MGMT 304, Fall 2021

Prof. Youm
Exam #2 Study Guide
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Materials included in the Final Exam:
 Materials: Week 8~ 15 (Shareholder activism)
 ALL readings, minicases, and materials that we went over in class since the midterm exam.
 In terms of the textbook, the final will cover chapter 6-12.
 This is a general study guide. Do not limit your review to this summary.
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General instructions & notes:
 Everyone needs to have the camera on during the exam. The exam will not start until everyone’s camera is on
 Question format:
o Multiple choice, T/F, short answer/open-ended questions
 You can use a calculator
 Open book exam:
o You can ONLY refer to class materials
o You CANNOT refer to online sources (e.g., Google search)
o You SHOULD NOT be sharing anything with peers or anyone else
o I WILL BE comparing and checking answers
 The blanks within this study guide is to help you study the materials. It is not how the exam will look like.
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Chapter 6 - Business strategy: Differentiation, cost leadership, and blue oceans (Week 8: Tue & Thur)

 Business-level strategy
o Strategic trade-offs: __________________ vs. ______________
 _______________ strategy
 _______________ strategy
o Drivers for cost-leadership strategy
 Cost of input factors
 Economies of scale
 Diseconomies of scale (What are some causes for diseconomies of scale?)
 Economies of scope (What are some sources of economies of scope?; Exercise assessing economies of scale vs
scope)

 Learning-curve effects vs. Experience-curve effects

 Production techniques/design
 Managerial/organizational efficiency

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 o Drivers for differentiation strategy – unique product features, service, marketing and promotion, brand value, etc
o Mini case: “Is Porsche killing the golden goose?”
 Brand extensions:
 Brand enhancement (“consistency”) vs. Brand dilution

o Blue Ocean Strategy

- Value innovation to reconcile trade-offs
 Lowering costs & increasing perceived consumer benefits
Strategy canvas:
 Graphical depiction of a company’s performance relative to its competitors
- Being stuck in the middle – neither a clear differentiation nor a clear cost-leadership profit (ex: J.C. Penny)

Chapter 7 Business strategy: Innovation and entrepreneurship

Forum Question for Week 8: Innovation & Entrepreneurship

 
Where does innovation come from? In other words, where do new ideas come from? Freely discuss your thoughts based on
experience (personal and work experience), classes, lectures, reading, etc.
 
Another question you can chose to discuss is, do you think empathy can be a source of innovation? (Recommended reading:
“Microsoft CEO Satya Nadella: How Empathy Sparks Innovation“, https://knowledge.wharton.upenn.edu/article/microsofts-ceo-on-how-empathy-
sparks-innovation/)

(Week 8: Thur)
o Innovation
- Intrapreneurs – change agents who are pursing innovation within existing companies; those pursing corporate
entrepreneurship (Ex: Spencer Silver & Arthur Fry in coming up with Post-its)
- Where does innovation come from? What are the sources of innovative capabilities?
 Empathy in design; empathy map
 “The Innovator’s DNA” (HBR. 2009. Dyer, Gregersen & Christensen) – 5 discovery skills/Creative intelligence
(associating, questioning, observing, experimenting, networking)

o Case: Bratwurst, Beer and Business: Planning for Growth at Wurstküche

 Business model & menu
 What were some reasons for their success in the DTLA location? – link the reasons to the 5 discovery skills mentioned above
 What were some reasons for failure in the Denver expansion? – e.g., premature scaling

Chapters 8 & 9. Corporate strategy – Vertical integration, diversification, M&A

Corporate-level strategy: vertical integration. This week, we will start corporate-level strategy with the topic of
vertical integration. As described in the textbook (page 259), “when firms are more efficient in organizing economic
activity than are markets, which rely on contracts among many independent actors, firms should vertically integrate.”
Underlying this decision to vertically integrate are various risks and disadvantages of the market. To list a few,

 Search costs
 Opportunism (e.g., holdup)
 Incomplete contracting (e.g., specifying & measuring performance, information asymmetries)
 Enforcement of contracts

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 Chose any one of the risks/disadvantages of the market listed above and elaborate - through specific examples, prior
experience, knowledge, etc - how it is relates to the costs of using the market (vs. pursing the same activity within the
firm).

(Week 9: Tue)
o Corporate-level strategy
- What is the objective of the corporate-level strategy? How is it different from business-level strategy?
- What are the three fundamental corporate-level strategic decisions?

- Various strategic management concepts underlie the issue of the scope of the firm:
o Core competencies
o Economies of scale
o Economies of scope
o Transaction cost
o How does transaction cost relate to the question of whether to vertically integrate or not?

(Week 9: Thur)
o Disadvantages of the market:
 Among various disadvantages, we focused on information asymmetries (unequal information can
lead to a lemons problem. Can result in the crowing out of desirable goods and services by inferior
ones) => lemons problem (exercise)
 What are some ways to mitigate information asymmetry in the marketplace?
 Signaling
 screening

o Vertical integration
– full vertical integration, backward integration, forward integration
- We went over various factors that influence firms’ decision in vertical integration. Specifically,
 Transaction costs
 3 factors/approaches mentioned in the “Disney & Pixar” case (this case was specifically looking at vertical
integration vs. outsourcing, but it can be applied to settings beyond outsourcing); 3 approaches to explain firm
boundary decisions:
1. _______________________
2. _______________________
3. _______________________

(Week 10: Tue)

 Industry structure – double marginalization/double markup (the double markup cases the prices of the
finished good to exceed the price that maximizes the joint profits of the supplier and the buyer)
 Vertical integration mitigates the issues of double marginalization. What are some other ways to
mitigate the issue of double marginalization?
o Revenue sharing
o Quantity forcing

o Horizontal diversification
 Four main types of business diversification: depending on (1) the percentage of revenue from the dominant or
primary business, and (2) the relationship of the core competencies across the business units
 Single business
 Dominant business
 Related diversification – business sharing core competencies
 Unrelated diversification (conglomerate/business group)
A. Disadvantages: size can hurt the company/diseconomies of scope; lack of managerial focus;
issues in financial transparency
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 B. Diversification discount vs Diversification premium
 Unrelated diversification can be advantageous in emerging economies (overcome
institutional weakness in emerging economies, etc)
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 There are various ways in which a company can achieve horizontal diversification – it could be via organic growth
or inorganic growth (e.g., non-equity alliance, equity alliance, M&A) – among inorganic growth, we talked in depth
regarding M&A,
 M&A: Acquisitions could be,
 Friendly
 Unfriendly/hostile takeover:
o Tender offer – offer to purchase the shares of the targeted company at a premium price
o Proxy fight – the acquiring corporation tries to persuade shareholders to use their proxy
votes to install new management or take other types of corporate action

(Week 10: Thur)

 hostile takeover defense mechanisms:
 Poison pill (example) – form of a defense tactic utilized by a target company to
prevent/discourage a hostile takeover by an acquirer

 Divestments – selling off part of a firm’s operations (the decision to divest business units, decision to
abandon a technology, etc); a means to undo diversification strategies

Forum for Week 10

Corporate-level strategy - horizontal diversification & strategic alliance 
Given that mergers and acquisitions, on average, destroy rather than create shareholder value, why do we see so many mergers?
Reasons include,
 Principal-agent problems,
 The desire to overcome competitive disadvantage,
 Superior acquisition and integration capability
A related issue under principal-agent problems, is managerial hubris. That is, (in this case) although many top-level managers are
aware that the majority of acquisitions destroy rather than create shareholder value, they see themselves as the exceptions to
the rule. (Roathermal p. 313-14)

(Questions) How much do you think cognitive biases and heuristics have an impact in our decision-making? (you can read the
following passage for more additional information) Also, what can we do to avoid psychological biases and heuristics in

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 decision making? 
Chapters 9 & 10. Corporate strategy – Strategic alliance; Global strategy

(Week 11: Tue)

o Strategic alliances
 Three major types of strategic alliances:
 Non-equity alliances
 Equity alliance
 Joint ventures
 Ex: NUMMI – joint venture by GM and Toyota that started in 1984

 Why do firms enter strategic alliances?

A. Among the various reasons, we specifically focused on co-opetition & learning race

o Global strategy (Chapter 10)

- Why go global? Advantages vs Disadvantages of globalization
- Disadvantages:
o Among various disadvantages, we specifically looked at liability of foreignness (e.g., Walmart
retreats from Germany)
- Advantages/motivations:
o Among various disadvantages, we specifically looked at reverse innovations

- How do multinational enterprises enter foreign markets?

o Ranges from contract-based (e.g., exporting) to subsidiaries (e.g., acquisitions, greenfields) – we focused
on greenfield ventures

- Applications/research: cross-border M&As; CEO’s international experience on firm outcomes; multicultural identifies in the
workplace

(Week 11: Thur)

- Case: Italian tax mores & “Values in tension”
How can companies answer the toughest question in global business
o Case - What is the dilemma posed in the case? ethics? -- “What happens when a host country’s ethical standards
5 than the home country’s?”
seem lower
 o “Values in tension” by Donaldson

o Cultural relativism vs Ethical imperialism & the messy middle

o Three guiding principles proposed by Donaldson to balance the extremes:
1. Respect for core human values
2. Respect local conditions/traditions
3. Context matters between right and wrong
 Context of relative economic development => “Would the practice be acceptable if my country were
in a similar stage of economic development?”
 Context of cultural tradition => What were the more objective tests that Donaldson proposed?

Forum Question for Week 11: Corporate-level strategy - Global strategy

 
Based on the reading “Italian tax mores” (under Resources), answer the following,
 Did the American manager do anything wrong? Why or why not?
 What you would have done in his place?

Chapter 11. Organizational design

- Organizational culture & diversity

- Research has shown that diversity benefits organizations. In class, we looked at the benefits of diversity going beyond the
benefits coming from unique perspectives; what was the mechanism that we looked at in understanding why diverse
teams are smarter?
o (remember, “affective pains  cognitive gains”) ___________________________________________________

- Fitting in vs. standing out – cultural vs. structural embeddedness

- Where do organizational cultures come from? -> one way is through founder imprinting
o However, we need to be cautious about groupthink & conformity bias

(Week 12: Tue)

Why is it so difficult for organizations to make change?

> Organizational inertia (barriers to change)
- Internal politics
- Sunk costs & transferability

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 - Organizational history/tradition
- Conformity
- External legitimacy
- Status quo bias & loss aversion
- Negativity bias (which is likely to be reinforced by self-fulfilling prophecy)
 We can change this by ‘flipping the script’ via priming

(Week 12: Thur)

Forum for Week 12:

We will cover ethical issues in business, especially in terms of cognitive biases and decisional heuristics. We will allocate a lot of
time going over the “slippery slope effect”.
1. Have you been in an organizational setting where you observed the slippery slope effect within its culture, routine, etc?
Read the following (which is required for class) to get a better understanding of the slippery slope effect, “Wells Fargo
and the slippery slope of sales incentives” (https://hbr.org/2016/09/wells-fargo-and-the-slippery-slope-of-sales-incentives)

2. Based on your experience and/or the reading, what can organizations do to prevent from their employees and leaders
from falling down the slippery slope?

Ethical issues in business -> The Wells Fargo scandal

o “Slippery-slope effect” -> slippery slope of unethical behavior
 People often start their misconduct with small transgressions and the slide down the slippery slope
 One mechanism that explain the slippery slope is that moral disengagement is more likely facilitated in gradual
unethical changes vs. abrupt changes; people who are faced with gradual opportunities to behave unethically are much
more likely to rationalize their conducts than those who are presented with an abrupt change
 Small indiscretions can get worse over time
 What can we do? -> ethical nudges (priming, guidelines, etc) – using subconscious exposure to contents that increase
moral awareness (images, symbols, stories, slogans, etc)

Corporate governance (Part 2) – shareholder activism will be covered during Dec. 7 class
- Shareholder activism
o Different types of shareholder activism
 Shareholder resolutions

Forum Question for Week 13/15: shareholder activism

Question: How much influence should shareholders have on business decisions?
Pick at least one of the readings listed below in posting your answer,

 The shareholders fighting to make oil firms greener (https://www.bbc.com/news/business-50221505)

 SEC backs shareholder proposal changes in win for corporations (https://www.politico.com/news/2019/11/05/sec-proxy-advisory-
firms-shareholder-proposals-066097)
 Do not stifle shareholder voices (https://www.ft.com/content/246f9ef8-0d4a-11ea-8fb7-8fcec0c3b0f9)