Chapter 4
- The firms are pursuing cost leadership strategy and in this strategy advertising is essential. It is considered fixed cost because it is showing the people or shifting their focuses on the products with similar qualities as their competitors’ products but at a lesser price. On the other hand, product-differentiation strategy is based on advertising the unique qualities of the products and their reasonable costs.
- The actions the firms can take to ensure that economies of scale exist are 1- they make sure that the volume of production reach the optimal level where the average cost per unit of production starts to rise. 2- The business works in full capacity. 3- Advertising and new product development or enhancement should be done. 4- Human resource should be used to their full potential. 5- New specialized machines should be used.
- Forward pricing is used by firms who have just entered the market to gain the attention of investors. When they receive considerable amount of investments in the form of dividends or stocks then gradually the average total cost of the production lowers down and profits start to rise then the investors also earn income from these profits. The risk involved in forward pricing is if the firm is unable to sell its products at a desirable rate then the money invested by the investors will turn into a loss for them.
- The decentralization of an organization refers to the multidivisional structure meaning that each department in a firm has separate head manager who is authoritative enough to make decision on his or her own. M-structure or decentralization is the most widely used organizational structure in large firm because when the functions of the business enlarge and get complicated only this type of organizational structure is able to solve the problems of the firm.
Chapter 5
- It is not necessary that if a firm is pursuing product differentiation strategy, it cannot achieve cost leadership. It can acquire cost leadership by using highly specialized machines or plants, form teams that participate in the project with great enthusiasm, use group-oriented management techniques and focus on making close and sincere relations with consumers. Through these strategies the firm will be able to differentiate its product as well as earn economies of scale in the long run.
- Yes it seems paradoxical and to solve this paradox what a firm can do is to gain sustained competitive advantage with the protection by the patents. Although patents provide protection but only to some extend like it disallow direct duplication; the ideas of the product are quickly copied by the competitors. Nevertheless, if a company is unable to gain sustained competitive advantage it should work on getting temporary competitive advantage. A firm should introduce new features of their product in the market and attract new customers. These customers will then check out the other attractive features of the product (that are difficult to duplicate) and will be retained.
- The regression analysis and hedonic prices provide data regarding the sales of the products that can be compared and analyzed more appropriately. It helps in identifying the needs and demands of consumers and whether the characteristics of the product are fulfilling those needs and demands. It helps in recognizing the actual choices of consumers. However, regression analysis and hedonic prices can be used in only fewer businesses and not all. It is an expensive and time consuming method. The data acquired can be misleading because different consumers like different attributes in a product.
- No this problem does not occur with firms operating in monopolistic competition because producer sells different products then the ones that their competitors are selling which are not each other’s substitute as well (They might differ in quality, quantity, location, etc).
- It is possible to evaluate by making sure that product differentiate as compare to their competitors in the best way possible. This can happen by enhancing the relations with the suppliers who are givers of unique blend of material and consumers with whom valuable information is exchanged. It is possible by promoting attractive marketing campaigns as well.
- Do not get ‘stuck in the middle’ by acquiring special skills and removing the organizational contradictions that arise due to the implementation of product differentiation and cost leadership strategies simultaneously.
Chapter 6:
- A firm that feels the threat that it will be exploited by its supplier will use backward vertical integration so that supplier do not charge higher prices to them because they are one of the few suppliers present in the market for that particular company.
- The threat faced in buying a used car is its uncertainty. It is not known when this car will stop working. It is not known how much more investments will it take to make the used car more functional. Instead of vertically integrating into a transaction which is uncertain, one should opt for vertical alliance. This option will help person give adequate information through which the value of the exchange can be determined more appropriately.
- The potential exchange partner can take advantage of the firm. They can exploit the firm it is the only supplier in the market by selling raw material at higher prices, by selling lower quality or by delaying the delivery of the material.
- The manufacturing manager focuses on quality enhancement in manufacturing the products and cost cutting techniques in various departments of the firm while the research and development department may want more spending on technology and innovations. Finance managers focus on enhancing the relations with external capital markets (banks, stock exchange market, etc) while the manufacturing might want to drift their attention to cost cutting techniques within the organization. Accounting department audit every other department in which various conflicts might arise. It will do the budget allocation and every department will ask for the largest portion of budget.
- A lower-paying job is accepted against a higher-paying job when the employee has found out that lower-paying firm has more value for him or her as compare to the other firms. This is called firm-specific investment. The implications in this type of investment are that the employee will become extremely committed to the firm as he has investment a lot of energy in it and the option of leaving will cause him or her a huge loss. Besides that, the firm can take advantage of him or her or exploit him or her and there is little he or she can do about it.
Chapter 7
- When firms are pursuing diversification strategies they do not look for markets across borders that share common capabilities and resources. They look for related markets that may share either similar suppliers, similar customers, similar production technology or have no common attribute at all but potential to earn huge profits.
- A firm may acquire another strategically related target firm and does not make any changes in it because their activities or core competences may be similar to each other. They must try to coordinate with each other to obtain economies of scope otherwise they may suffer from organizational gridlock, bureaucracies or inefficiency and their competitors might take advantage of these problems.
- When investing in another firm which is located offshore, I will simply develop it into another business having totally different business practices to earn the maximum amount of profits. Another option is to for strategic alliance with another business from which we benefit mutually.
- This firm will opt for related diversification strategy because it helps them save most of their economies of scope from duplication from the competitors. However, they will not do related diversification to some extend and not entirely otherwise they will have to share a large amount of information with others.
- The biggest implication of related diversification strategy is that shared activities and core competences with the offshore firms can be easily imitated. The valuable data for the business can be leaked. This is why; this diversification strategy is not a strong source for competitive advantage for a firm.
Chapter 8:
- Agency theory creates conflicts amongst the principals (for example: shareholders) and agents (for example: company executives). On different occasions their views may differ from each other and that is why they may want to take differing actions. Conflicts arise when they have different views regarding risk or when principals cannot verify what the agents are doing.
- When a firm adopts diversification strategies, stewardship theory will be best suitable for it because in this theory the agents work harmoniously and as a group to acquire goals and fulfill the firm’s mission.
- Although in the M-structure the management’s functions are decentralized but it has limitations because the resources of every firm are limited and it cannot exploit them after certain point. Every division in the M-structure requires training and staffing which calls for a lot of financial investments. If the firm does not have enough investment it will have to allocate the functions to the already existing strategic business units.
- Yes the private sector hierarchies are different from government hierarchies because their structure is in decentralized form. They do not have to report everything to a single reporter. Each strategic business unit of the firm has different senior executive to whom all the lower level managers are answerable. These senior executives have the authority to make decisions without asking anyone else.
- Yes the firm may be the parent company of the business with whom it is doing optimal transfer pricing.
Chapter 9
- Yes it is pursuing cost leadership strategy because a firm seeking strategic alliance does not only want their profits levels to increase but their costs decrease. Different firms opt for different types of strategic alliance that is able to help them save costs in the best possible way.
- In this strategic alliance, Toyota is able to gain most benefit because they already have the ‘lean manufacturing’ technology; they just want to learn how to reach the US markets which will take little time. Whereas GM does not have the ‘lean manufacturing’ technology and will take a lot of time for them to learn. There are many implications of ‘learning race’ in this alliance like no matter how much leniently the firms work with each other their absorptive capacity is different and the firm with higher absorptive capacity will stay ahead in the game, the firm winning can slow down the progress of its alliance by sharing no or partial information with them and the winning firm can also slow down the training being given to the employees of its alliance. Through these techniques the winning firm can gain competitive advantage.
- When a firm is opting for strategic alliance with another firm, the news spread everywhere and nothing is hidden. However, in the case of tacit collusion, the firm sends signals indirectly to their competitors or substitutes through various methods to work on some sort of cooperative strategy. If a firm has announced through the news a merger, join venture, etc with another firm then its strategic alliance. If a firm is raising the price of its product, reducing the production or not advertising heavily then it is doing tacit collusion with another firm.
- Firms form strategic alliance with other firms when they want to reduce the costs and alleviate the profits of entering into a new market. This can be done by saving the costs like acquiring complex skills, staff members, etc that the firm would otherwise encounter if it tried to enter the new market on its own. In fact, strategic alliance opens doors of new opportunities of gaining profit that the firm would not have discovered on its own as it will be able to take advantage of the valuable skills of the merging firm.
- Firms opt for strategic alliance instead of ‘going it alone’ when they find that alliance will let them earn huge economic benefits in the long run. They will merge with those firms who skills, resources or other possessions are hard to acquire or imitate. When they find that investing in the alliance with result in the betterment of their overall image.
Chapter 10
- The firm that acquired the target can expect to earn profits if the bidding price by the target is less than the value of the target.
- The firm that acquired or merged with related target firm for whom no bidding was done will earn economic profits through acquiring related target firm’s assets like customers, suppliers, products, technology or markets. On the other hand, it can earn profits by dictating the prices of the acquired firm’s products, by tax reductions and by lowering down the other financial and management costs.
- Free cash flow if not used appropriately can create problems for the firm. The strength of the free cash flow is additional income that can be invested in other functions of the business and acquire competitive parity. The weakness of the cash flow is that it can create competitive disadvantage.
- There are no attributes in the market of corporate control that suggest that managerial hubris should exist as investors discourage it and it lowers down the economic value of the firm. However, a firm may be motivated to work upon hubris hypothesis because it does not degrade the entire economic value of the firm.
- Its stock prices go to pay special kind of dividend to the stockholder. This tactic discourages the bidding firms from acquiring the target because the acquiring the target becomes expensive. On the other hand, this tactic can also degrade the value of the bidding firm’s equity investment.
Chapter 11:
- International strategies focus mainly on the potential markets across the borders of the country where the firm is located. Different geographic locations might hold different economic benefits for a firm so it should form strategic alliance with firms in other countries as well to exploit their markets as well or make use of their resources to get higher competitive advantage.
- Gaining access to the low-cost labor market is a profitable investment for a firm because it makes them access a market that a highly skilled and productive labor at a very low cost. When a firm operates in outside countries, the government of that country charges taxes on the firm; these taxes or tariff barriers do not discourage the firm from operating in the other country because the potential of incurring higher level of profits is greater than those tax expenses.
- Firms that earn large amount of profits and retained earnings or that see great potential on offshore markets are the only ones implementing transnational strategy. There are various implications that a firm has to go through when it implements transnational strategy for example communication barriers, tariff barriers, cultural or social issues, trust issues and flexibility in adopting the management skills.
- The threat of adverse selection and moral hazard in implementing international strategies is greater because of geographical differences, business practices differences, cultural differences, language differences, social differences and trust issues.
- These international organization options are simply special cases of multidivisional structure. International organizations either form decentralized federation, coordinated federation, Centralized hub or transnational structure in which all the managers work as a team to achieve their targets.
