Global Strategy Flashcards

Firm
Terms Definitions
MNE
A firm that engages in FDI by directly controlling and managing value-adding activities in other countries
FDI
A firms direct investment in production and/or service activities abroad
Triad
Three primary regions of developed economies: North America, Europe and Japan
Emerging Economies
A label that describes fast growing developing economies since the 1990's
BRIC
Brazil, Russia, India and China
Base of the Pyramid
The vast majority of humanity, about four billion people, who make less than $2,000 a year
Strategic Management
A way of managing the firm from a strategic, "big picture" perspective
Strategy as Plan
A perspective that suggests that strategy is most fundamentally embodied in explicit, rigorous formal planning
Strategy as Action
A perspective that suggests that strategy is most fundamentally reflected by firms pattern of actions
Intended Strategy
A strategy that is deliberately planned for
Emerging Strategy
A strategy based on the outcome of a stream of smaller decisions from the "bottom up"
Strategy as Integration
A perspective that suggests that strategy is neither solely about plan nor action and that strategy integrates elements of both schools of thought
Strategy
A firm's theory about how to successfully compete
Strategy Formulation
The crafting of a firm's strategy
Strategy Implementation
The actions undertaken to carry out a firm's strategy
SWOT Analysis
A strategic analysis of a firm's internal Strengths and Weaknesses, and the Opportunities and Threats in the environment
Replication
Repeated testing of theory under a variety of conditions to establish its applicable boundaries
Strategy Tripod
A framework that suggests the strategy as a discipline has three "legs" or key perspectives: industry-, resource-, and institution-based views
Global Strategy
1) Strategy of firms around the globe2) A particular form of international strategy, characterized by the production and distribution of standardized products and services on a worldwide basis
Globalization
The close integration of countries and peoples around the world
Semiglobalization
A perspective that suggests that barriers to market integration at borders are high but not high enough to completely insulate countries from each other
Nongovernmental Organization
Organization advocating causes such as the environment, human rights, and consumer rights that are not affiliated with government
Four fundamental questions in Strategy
1) Why do firms differ2) How do firms behave3) What determines the scope of the firm4) What determines the success and the failure of firms around the globe
Industry
A group of firms producing products that are similar to each other
Perfect Competition
A competitive situation in which price is set by the "market" all firms are price takers, and entries and exits are relatively easy
Industrial Organization Economics
A branch of economics that seeks to better understand how firms in an industry compete and then how to regulate them
Structure
Structural attributes of an industry such as the costs of entry/exit
Conduct
Firm actions such as product differentiation
Performance
The results of firm conduct
Structure-Conduct-Performance Model
An industrial organization economics model that suggests industry structure determines firm conduct which in turn determines performance
Monopoly
A situation whereby only on firm provides the goods and/or services for an industry
Oligopoly
A situation whereby a few firms control an industry
Duopoly
A special case of oligopoly that has two players
Five Forces Framework
A framework governing the competitiveness of an industry proposed by Michael Porter. The five forces are (1) the intensity of rivalry among competitors(2)the threat of potential entry(3) the bargaining power of suppliers(4) the bargaining power of buyers(5) the threat of substitutes
Dominance
A situation whereby the market leader has a very large market share
Incumbents
Current members of an industry that compete against each other
Entry Barriers
The industry structures that increase the costs of entry
Scale-Based Advantages
Advantages derived from economies of scale (the more a firm produces some products, the lower the unit costs become)
Economies of Scale
Reduction in per unit costs by increasing the scale of production
Non-Scale-Based Advantages
Low-cost advantages that are not derived from the economies of scale
Product Proliferation
Efforts to fill product space in a manner that leaves little "unmet demand" for potential entrants
Product Differentiation
The uniqueness of products that customers value
Network Externalities
The value a user derives from a product increases with the number of other users of the same product
Excess Capacity
Additional production capacity currently underutilized or not utilized
Bargaining Power of Suppliers
The ability of suppliers to raise prices and/or reduces the quality of goods and services
Forward Integration
Acquiring and owning downstream assets
Backward Integration
Acquiring and owning upstream assets
Substitutes
Products of different industries that satisfy customer needs currently met by the focal industry
Industry Positioning
Ways to position a firm within an industry in order to minimize the threats presented by the five forces
Generic Strategies
Strategies intended to strengthen the focal firm's position relative to the five forces including: Cost leadership, differentiation and focus
Cost Leadership
A competitive strategy that centers on competing on low cost and prices
Differentiation
A strategy that focuses on how to deliver products that customers perceive as valuable and different
Focus
A strategy that serves the needs of a particular segment or niche of an industry
Complementors
A firm that sells products that add value to the products of a focal industry. ALSO THE SIXTH FORCE.
Flexible Manufacturing Technology
Modern manufacturing technology that enables firms to produce differentiated products at low costs
Mass Customization
Mass produced but customized products
Strategic Groups
Groups of firms within a broad industry
Mobility Barriers
Within-industry difference that inhibits the movement between strategic groups
Resource-Based View
A leading perspective of strategy which suggests that differences in firm performance are most fundamentally driven by differences in firm resources and capabilities
Resources
The tangible and intangible assets a firm uses to choose and implement its strategies
Capabilities
The tangible and intangible assets a firm uses to choose and implement its strategies
Tangible Resources and Capabilities
Assets that are observable and more easily quantified. Financial, Physical, Technological, Organizational
Intangible Resources and Capabilities
Hard to observe and difficult to codify resources and capabilities. Human, Innovation, Reputation
Value Chain
Goods and services produced through a chain of vertical activities that add value
Benchmarking
Examination as to whether a firm has resources and capabilities to perform a particular activity in a manner superior to competitors
Commoditization
A process of market competition through which unique products that command high prices and high margins generally lose their ability to do so- these products thus become commodities
Outsourcing
Turning over all or part of an activity to an outside supplier to improve the performance of the focal firm
Offshoring
International/Foreign outsourcing
Inshoring
Domestic outsourcing
Captive Sourcing
Setting up subsidiaries to perform in house work in foreign location. Conceptually identical to FDI
VRIO Framework
A resource based framework that focuses on the value, rarity, imitability, and organizational aspects of resources and capabilities
Causal Ambiguity
The difficulty of identifying the causal determinants of successful firm performance
Complementary Assets
Numerous noncore assets that complement and support the value adding activities of core assets
Social Complexity
The socially complex ways of organizing typical of many firms
Hypercompetition
A way of competition centered on dynamic maneuvering intended to unleash a series of small, unpredictable but powerful, actions to erode the rival's competitive advantage
Institution Based View
A leading perspective of strategy that argues that in addition to industry and firm level conditions, firms also need to take into account wider influences from sources such as the state and society when crafting strategy
Institution
Humanly devised constraints that structure human interaction, "rules of the game"
Institutional Framework
A framework of formal and informal institutions governing individual and firm behavior
Formal Institutions
Institutions represented by laws, regulations and rules (Regulatory)
Regulatory Pillar
How formal rules, laws and regulations influence the behavior of individuals and firms
Informal Institutions
Institutions represented by norms, cultures, and ethics (normative and cognitive)
Normative Pillar
How the values, beliefs, and norms of other relevant players influence the behavior of individuals and firms
Norm
The prevailing practice of relevant players that affect the focal individuals and firms
Cognitive Pillar
The internalized, taken for granted values and beliefs that guide individual and firm behavior
Transaction Costs
Costs associated with economic transaction or more broadly, costs of doing business
Opportunism
Self-interest seeking with guile
Relational Contracting
Contracting based on informal relationships
Informal, Relationship-Based, Personalized Exchange
A way of economic exchange based on informal relationships among transaction parties. AKA relational contracting.
Arm's-Length Transactions
Transactions in which parties keep a distance
Formal, Rule-Based, Impersonal Exchange
A way of economic exchange based on formal transactions in which parties keep a distance. AKA arm's length transactions.
Institutional Transitions
Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players
Firm Strategy, Structure and Rivalry
How industry structure and firm strategy interact to affect interfirm rivalry
Factor Endowments
The endowments of production factors such as land, water, and people in one country
Related and Supporting Industries
Industries that are related to and/or support the focal industry
Domestic Demand
Demand for products and services within a domestic economy
Culture
The collective programing of the mind that distinguishes the members of one group or category of people from another
Power Distance
The degree of social inequality
Individualism
The perspective that the identity of an individual is most fundamentally based on his or her own individual attributes
Collectivism
The perspective that the identity of an individual is most fundamentally based on the identity of his or her collective group
Masculinity
A relatively strong form of societal-level sex role differentiation whereby men tend to have occupations that reward assertiveness and women tend to work in caring professions
Femininity
A relatively weak form of societal-level sex role differentiation whereby more women occupy positions that reward assertiveness and more men work in caring professions.
Uncertainty Avoidance
The extent to which members in different cultures accept ambiguous situations and tolerate uncertainty
Long Term Orientation
A perspective that emphasizes perseverance and savings for future betterment
Ethics
The norms, principles, and standards of conduct governing individual and firm behavior
Code of Conduct/Ethics
Written policies and standards for corporate conduct and ethics
Ethical Relativism
The relative thinking that ethical standards vary significantly around the world and that there are no universally agreed upon ethical and unethical behaviors
Ethical Imperialism
The imperialistic thinking that one's own ethical standards should be applied universally around the world
Middle of the Road Approaches to Managing Ethics (3)
1) Respect for human dignity and basic rights2) Respect for local traditions3) Respect for institutional context
Corruption
The abuse of public power for private benefit usually in the form of bribery
Strategic Responses to Ethical Challenges (4)
1) Reactive: Deny responsibility, do less than what is required2) Defensive: Admit responsibility but fight it, do least that's required3) Accommodative: Accept responsibility, do all that is required4) Proactive: Anticipate responsibility, do more than is required
In-Group
Individuals and firms regarded as part of "us"
Out-Group
Individuals and firms not regarded as part of "us"
Cultural Distance
The difference between two cultures along some identifiable dimensions
Institutional Distance
The extent of similarity or dissimilarity between the regulatory, normative and cognitive institutions of two countries
Propositions Underpinning an Institution Based View of Strategy
1) Managers and firms rationally pursue their interests and make strategic choices within formal and informal institutional constraints2) In situations where formal constraints fail, informal constraints will play a larger role
The stream of activities from upstream to downstream that add value is known as the ___________.
Value Chain
According to the text, what are the three leading perspectives on strategy?
industry-based competition, firm-specific resources & capabilities, & institutional conditions & transitions
High initial costs per economic transaction, due to the high costs of formal institutions, is characteristic of what institutional mode for governing relationships?
formal, rule-based, impersonal exchange with third-party enforcement
The so-called “sixth force” to supplement the five forces model, as endorsed by Andrew Grove, is ________________.
Complementors
Integration Responsiveness Network
A framework of MNE management on how to simultaneously deal with two sets of pressures for global integration and local responsiveness
Local Responsiveness
The necessity to be responsive to different customer preferences around the world
Home Replication Strategy
A strategy which emphasizes the international replication of home country based competencies such as production scales, distribution efficiencies, and brand power
Localization/Multidomestic Strategy
An MNE strategy which focuses on a number of foreign countries/regions, each of which is regarded as a standalone local market worthy of significant attention and adaption
Global Standardization Strategy
An MNE strategy that relies on the development of standardized products worldwide to reap the maximum benefits from low cost advantages
Centers of Excellence
MNE subsidiaries explicitly recognized as as source of important capabilities, with the intention that these capabilities be leverages by and/or disseminated to other subsidiaries
Worldwide Mandate
The charter to be responsible for one MNE function throughout the world
Transnational Strategy
An MNE strategy which endeavors to be cost efficient, locally responsive, and learning driven simultaneously.
International Division
A structure typically set up when firms initially expand abroad often engaging in a home replication strategy
Geographic Area Structure
An organizational structure which organizes the MNE according to different countries and regions and is the most appropriate structure for a multidomestic strategy
Country Manager
The business leader in charge of a specific country for an MNE
Global Product Division
An organizational structure which assigns global responsibilities to each product division
Global Matrix
An organizational structure often used to alleviate the disadvantages associated with both geographic area and product division structures, especially using transnational strategies
Reciprocal Relationship Between Strategy and Structure (3)
1) Strategy drives structure2) Relationship is not one way3) Strategies and structures are not static
Knowledge Management
The structures, processes, and systems that actively develop, leverage, and transfer knowledge
Explicit Knowledge
Knowledge that is codifiable
Tacit Knowledge
Knowledge that is not codifiableG
Global Virtual Teams
Teams whose members are physically
Absorptive Capacity
The ability to absorb new knowledge by recognizing the value of new information, assimilating it, and applying it
Social Capital
The informal benefits individuals and organizations derive from their social structures and networks
Micro-Macro Link
Micro, informal interpersonal relationships among managers of various units may greatly facilitate macro, interorganizational cooperation among various units
Subsidiary Initiative
The proactive and deliberate pursuit of new business opportunities by and MNE's subsidiary to expand its scope of responsibility
Global Account Structure
A customer focused structure that supplies customers in a coordinated and consistent way across various countries
Solutions Based Structure
An MNE organization structure which caters to the needs of providing solutions for customer's problems
CSR
The social responsibility of corporations. It pertains to considerations of, and response to, issues beyond the narrow economic, technical, and legal requirements of he firm to accomplish social benefits along with the traditional economic gains that the firm seeks
Stakeholder
Any group or individual who can affect or is affected by the achievement of the organizations objectives
Global Sustainability
The ability to meet the needs of the present without compromising the ability of future generations to meet their needs
Primary Stakeholder Groups
Constituents on which the firm relies for its continuous survival and prosperity
Secondary Stakeholder Groups
Stakeholders who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival (Ex Greenpeace)
Triple Bottom Line
A performance yardstick consisting of economic, social, and environmental performance
Social Issue Participation
Firm's participation in social causes not directly related to managing primary stakeholders
Reactive Strategy
A strategy that is passive about CSR. Firms do not act in the absence of disasters and outcries. When problems arise denial is the first line of defense
Defensive Strategy
A strategy that is defensive in nature. Firms admit responsibility, but often fight it
Accommodative Strategy
A strategy that tries to accommodate CSR considerations into decision making
Codes of Conduct
A set of written policies and standards for corporate conduct and ethics
Proactive Strategy
A strategy that focuses on proactive engagement in CSR.
Stakeholder View of the Firm
-Urges companies to pursue more balanced triple bottom line consisting of economic, social, and environmental performance-Despite defense of free market school (shareholder capitalism) CSR is becoming a more central part of strategy
SME's
Firms with less than 500 employees
Entrepreneurship
The identification and exploitation of previously unexplored opportunities
Entrepreneurs
Individuals who identify and explore previously unexplored opportunities
International Entrepreneurship
A combination of innovative, proactive, and risk seeking behavior that crosses national borders and is intended to create wealth in organizations
Five Entrepreneurial Stages
1) Growth2) Innovation3) Network4) Financing/Governance5) Harvest/Exit
Liability of Newness
The inherent disadvantage that entrepreneurial firms experience as new entrants
Strong Ties
More durable, reliable, and trustworthy relationships cultivated over a long period of time
Weak Ties
Relationships that are characterized by infrequent interaction and low intimacy
Routes of Harvest and Exit
-Selling equity stake-Selling the business-Merging with another firm-Considering and IPO-Declaring bankruptcy
IPO
The first round of public trading of company stock
Born Global
Start up companies that attempt to do business abroad from inception
Entering Foreign Markets
-Direct exports-Franchising/Licensing-FDI
Staying in Domestic Markets
-Indirect exports-Supplier of foreign firms-Franchisee/Licensee of foreign brands-Alliance partner of FDI-Harvest and Exit
Stage Models
Models which suggest firms internationalize by going through predictable stages from simple steps to complex operations
Serial Entrepreneurs
People who start, grow, and sell several businesses throughout their careers
Liability of Foreignness
The inherent disadvantage foreign firms experience in host countries because of their nonnative status
Dissemination Risks
The risks associated the unauthorized diffusion of firm-specific assets
Obsolescing Bargain
The deals struck by MNE's and host governments, which change their requirements after the entry of MNE's
Expropriation
Confiscation of foreign assets invested in one country
Sunk Costs
Irrevocable costs occurred and investments made
Trade Barriers
Barriers blocking international trade
Tariff Barriers
Taxes levied on imports
Nontariff Barriers
Trade and investment barriers which do not entail tariffs
Local Content Requirements
Government requirements that certain products be subject to higher import tariffs and taxes unless a given percentage of their value is produced domestically
Currency Risks
Risks stemming from exposure to unfavorable movements of the currencies
Speculation
Making bets on currency movements by committing to stable currencies
Hedging
Spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through the gains in other regions
Location Specific Advantages
Advantages associated with operating in a specific location
Agglomeration
Clustering economic activities in certain locations
Natural Resource Seeking
Firms entering foreign markets in search of natural resources
Market Seeking
Firms going after the most lucrative markets for their products and services- Seafood in Japan
Efficiency Seeking
Firms going after certain locations in search of efficiency gains- Manufacturing in China
Innovation Seeking
Firms targeting countries and regions renowned for generating world class- IT Silicon Valley
Cultural Distance
The difference between two cultures along some identifiable dimensions
Institutional Distance
The extent of similarity of dissimilarity between the regulatory, normative, and cognitive institutions of two countries
First Mover Advantages
-Tech leadership-Preemption of scarce resources-Establishment of entry barriers for late movers-Avoidance of clash with dominant firms at home-Relationships with key stakeholders
Late Mover Advantages
-Free ride on first mover-Resolution of tech and market uncertainty-First mover's difficulty to adapt to market changes
Scale of entry
The amount of resources committed to foreign market entry
Non-Equity Modes of Entry
Exports and Contractual Agreements
Equity Modes of Entry
JVs and Wholly Owned Subsidiaries
Ownership Advantage
Advantage associated with directly owning assets overseas, which is one of the three key advantages of being a MNE
Advantages of being and MNE through FDI
-ownership advantages-location advantages-internationalization advantages
Internationalization
The process of replacing a market relationship with a single multinational organization spanning both countries
Internationalization Advantage
Reduces cross boarder transaction costs and increases efficiencies
Direct Exports
Directly selling products made in the home country to customers in other countries
Indirect Exports
Exporting directly through domestic based export intermediaries
Licensing/Franchising Agreements
Agreements according to which the licensor/franchiser sells the rights to intellectual property, such as patents and know how, to the licensee/franchisee for a royalty fee
Turnkey Projects
Projects in which clients pay contractors to design and construct new facilities and train personnel
Build-Operate-Transfer Agreements
A special kind of turnkey project in which contractors first build facilities, then operate them for a period of time, and then transfer them back to clients. Have longer duration than turnkey projects
R&D Contracts
Outsourcing agreements in R&D between firms
Co-Marketing
Agreements among a number of firms to jointly market their products and services
Equity Modes
Modes of foreign market entry which involves the use of equity
JV
A corporate child that is a new entity given birth and jointly owned by two or more parent companies
Wholly Owned Subsidiaries
Subsidiaries located in foreign countries which are entirely owned by the MNE
Greenfield Operations
Building factories and offices from scratch
Acquisition
The transfer of control of assets, operations, and management from one firm to another
Country of Origin Effect
The positive or negative perception of firms and products from a certain country
Strategic Alliances
Voluntary agreements between firms involving exchanging, sharing, or co-developing of products, technologies, or services
Contractual Alliances
Alliances which are based on contracts and which do not involve the sharing of equity
Equity-Based Alliances
Strategic alliances which involve the use of equity
Cross-Shareholding
Both partners invest in each other to become cross-shareholders
Strategic Investment
One partner invests in another as a strategic investor
Strategic Networks
Strategic alliances formed by multiple firms to compete against other such groups and against traditional single firms
Constellations
Multipartner strategic alliances
Horizontal Alliances
Strategic alliances formed by competitors
Upstream Vertical Alliances
Alliances with firms on the supply side
Downstream Vertical Alliances
Alliances with firms in distribution
Real Option
An option investment in real operations as opposed to financial capital
Advantages of Strategic Alliances
-Reduce costs, risks, uncertainties-Gain access to complementary assets-Opportunities to learn from partners-Possibilities to use alliances and networks as real options
Disadvantages of Strategic Alliances
-Choosing wrong partners-Costs of negotiation and coordination-Possibility of partner opportunism-Risk of helping nurture competitors
Learning Race
A race in which alliance partners aim to outrun each other by learning the "tricks" form the other side as fast as possible
Relational Capabilities
The capabilities to successfully manage interfirm relationships
Partner Rarity
The difficulty to locate partners with certain desirable attributes
Network Centrality
The extent to which a firm's position is pivotal with respect to others in the inter-firm network
Learning by Doing
A way of learning not by reading books but by engaging in hands on activities
Strong Ties Advantages
-Exchange of finer-grained higher quality information-Informal social control mechanism
Weak Ties Advantages
-Less costly-Excel at connecting with distant others possessing unique and novel info for strategic actions
Exploitation
Actions captured by terms such as refinement, choice, production, efficiency, selection, and execution
Exploration
Actions captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, and innovation
Corporate Divorces
-Initiation-Going public-Uncoupling-Aftermath
Alliance Performance
-Equity-Learning and experience-Nationality-Relational Capabilities
Alliances
-Resource interdependence- low-Ratio of soft to hard assets- High-Source of value creation- Combining complementary resources-Level of uncertainty- High
Acquisitions
-Resource interdependence- High-Ratio of soft to hard assets- Low-Source of value creation- Eliminating redundant resources-Level of uncertainty- Low
Competitive Dynamics
Actions and responses undertaken by competing firms
Competitor Analysis
The process of anticipating rivals' actions in order to both revise a firm's plan and prepare to deal with rivals' responses
Multimarket Competition
Firms engage the same rivals in multiple markets
Mutual Forbearance
Multimarket firms respect their rivals' spheres of influence in certain markets and their rivals reciprocate, leading to tacit collusion
Collusion
Collective attempts between competing firms to reduce competition
Cartel
An entity that engages in output and price fixing, involving multiple competitors. AKA a trust.
Antitrust Laws
Laws that attempt to curtail anticompetitive business practices such as cartels and trusts
Game Theory
A theory which focuses on competitive and cooperative interaction
Prisoners Dilemma
Getting caught and who if anyone confesses
Concentration Ratio
The percentage of total industry sales accounted for by the top four, eight or twenty firms
High Possibility of Collusion
-Few firms/High concentration-Existence of industry price leader-Homogeneous products-High entry barriers-High market commonality
Low Possibility of Collusion
-Many firms/Low concentration-No price leader-Heterogeneous products-Low entry barriers-No mutual forbearance
Price Leader
A firm that has a dominant market share and sets "acceptable" prices and margins in an industry
Capacity to Punish
Having sufficient resources to deter and combat defection
Market Commonality
The degree that two competitors' markets overlap
Cross-Market Retaliation
Retaliation in other markets when one market is attacked by rivals
Resource Similarity
The extent to which a given competitor possesses strategic endowments comparable to those of the focal firm
Competition Policy
Policy governing the rules of the game in competition, which determine the institutional mix of competition and cooperation that gives rise to the market system
Collusive Price Setting
Monopolists or collusion parties setting prices at a level higher than the competitive level
Predatory Pricing
1) Setting prices below costs in the short run to destroy rivals2) Intending to raise prices to cover losses in the long run after eliminating competition
Extraterritoriality
The reach of one country's laws to another countries
Dumping
An exporter selling below cost abroad and planning to raise prices after eliminating local rivals
Antidumping Laws
Laws that punish foreign companies that engage in dumping in a domestic market
Attack
An initial set of actions to gain competitive advantage
Counterattack
A set of actions in response to attacks
Thrust
The classic frontal attack with brute force
Feint
A firm's attack on a focal arena important to a competitor, but not the attacker's true target area
Gambit
A firm's withdrawal from a low-value market to attract rival firms to divert resources into the low value market so that the original withdrawing firm can capture a high-value market
Signaling
-Fat cat strategy-Non aggression strategy-Open signal for truce-Enlisting help of governments
Defender
A strategy that leverages local assets in areas which MNE's are weak
Extender
A strategy that centers on leveraging home grown competencies abroad by expanding into similar markets
Dodger
A strategy that centers on cooperating through JV's with MNEs and/or selloffs to MNE's
Contender
A strategy that centers on rapid learning and then expanding overseas
Corporate Governance
The relationship among various participants in determining the direction and performance of corporations. Owners, managers and board of directors
Concentrated Ownership Control
Ownership and control rights concentrated in the hands of the owners
Diffused Ownership
An ownership pattern involving numerous small shareholders, none of which has a dominant level of control
Separation of Ownership and Control
The dispersal of ownership among many small shareholders, control of the firm is largely concentrated in the hands of salaried professional managers who own
State Owned Enterprises
A firm owned and controlled by the state
Top Management Team
The team consisting of the highest level of executives of a firm led by the CEO
Agency Relationship
Relationship between principles and agents
Principals
Persons to whom authority is delegated
Agents
Persons such as managers to whom authority is delegated
Agency Costs
The costs associated with principal agent relationships.1) sum of principals costs of monitoring and controlling agents2) Agents costs of bonding3) the residual loss because the interests of the principals and the agents do not align
Information Asymmetries
Asymmetric distribution of information between two sides. For example, in principal agent relationships, agents almost always know more about the property they manage than principals do
Principal-Principal Conflicts
Conflicts of interests between controlling shareholders and minority shareholders
Expropriation
Activities that enrich controlling shareholders at the expense of minority shareholders
Tunneling
Activities of managers from the controlling family of a corporation to divert resources from the firm for personal or family use
Related Transactions
Controlling owners sell firm assets to another firm they own at below market prices or spin off the most profitable part of a public firm and merge it with another of their private firms
Inside Directors
Directors serving on corporate boards who are also full time managers of these companies
Outside Directors
Non management members of the board
CEO Duality
When the board is lead by the CEO who doubles as chairman
Interlocking Directorate
A situation whereby two or more firms share one director affiliated with one firm who serves on multiple boards
Pros of Outside Directors
-More independent from management-More capable of monitoring and controlling managers-Good at financial control
Cons of Outside Directors
-Independence may be illusionary-Affiliated outside directors may have family or professional relationships with the firm or management-Not good at strategic control
Pros of Inside Directors
-First hand knowledge about the firm-Good at strategic control
Cons of Inside Directors
-Non CEO inside directors may not be able to control and challenge CEO
Voice Based Mechanisms
Corporate governance mechanisms which focus on shareholders willingness to work with managers, usually through the board of directors by voicing their concers
Exit Based Mechanisms
Corporate governance mechanisms which focus on exit, indicating that shareholders no longer have patience and are wiling to exit by selling their shares
Leveraged Buyout
A means by which private investors, often in partnership with incumbent managers, issue bonds and use the cash raised to but the firms stock
Shareholder Capitalism
A view of capitalism which suggests that the most fundamental purpose for firms to exist is to serve the economic interests of shareholders
Managerial Human Capital
The skills and abilities acquired by top managers
Foreign Portfolio Investment
Foreigners purchase of stocks and bonds in one country. Do not directly manage operations
Stewardship Theory
A theory which suggests that managers should be regarded as stewards of owner's interests
Cross-Listing
Firms list their shares on foreign stock exchanges
Board of Directors
-Control-Service-Resource Acquisition
Product Diversification
Entries into new product markets and/or business activities that are related to a firms existing market and/or activities
Operational synergy
Synergy derived by have joint shared activities, personnel, and technologies
Scale Economies
Reductions in per unit costs by increasing the scale of production
Product-Unrelated Diversification
Entries into industries that have no obvious product related connections to the firm's current lines of business
Conglomerates
Product-unrelated diversifiers
Anchored Replicators
Companies that seek to replicate a set of activities in related industries in a small number of countries anchored by the home country
Multinational Replicators
Firms which engage in product-related diversification on one hand and far-flung multinational expansion on the other
Far-Flung Conglomerate
Conglomerate firms which pursue both extensive product-unrelated diversification and extensive geographic diversification
Classic Conglomerate
Companies that engage in product-unrelated diversification within a small set of countries centered on the home country
Primary Ways of Restructuring
1) Downsizing2) Downscoping (divestitures and spinoffs)
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