/services increases as a function of the number of different businesses in which that firm operates
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Operational economies of scope
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-shared activities
-shared core competencies
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financial economies of scope
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-internal capital allocation
-risk reduction
-tax advantages (can be used to 'smooth' income)
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Anticompetitive economies of scope
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-multipoint competition
-market power advantages
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strategic alliance
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any cooperative effort between two or more independent organizations to develop, manufacture, or sell products or services
ex.) Disney toys in Happy Meals when a Disney movie comes out
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Alliances create economic value by:
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-accessing complementary resources and capabilities
-leveraging existing resources and capabilities
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3 types of alliances:
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-nonequity alliance
-equity alliance
-joint venture
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Nonequity alliance
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-licensing
-supply & distribution agreements
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Equity alliance
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-partners hold stakes in each other
-cross equity holdings (cooperating firms supplement contracts with equity holdings in alliance partners)
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Joint venture
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independent firm is created
-ownership, control, profits shared
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How strategic alliances create value:
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-improve current operations
-shape competitive environment
-facilitating entry and exit
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tacit collusion
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when firms limit production and raise prices in a way that raises each others ' profits, even though they have not made any formal agreement
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Explicit Collusion
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Two or more firms negotiate directly to jointly agree about the amount to produce as well as the prices for what is produced
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Three forms of misappropriating value:
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-adverse selection
-moral hazard
-holdup
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Adverse selection
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an alliance partner promises to bring to an alliance certain resources that it either does not control of cannot acquire
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moral hazard
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partners in an exchange have high-quality resources and capabilities but fail to make them available to the other partners
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holdup
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one firm makes more transaction-specific investments in an exchange than partner firms make and the firm that has not made these investments tries to exploit the firm that has made those investments
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Ways to minimize threat of cheating:
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-explicit contracts & legal sanctions
-joint ventures
-equity investments
-trust
-firm reputations
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Alliances may generate competitive advantage if:
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-combinations of complementary resources meet the VRIO criteria
-governance responses meet the VRIO criteria (VRIO = value, rarity, imitability, organization)
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Mergers
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2 firms are combined on a relatively co-equal basis
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Acquisitions
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one firm buys another firm
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Conglomerate merger
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a merger or acquisition where there are no vertical, horizontal, product extension or market extension links between the firms; completely unrelated
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What is/are related in these acquisitions?
-vertical
-horizontal
-product extension
-market extension
-conglomerate
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-vertical: suppliers or customers
-horizontal: competitors
-product extension: complementary products
-market extension: complementary markets
-conglomerate: everything else/unrelated
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Can a merger & acquisition strategy generate sustained competitive advantage? How?
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Yes, if managers' abilities meet VRIO criteria
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thinly traded market
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market where there are only a small number of buyer and sellers
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What can a bidding firm do to help increase the value of its acquisition?
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-search for rare economies
-limit information to other bidders
-limit information to the target
-avoid bidding wars
-close the deal quickly
-seek thinly traded markets
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What types of firms are usually in thinly traded markets?
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sole proprietorships
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What can a target firm do to help increase its power during an acquisition?
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-seek information from bidders
-invite other bidders to join in biding contest
-delay, but do not stop the acquisition
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What business structure is used in M&A activity?
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M-form
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Multi-divisional Structure (M-form)
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each business that a firm engages in is managed through a separate profit-and-loss division
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Logic of corporate level strategy:
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a group of businesses would make more money under one umbrella rather than on their own
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Who captures the economic value of M&A activity?
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target firms
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What characteristics do high-tech firms have in common?
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-strong leadership
-firms that thrive oscillate between "chaos and continuity"
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Six themes of success:
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1) business focus
2) adaptability
3) organizational cohesion
4) entrepreneurial culture
5) sense of integrity
6) "Hands-on" top management
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Entrepreneurial characteristics:
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-good communication
-overlapping responsibilities
-decision-making authority
-concentration of power
-funding channels (family, friends, investors who believe in your idea)
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Parts of the "chasm" model:
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-early market
-chasm
-bowling alley
-tornado
-main street
-end of life
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Chasm model: early market
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-excitement period
-technology enthusiasts and visionaries want to be the first ones on board with the new item
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Chasm model: chasm
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-time of great despair
-early-market's interest wanes
-mainstream market is uncomfortable with the immaturity of the solutions available
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Chasm model: bowling alley
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niche-based adoption in advance of the general market place
-driven by compelling customer needs and willingness of vendors to craft niche-specific whole products
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Chasm model: tornado
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-mass-market adoption
-general marketplace switches over to the new infrastructure paradigm
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Chasm model: main street
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-period of aftermarket development
-base infrastructure has been deployed
-goal is now to flesh out its potential
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Chasm model: end of life
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new paradigms come into the market and supplant the leaders who had only just arrived
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How do businesses cross the chasm?
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-going after a niche market before going after a big market
-decide on a niche market in Early Market phase to cross the chasm
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Discontinuous Innovation
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- a new product or service that radically changes the way we live
- Top 4
1. internet
2. mobile phones
3. PC
4. email services
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Psychology of Gains and Losses
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-Customer perceptions of gains and losses: losses have a bigger impact than gains
-Endowment effect: we value what we already have
-Status quo bias: we stick with what we have even if something is better because we are more comfortable with it
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9X Effect
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consumers overestimate the value of their current products by 3, while developers overestimate the value of their new products by 3
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Degree of product change: easy sells
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-top left of box
-low product and low behavior changes
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Degree of product change: smash hits
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-top right of box
-high product changes, low behavior changes
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Degree of product changes: sure failures
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-bottom left of box
-low product changes, high behavior changes
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Degree of product change: long hauls
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-bottom right of box
-high product changes, low behavior changes
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Minimum Winning Game
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-defines initial target market
-defines goals that can be both achieved and measured
-sets achievable goal for 12-18 months
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3 drivers of strategic action:
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-technology development
-product development
-business strategy
*All 3 are necessary to achieve first MWG
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Greenmail
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target firm's management purchases any of the target firm's stock owned by a bidder and does so for a price that is greater than the current market value of that stock
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Standstill agreements
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contract that says the bidding firm will not take over the target firm for some period of time
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Poison pills
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variety of actions a target firm managers can take to make the acquisition of the target very expensive; prevent a hostile takeover
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tender offers
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bidding firm offers to purchase the shares of a target firm directly by offering a higher than market price for those shares to current stakeholders
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shark repellents
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variety of relatively minor corporate governance changes that, in principle, are supposed to make it somewhat more difficult to acquire a target firm
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Supermajority Voting Rules
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A form of shark repellent. Specify that more than 50% of the target firm's board of directors must approve a takeover
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state incorporation laws
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-form of shark repellent
-can make it difficult to acquire a firm incorporate in a certain U.S. state
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Pac Man defense
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-target turns the tables on current and potential bidders
-target firm attempts to acquire the bidder
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Crown Jewel Sale
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A bidding firm is really just interested in a few of the businesses currently being operated by the target firm
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White knight
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another biding firm that agrees to acquire a particular target in the place of the original bidding firm
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bidding auction
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-on average, increases the wealth of target firm equity holders by 20%
-establishes the price of assets during an acquisition
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golden parachute
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a prearranged contract with managers specifying that, in the event of a hostile takeover, the target firm's managers will be paid a significant severance package.
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A(n) ____ ____ ____ is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges.
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transaction specific action
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Which organizational structure is used to implement a vertical integration strategy?
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U-form (Functional)
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The major substitute for vertical integration is _______.
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strategic alliance
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Which committee in a U-form organization meets monthly and usually consists of the CEO and each of the heads of the functional areas included in a firm?
A) executive committee
B) functional committee
C) operations committee
D) managerial committee
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C) operations committee
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According to the capabilities-based explanations of vertical integration, which would be the most appropriate type of compensation to support strategy implementation?
A) salary
B) cash bonuses for corp. performance
C) cash bonuses for individual performance
D) stock grants for individ…
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B) cash bonuses for corp. performance
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When a firm operates in multiple geographic markets simultaneously it is said to be implementing what type of strategy?
A) international diversification
B) product differentiation
C) geographic market diversification
D) geographic market differentiation
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C) geographic market diversification
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In which type of corporate diversification do firms have greater than 95% of their total sales in a single product market?
A) dominant-business firms
B) single-business firms
C) related-constrained firms
D) related-linked firms
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B) single-business firms
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Which type of economies of scope includes shared activities and core competencies?
A) operational economies of scope
B) financial economies of scope
C) anticompetitive economies of scope
D) employee and stakeholder incentives for diversification
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A) operational economies of scope
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____ ____ are substitutes for eploiting economies of scope in diversification.
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Strategic alliances
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Which of the following economies of scope is costly to duplicate?
A) share activities
B) internal capital allocation
C) risk reduction
D) task advantages
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B) internal capital allocation
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_____ often occurs when partners in an alliance possess high-quality resources and capabilities of significant value in an alliance but fail to make those resources and capabilities available to alliance partners.
(moral hazard, adverse selection, holdup, tacit collusion)
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Moral hazard
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When one firm makes more transaction-specific investments in a strategic alliance than partner firms make, that firm may be subject to a form of cheating called ______.
(adverse selection, holdup, moral hazard, noncompliance)
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holdup
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Two possible substitutes for strategic alliances include:
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-internal development
-acquisitions
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______ collusions exists when firms directly communicate with each other to coordinate their levels of production, their prices, and so forth.
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explicit
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Consistent with a real options perspective, firms in new and uncertain environments are likely to:
A) avoid using strategic alliances
B) develop numerous strategic alliances
C) develop few strategic alliances
D) engage in vertical integration
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B) develop numerous strategic alliances
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A(n) ______ acquisition occurs when the management of the target firm wants to be acquired.
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friendly
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In a _____ merger, firms acquire complementary products through their merger and acquisition activities.
(vertical, market extension, product extension, horizontal)
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product extension
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When one firms acquires a(n) _____ ____ of another firm, it has acquired enough of that firm's assets so that the acquiring firm is able to make all the management and strategic decisions in the target firm.
(market stake, equity share, controlling share, equity stake)
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controlling share
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A thinly traded market is a market where:
A) there are only a small number of buyers and sellers
B) many firms are implementing acquisition strategies
C) info about opportunities is widely known
D) the only important interest is to maximize firm value
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A) there are only a small number of buyers and sellers
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A ____ ____ is another bidding firm that agrees to acquire a target in place of the original bidding firm.
A) golden parachute
B) poison pill
C) white knight
D) crown jewel
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C) white knight
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Based on "The Art of High-Technology Management," which of the following is not one of the six themes found in the management of successful companies?
(business focus, sense of integrity, organizational cohesion, ambidextrous management)
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ambidextrous management
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Based on "Defining the Minimum Winning Game in High-Technology Ventures," the minimum winning game is a goal to reach a specific target market in __ to __ months.
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12; 18
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In "Easy Sellers and Stony Buyers," ____ ____ are defined as new products that offer significant product changes (benefits) and require limited behavior changes on the part of the consumer.
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smash hits
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Based on the study in "The Art of High-Technology Management," managers of high-tech firms should do the following:
A) allow chaos to reign
B) strictly control innovation processes
C) oscillate between chaos and continuity
D) engage in chaos and continuity at the same time
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C) oscillate between chaos and continuity
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According to "Crossing the Chasm and Beyond," what type of product should be offered when the firm is trying to reach the early majority in the tornado phase?
A) niche based product
B) common, standard product
C) mass customization
D) individual customization
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B) common, standard product
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What are 3 value considerations in vertical integration?
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-leverage capabilities
-manage opportunism
-exploit flexibility
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Flexibility is prized when uncertainty is:
a) high
b) low
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a) high
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