CH-9-10 Cooperative Strategy – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Book Guide

This Document Contains Chapters 9 to 10 Chapter 9 Cooperative Strategy ANSWERS TO REVIEW QUESTIONS 1. What is the definition of cooperative strategy, and why is this strategy important to firms competing in the twenty-first century competitive landscape? A cooperative strategy is a strategy in which firms work together to achieve a shared objective. Cooperative strategy is the third major alternative (internal growth and mergers and acquisitions are the other two) firms use to grow, develop value-creating competitive advantages, and create differences between them and competitors. Thus, cooperating with other firms is another strategy that is used to create value for a customer that exceeds the cost of creating that value and to create a favorable position in the marketplace. The increasing importance of cooperative strategies as a growth engine shouldn’t be underestimated. This means that effective competition in the 21st century landscape results when the firm learns how to cooperate with, as well as compete against, competitors. 2. What is a strategic alliance? What are the three major types of strategic alliances firms form for the purpose of developing a competitive advantage? A strategic alliance is a partnership between firms whereby each firm’s resources and capabilities are combined to create a competitive advantage. The three types of explicit cooperative strategies mentioned are (1) joint ventures, (2) equity strategic alliances, and (3) non-equity strategic alliances. However, tacit collusion and mutual forbearance (the latter being a form of tacit collusion) are also included as implicit cooperative arrangements. A joint venture is an alliance where a new, independent firm is formed by two or more partners who share some of their resources and capabilities to develop a competitive advantage. An equity strategic alliance is an alliance where partner firms share resources and capabilities, but own unequal shares of equity in a new venture. Many foreign direct investments are completed through equity strategic alliances, such as those involving Japanese or US companies operating in China. A non-equity strategic alliance is an alliance where a contract is granted to a company to supply, produce, or distribute a firm’s products or services. No equity sharing is involved. Other types of cooperative contractual arrangements concern marketing and information sharing. Because they do not involve the forming of separate ventures or equity investments, non-equity strategic alliances are less formal and demand fewer commitments from partners as compared to both joint ventures and equity strategic alliances. However, the attributes of non-equity alliances make them unsuitable for complex projects where success is influenced by effective transfer of tacit knowledge between partners. 3. What are the four business-level cooperative strategies? What are the key differences among them? Complementary strategic alliances are partnerships that are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways so that new value is created. These are classified as either vertical or horizontal complementary strategic alliances. Vertical complementary strategic alliances are formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value. Horizontal complementary strategic alliances represent partnerships that link similar activities of rival firms. Horizontal complementary alliances often are used to increase each firm’s strategic competitiveness, focusing on the long-term development of product and service technology and distribution opportunities. Competition response strategies are cooperative strategic alliances that are established to enable partner firms to respond to major strategic actions (but typically not tactical actions) initiated by competitors or to enable firms to more effectively compete in emerging markets. Uncertainty-reducing strategies represent cooperative alliances used as strategic options to hedge against risk and uncertainty. Thus, the rapidly changing 21st century competitive landscape may create uncertain outcomes for firms as their rivals form and use cooperative strategies to reduce their own risks. For example, firms form alliances to reduce the uncertainty associated with developing new product or technology standards. However, in terms of competitive dynamics, one firm’s alliances can create risks and uncertainty for its competitors. Competition-reducing strategies are cooperative strategies adopted by some firms to reduce competition that they perceive as potentially destructive or excessive. Examples of competition-reducing strategies include explicit collusion and tacit collusion (or mutual forbearance). Alliances formed to reduce competition are likely to result in inefficiencies in both manufacturing and service industries and these often lead to below-average firm performance in international markets. Tacit collusion exists when several firms in an industry cooperate tacitly to reduce industry output below the potential competitive level, thereby increasing prices above the competitive level. Most strategic alliances, however, exist not to reduce industry output but to increase learning, facilitate growth, or increase returns and strategic competitiveness. Cooperative agreements may also be explicitly collusive, but this is illegal in the United States unless regulated by the government (for example, the telecommunications industries prior to deregulation). Mutual forbearance is tacit recognition of interdependence, but it has the same effect as explicit collusion in that it reduces output and increases prices. 4. What are the three corporate-level cooperative strategies? How do firms use each of these strategies for the purpose of creating a competitive advantage? Strategic alliances used to facilitate product or market diversification are called corporate-level cooperative strategies. Three types of strategic alliances are used at the corporate level to facilitate cooperation among diversified companies. As shown in Figure 9.3, the corporate-level strategic alliances are called diversifying alliances, synergistic alliances, and franchising. However, it is instructive to note that managing a large number of strategic alliances is difficult. Therefore, if relatively few firms are able to do it well, alliance management in itself may represent a source of competitive advantage. Nonetheless, though alliance networks may enable firms to achieve industry leadership, they also involve risks and their management is a complex and potentially costly challenge. Diversifying strategic alliances allow a company to expand into new product or market areas without completing a merger or an acquisition. A corporate-level strategic alliance is a viable strategic option for a firm that wants to grow but chooses not to merge with or acquire another company to do so. Such corporate-level alliances provide some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility. These benefits accrue to a firm because exiting a strategic alliance is less difficult and costly as compared to divesting an acquisition that did not contribute as expected to strategic success. Synergistic strategic alliances allow firms to share resources and capabilities to create joint economies of scope. Similar to the horizontal complementary strategic alliance that is used at the business level, synergistic strategic alliances create synergy across multiple functions or multiple businesses controlled by partner firms. Two firms might, for example, create joint research and manufacturing facilities that they both use to their advantage and thus attain economies of scope without a merger. Franchising is a cooperative strategy a firm uses to spread risk and to use resources and capabilities productively, but without merging with or acquiring another company. As a cooperative strategy, franchising is based on a contractual relationship concerning a franchise that is developed between two parties—the franchisee and the franchisor. Thus, franchising is an alternative to diversification. Defined formally, a franchise is a contractual arrangement between two independent companies whereby the franchisor grants the right to the franchisee to sell the franchisor’s product or do business under its trademarks over a given territory and time period. The foundation for this cooperative strategy’s success is the ability to gain economies of scale by forming multiple units while deriving operational efficiencies from the work of individual units competing in specific local markets. Franchising permits relatively strong centralized control and facilitates knowledge transfer without significant capital investment. Brand name is thought to be the most effective competitive advantage for a franchise since this can signal both tangible and intangible consumer benefits. Franchising reduces financial risk because franchisors often invest some of their own capital in the local venture, and this capital investment motivates franchisors to perform well by emphasizing quality, standards, and a brand name that are associated with the franchisee’s original business. Because of these potential benefits, franchising may provide growth with less risk than diversification. 5. Why do firms use cross-border strategic alliances? The first reason firms decide to use cross-border strategic alliances is that multinational corporations usually outperform firms operating in domestic-only markets. In the context of cooperative strategies, this general evidence suggests that a firm can form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets. Second, cross-border alliances can be used when opportunities to grow through either acquisitions or alliances are limited within a firm’s home nation. The third reason firms choose to form cross-border alliances revolves around government policies. Some countries regard local ownership as an important national policy objective, so investment by foreign firms may be allowed only through cooperative agreements such as cross-border alliances. This is often true in newly industrialized and developing countries with emerging markets. Cooperative arrangements can be helpful to foreign partners because the local partner can provide information about local markets, capital sources, and management skills. The fourth primary reason cross-border alliances are used is to help a firm transform itself in light of rapidly changing environmental conditions. In general, cross-border alliances are complex and more risky than domestic strategic alliances. However, the fact that firms competing internationally tend to outperform domestic-only competitors suggests the importance of learning how to diversify into international markets. Compared to mergers and acquisitions, cross-border alliances may be a better way to learn this process, especially in the early stages of the firms’ geographic diversification efforts. 6. What risks are firms likely to experience as they use cooperative strategies? Because firms that are cooperating may also be competing with each other, four significant risks accompany cooperative strategies. As summarized in Figure 9.4, the primary competitive risks associated with cooperative strategies are: (1) poor contract development that may result in one (or more) of the partners acting opportunistically and taking advantage of other venture partners; (2) misrepresentation of a partner firm’s competencies by misstating or exaggerating an intangible resource such as knowledge of local market conditions; (3) failure of partner firm(s) to make complementary resources available to the venture; and (4) being held hostage through specific investments (whose value is associated only with the venture or the local partner), especially if laws in a country do not protect investments in the case of nationalization. 7. What are the differences between the cost-minimization approach and the opportunity-maximization approach to managing cooperative strategies? Two primary approaches are used to manage cooperative strategies. In one instance, the firm develops formal contracts with its partners. These contracts specify how the cooperative strategy is to be monitored and partner behavior controlled. The goal is to minimize the cost of an alliance and to prevent opportunistic behavior by a partner, thus the use of the term cost-minimization. The focus of the second managerial approach is on maximizing value-creation opportunities as the partners participate in the alliance. In this case, partners are prepared to take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities. Trust-based relationships and complementary assets must exist between partners for this approach to be used successfully. When trust exists, there is less need to write detailed formal contracts to specify each firm’s alliance behaviors, and the cooperative relationship tends to be more stable. Research showing that trust between partners increases the likelihood of alliance success seems to highlight the benefits of the opportunity maximization approach to managing cooperative strategies. MINI-CASE Alliance Formation, Both Globally and Locally, in the Global Automotive Industry A common rationale for alliances is that firms seek out complementary resources from an alliance partner. The Mini-Case notes that a new rationale for alliances has emerged in the literature – that firms are often co-located in the same country, and often in the same region of the country, so that it is easier for them to collaborate locally (even though they may compete globally). Examples provided in the Mini-Case include the alliances in the auto industry between Peugeot-Citroen and Opel-Vauxhall; Ford and General Motors; Renault and Nissan; and Fiat-Chrysler, Mazda, and Suzuki. As the Mini-Case shows, there are a number of rationales for why competitors form alliances and joint ventures in order to meet strategic needs for increased market power, take advantage of complementary assets, and cooperate with close neighbors, often in the same locale. Teaching Note: The Mini-Case profiles the cooperative strategies (strategic alliances) that have been established by several automobile manufacturers. Students should realize that cooperative strategies allow firms to combine resources and capabilities that contribute to successful performance. More specifically, these are resources and capabilities that neither partner possesses individually. A good discussion could be initiated by asking students to identify other examples of firms that utilize cooperative strategies and to explain how these cooperative strategies contribute to the success of both partners. 1. How can the resource-based view of the firm (see Chapters 1 and 3) help us understand why firms develop and use cooperative strategies such as strategic alliances and joint ventures? The resource-based view of the firm helps us by having us realize the restraints that businesses have for raw materials, capabilities, and for human assets (talent). Having an edge on any of the resources typically translates into a significant competitive advantage. But, when one firm has a resource that another needs, and vice versa, strategic alliances form so that both terms are better off. 2. What is the relationship between the core competencies a firm possesses, the core competencies the firm feels it needs, and decisions to form cooperative strategies? The relationship between the core competencies a firm possesses, needs, and decisions to form cooperative strategies are all linked. If a firm has a competency it needs, there is no need for a cooperative strategy. If a firm does not have a competency that it needs, a cooperative strategy will be formed. Also, if there is a competency that a firm has that it does not need, it will form a cooperative strategy to aid other firms in competency’s and form alliances. 3. What does it mean to say that the partners of an alliance have “complementary assets?” What complementary assets to Renault and Nissan share? Complementary assets are when firms share assets that can be used and aid both firm create a greater competitive advantage if used in tandem. The complementary assets to Renault and Nissan are knowledge based. Renault is very strong in Europe, and Nissan is very strong in Asia. Together, they aided their efforts in these different geographical and cultural markets to become more successful. 4. What are the risks associated with the corporate-level strategic alliance between Renault and Nissan? What have these firms done to mitigate these risks? The risk that is associated with the corporative-level strategic alliances between Renault and Nissan is the trust factor. Both companies will hold industry secrets and completive factors of the others that may leave the company exposed if decided to be used maliciously. Nissan and Renault deterred some of these issues with three values; trust, respect, and transparency. Because of these values, the alliance was deemed a success. 5. Is it possible that some of the firms mentioned in this Mini-Case (e.g., Renault, Nissan, Mazda, Peugot-Citroen, Opel—Vauxhall) might form a network cooperative strategy? If so, what conditions might influence a decision by these firms to form this particular type of strategy? It is possible that some of the firms will form a network cooperative strategy. The conditions needed will be transparency in the organizations and in communication so that the other firms will be able to know how to aid their ally. The influencers of these decisions will be the amount of trust and respect each firm has for the other. This sharing of knowledge can quickly lead to companies loosing competitive advantages, it will take a substantial amount of trust for alliances to be significantly helpful for each company. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Ask students to visit the website for Financial Times (http://www.ft.com). Find three or four articles that discuss different firms’ uses of cooperative strategies. What types of cooperative strategies are revealed in each article? What objective is each firm pursuing as it uses a particular cooperative strategy? Ask students to visit the Financial Times website (http://www.ft.com) and find articles discussing various firms’ use of cooperative strategies. Each article might reveal a different type of strategy such as joint ventures, strategic alliances, or licensing agreements. Students should identify the specific strategy used by each firm, the objectives they aim to achieve (e.g., market expansion, technology sharing, cost reductions), and any challenges they may face in implementing these strategies. Examples might include companies in the tech, pharmaceutical, or automotive industries. 2. Ask students to use the Internet to find two articles describing firms’ use of a cooperative strategy: one where trust is being used as a strategic asset and another where contracts and monitoring are being emphasized. What are the differences between the managerial approaches being used in the two companies? Which of the cooperative strategies has the highest probability of being successful? Why? Students should find two articles online about firms using cooperative strategies—one focusing on trust as a strategic asset, and another emphasizing contracts and monitoring. They should compare the managerial approaches of the two firms, looking at how each company builds and maintains its partnerships. The strategy based on trust might focus on long-term, collaborative relationships, while the contract-based strategy might focus on clear terms and performance metrics. Students should analyze which strategy is likely to be more successful, considering factors like firm culture, the importance of innovation, and the competitive environment. 3. Each student should choose a Fortune 500 firm that has a significant need to outsource a primary or support activity (such as information technology). Given the activity the firm can outsource, should the firm form a non-equity strategic alliance to outsource the focal activity? Students should choose a Fortune 500 firm that needs to outsource a primary or support activity (like IT services). They should assess whether the firm should form a non-equity strategic alliance for outsourcing. The decision should be based on factors such as cost efficiency, the need for specialized knowledge, and the level of control the firm wants to retain over the outsourced activity. Students should research whether a non-equity alliance would allow the firm to leverage external expertise without a full merger or acquisition. 4. Ask students to use the Internet to determine whether DaimlerChrysler has formed strategic alliances to build its small cars. If these alliances have been formed, what factors caused this decision to be made? If alliances have not been formed for this purpose, why not? Students should investigate whether DaimlerChrysler has formed strategic alliances for building small cars. They should explore the reasons behind forming such alliances, such as sharing development costs, entering new markets, or improving technological capabilities. If no alliances have been formed, students should analyze the potential reasons, such as concerns about brand integrity, competition, or financial considerations. 5. Ask students to use the Internet to visit the websites of Deutsche Telekom AG, Sprint, and France Telecom SA. What is the role each firm has in the Global One Alliance they have all joined? Students should visit the websites of Deutsche Telekom AG, Sprint, and France Telecom SA to understand their roles in the Global One Alliance. This alliance, formed in the 1990s to offer global telecommunications services, involved these companies collaborating to expand their networks and improve service offerings. Students should explore each company's role in the alliance, how they collaborated, and the business objectives each firm pursued (e.g., cost sharing, market entry, technology integration). Ethics Questions 1. From an ethical perspective, how much information is a firm obliged to tell a potential strategic alliance partner about what it expects to learn from the cooperative arrangement? From an ethical perspective, a firm is obligated to share sufficient information with a potential strategic alliance partner to ensure that both parties have a clear understanding of expectations, roles, and responsibilities. The level of detail required will depend on the specific goals and nature of the alliance. Firms should disclose what they expect to learn, such as technological advancements, market insights, or customer behavior, but must also maintain confidentiality on sensitive competitive information. Ethical obligations emphasize transparency, honesty, and fairness in fostering trust between partners. 2. “A contract is necessary because most firms cannot be trusted to act ethically in a cooperative venture such as a strategic alliance.” Is this statement true or false? Why? Does the answer vary by country? Why? The statement "A contract is necessary because most firms cannot be trusted to act ethically in a cooperative venture such as a strategic alliance" can be seen as both true and false. On one hand, contracts provide clear terms, protect both parties’ interests, and reduce risks associated with potential unethical behavior. On the other hand, a successful cooperative venture also relies on trust, collaboration, and shared values. The need for a contract may vary by country based on cultural norms regarding trust and business practices. In some countries with strong legal systems and a culture of trust, less reliance on formal contracts may be needed, while in others, the law may be more critical in safeguarding the agreement. 3. Ventures in foreign countries without strong contract law are more risky, because managers may be subjected to bribery attempts once their firms’ assets have been invested in the country. How can managers deal with these problems? In foreign countries with weak contract law or high corruption risks, managers can take steps to mitigate the potential for unethical behavior, such as bribery attempts. They should ensure that their firms have a strong anti-corruption policy and provide training to employees and partners on ethical standards. Managers should also consider using third-party intermediaries with local expertise, perform due diligence on potential partners, and avoid markets where corruption is systemic. Additionally, firms can use international conventions and anti-bribery frameworks to safeguard against these risks. 4. Many international strategic alliances are being formed by the world’s airline companies. Do these companies face any ethical issues as they participate in multiple alliances? If so, what are the issues? Are the issues different for airline companies headquartered in the United States than for those with European home bases? If so, what are the differences, and what accounts for them? Airline companies forming international strategic alliances may face ethical challenges, including issues related to anti-competitive behavior, price-fixing, and monopolistic practices. When multiple airlines enter into alliances, they must ensure that they do not engage in agreements that unfairly limit competition or harm consumers. For example, concerns may arise if airlines coordinate routes or prices in ways that reduce market competition. Airlines headquartered in the United States might face stricter regulatory oversight due to antitrust laws, while European airlines might experience more flexibility in forming alliances under the European Union's regulations, which allow greater cooperation between carriers within the region. Differences in regulatory environments and national interests influence these ethical concerns. 5. Firms with a reputation for ethical behavior in strategic alliances are likely to have more opportunities to form cooperative strategies than will companies that have not earned this reputation. What actions can firms take to earn a reputation for behaving ethically as a strategic alliance partner? Firms can build a reputation for ethical behavior in strategic alliances by demonstrating transparency, adhering to agreed-upon terms, and respecting the interests of their partners. Actions include maintaining clear communication, honoring commitments, and being open to feedback and negotiations. Firms can also establish codes of conduct for their employees, promote ethical leadership, and ensure that they are transparent in their financial reporting and business practices. A strong reputation for ethical behavior leads to greater trust, which enhances the likelihood of forming successful and long-lasting strategic alliances. 4o mini INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR DIRECTED CASE Directed Case exercises are a series of multiple choice questions designed to focus on the concepts from the chapter utilizing the case study analysis steps, such as gaining familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the diagnosis and doing the action planning. Itaipu Binacional Itaipu Binacional is a partnership between Brazilians and Paraguayans who together constructed a hydroelectric plant called Itaipu Dam, which guaranteed a renewable clean energy source from the Paraná River. Students will review these concepts: • Cooperative Strategies • Related Diversification Strategy • Globalization • Outsourcing INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Flying the Friendly Skies: Strategic Actions with Airlines and Alliances The text says a strategic alliance “is a partnership between firms whereby their resources and capabilities are combined to create a competitive advantage.” The first airline alliance was formed in 1993 and resulted in a variety of benefits for both consumers and airline employees. In this group exercise, students investigate the history and purpose of forming an alliance in the passenger airline industry. The instructor will assign an alliance to each small group. • Students will research their alliance, including: • Why airlines form alliances? • The history of the assigned alliance • The main benefits airlines hope to gain through membership. Is there a competitive advantage to the alliance? • Categorize the alliance in terms of three types of alliances. • Think through issues of future of airline alliance as if you were the airline CEO • Students will prepare an oral presentation that may include a visual aid • They will present findings to the class in 15-20 minutes. All members are required to present. In this group project, students will have the opportunity to practice valuable strategic management skills, including: teambuilding, data analysis, critical thinking and research management. To modify this project as an individual assignment, consider requiring just one deliverable – a poster, a presentation or a paper. To enhance the project, the instructor may also challenge the students to discuss in detail the short- and long-term outcomes of the different types of cooperative strategies. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: Jaguar-Land Rover Joint Venture with Chery RT: 1:37 Topic Key: Cooperative Strategy, Growth Industry, Global Economy British carmaker Jaguar-Land Rover and leading Chinese carmaker Chery Automobile have established a joint venture. The companies are building a factory together in China as the Chinese market for Jaguar grows at a fast pace. The factory will manufacture well- known British luxury brands as well as a new vehicle designed for the growing Chinese middle class. Suggested Discussion Questions and Answers 1. What is a joint venture? A strategic alliance in which two or more firms create a legally independent company to share some of their resources to create a competitive advantage. 2. If you were an executive at Jaguar-Land Rover, why might a joint venture be a safer option over another entry mode? As a merger, the two companies would have combined each of their operations to work together, rather than implemented one company’s operations over the other 3. By entering into a joint venture with Chery’ Automobile, Jaguar-Land Rover will be depending on some of Chery’s distinct competencies. What is one of those competencies that will aid Jaguar-Land Rover in diversifying its car manufacturing to China? Chery’s competency in serving the Chinese market helps Jaguar-Land Rover because they are unfamiliar with operating in China and what Chinese customers need from them as an emerging car company. Chapter 10 Corporate Governance ANSWERS TO REVIEW QUESTIONS 1. What is corporate governance? What factors account for the considerable amount of attention corporate governance receives from several parties, including shareholder activists, business press writers, and academic scholars? Why is governance necessary to control managers’ decisions? Corporate governance is a relationship among stakeholders that is used to determine and control the direction and performance of organizations. Corporate governance receives a great deal of attention because governance mechanisms sometimes fail to adequately monitor and control top-level managers’ strategic decisions. If the behavior of top-level managers is not monitored and controlled effectively, this could mean that the firm will not be strategically competitive. Effective corporate governance is also of interest to nations. A country prospers as its firms grow and provide employment, wealth, and satisfaction—thus improving standards of living. These aspirations are met when firms are competitive internationally in a sustained way. Corporate governance reflects the standards of the company, which collectively reflect societal standards. Thus, in many corporations, shareholders attempt to hold top-level managers more accountable for their decisions and the results they generate. As with individual firms and their boards, nations that govern their corporations effectively may gain a competitive advantage over rival countries. As owners delegate strategy development and decision making to managers, conflicts of interest emerge—managers may select strategic alternatives that serve their own best interests, not those of the owners. Governance mechanisms help owners (shareholders) ensure that managers make strategic decision that are in the best interests of the former. If internal governance mechanisms are ineffective, the market for corporate control (an external governance mechanism) may be activated. 2. What is meant by the statement that ownership is separated from managerial control in the corporation? Why does this separation exist? Historically, US firms were managed by the founders/owners and their descendants. In these cases, corporate ownership and control resided in the same person(s). As firms grew larger, ownership and control were separated in most large corporations so that control of the firm shifted to professional managers while ownership was dispersed among unorganized stockholders who were removed from day-to-day management. These changes created the modern public corporation, which is based on the efficient separation of ownership and managerial control. Supporting the separation is a basic legal premise suggesting that the primary objective of a firm’s activities is to increase the corporation’s profit and thereby the financial gains of the owners (or shareholders). However, this right also requires that they accept the financial risk of the firm and its operation. As shareholders diversify their investments over a number of corporations, their risk declines (the poor performance or failure of any one firm in which they invest has less overall effect). Shareholders thus specialize in managing their investment risk while managers focus on decision-making. Without management specialization in decision-making and owner specialization in risk bearing, a firm probably would be limited by the abilities of its owners to manage and make effective strategic decisions. Therefore, in concept, the separation and specialization of ownership (risk bearing) and managerial control (decision-making) should produce the highest returns. 3. What is an agency relationship? What is managerial opportunism? What assumptions do owners of corporations make about managers as agents? Despite its advantages, the separation of ownership and control may result in some potential costs (and risks) for owners by creating an agency relationship. An agency relationship exists when one or more persons (the principal or principals) hire another person or persons (the agent or agents) as a decision-making specialist to perform a service. In other words, the agency relationship exists when one party delegates decision making to another party in return for compensation. The owner-agent relationship enables the possibility of managerial opportunism, the seeking of self-interest with guile (i.e., cunning or deceit) where opportunism is represented by an inclination toward self-seeking behaviors. However, before observing the results of decisions, it is impossible to know which agents will behave opportunistically and which ones will not. A manager’s reputation is an imperfect guide to future behavior and opportunistic behavior cannot be observed until after it has occurred. 4. How is each of the three internal governance mechanisms—ownership concentration, boards of directors, and executive compensation—used to align the interests of managerial agents with those of the firm’s owners? Ownership concentration is an effective governance mechanism because owners of large blocks of stock (representing a higher percentage of ownership) have a greater financial interest in monitoring managerial decisions than do small shareholders (characterized as diffuse ownership). Increasingly, institutional investors such as stock mutual funds and public-pension funds hold large blocks of stock, and these shareholders aggressively monitor and take action against managers who receive excessive compensation and perks but achieve only poor firm performance. Monitoring and controlling managerial decisions are supposed to be accomplished through the firm’s board of directors, members of which are elected by shareholders to oversee managers and ensure that the firm is operated in the best interests of owners. Members can be classified into three categories—insiders (the CEO and other top-level managers), related outsiders (member who are not involved in day-to-day operations but have some relationship with the firm), and outsiders (members who are independent of the firm and its operations). Executive compensation can be used to help align the interests of managers and owners by tying managerial pay to firm performance through salaries, bonuses, and long-term incentives based on stock options. However, given the complexity and long-term nature of strategic decisions, it may be difficult to perfectly align compensation with firm performance. First, the strategic decisions made by top-level managers are typically complex and non-routine, so direct supervision of executives is inappropriate for judging the quality of their decisions. Thus, compensation of top-level managers is usually determined by the firm’s financial performance. Second, the impact of an executive’s decisions is not immediate, making it difficult to assess the effect of decisions on the corporation’s performance. Third, a number of variables (unpredictable economic, social, or legal changes) intervene between top-level managerial behavior and firm performance, making it difficult to discern the effects of strategic decisions. 5. What trends exist regarding executive compensation? What is the effect of the increased use of long-term incentives on top-level managers’ strategic decisions? In recent times, many stakeholders, including shareholders, have been angered by what they consider the excessive compensation received by some top-level managers, especially CEOs. The primary reason for such large compensation packages is the inclusion of stock options and stock in the total pay packages. The primary reasons for compensating executives with stock is that it provides incentives to keep the stock price high, thus aligning manager and owner interests. However, there may be some unintended consequences. Research has shown that managers who own more than one percent of the firm’s stock are less likely to be forced out of their jobs, even when the firm is performing poorly. Increasingly, long-term incentive plans are becoming a critical part of compensation packages in US firms. The use of longer-term pay helps firms cope with or avoid potential agency problems. Because of this, the stock market generally reacts positively to the introduction of a long-range incentive plan for top executives. While some stock option-based compensation plans are well designed with option strike prices substantially higher than current stock prices, too many have been designed simply to give executives more wealth that will not immediately show up on the balance sheet. Research of stock option repricing where the strike price value of the option has been changed to be lower than it was originally set suggests that step is taken more frequently in high-risk situations. However, it also happens when firm performance was poor to restore the incentive effect for the option. But evidence also suggests that organizational politics are often involved. Additionally, research has found that repricing stock options does not appear to be a function of management entrenchment or ineffective governance; these firms often have had sudden and negative changes to their growth and profitability. They also frequently lose their top managers. Interestingly, institutional investors prefer compensation schemes that link pay with performance, including the use of stock options. Again, this evidence shows that no internal governance mechanism is perfect. Whereas stock options became highly popular as a means of compensating top executives and linking pay to performance, they also have become controversial of late. It seems that option awards became a means of providing large compensation packages and the options awarded did not relate to the firm’s performance, particularly when boards showed a propensity to reprice options at a lower strike price when stock prices fell precipitously. Because of the large number of options granted in recent years and the increasingly common practice of repricing them, some have called for expensing the options by the firm at the time they are awarded. This action could be quite costly to many firms’ stated profits. Thus, some firms have begun to move away from granting stock options. 6. What is the market for corporate control? What conditions generally cause this external governance mechanism to become active? How does this mechanism constrain top-level managers’ decisions and actions? The market for corporate control is an external governance mechanism that becomes active when a firm’s internal controls fail. The market for corporate control is composed of individuals and firms that buy ownership positions in (or take over) potentially undervalued corporations so they can form new divisions in established diversified companies or merge two previously separate firms. Because they are assumed to be the party responsible for formulating and implementing the strategy that led to poor performance, the top management team of the acquired company is usually replaced. Thus, the market for corporate control disciplines managers that are ineffective or act opportunistically. Firm’s poor performance is an indication that internal governance mechanisms have failed (that is, their use did not result in managerial decisions that maximized shareholder value), opening the door to the involvement of the market for corporate control. Indeed, hostile takeovers are the major activity in the market for corporate control. 7. What is the nature of corporate governance in Germany, Japan, and China? In many private German firms, owner and manager may be the same individual and thus no agency problem will exist. Even in publicly traded corporations, there is often a dominant shareholder, so the problem is minimized. Thus, ownership concentration is an important means of corporate governance in Germany, just as it is in the US. Historically, banks have been at the center of the German corporate governance structure, which is the case in many continental European countries such as Italy and France. As lenders, banks become major shareholders when companies they had financed earlier seek funding on the stock market or default on loans. Although stakes are usually under 10 percent, there is no legal limit on how much of a firm’s stock banks can hold (except that a single ownership position cannot exceed 15 percent of the bank’s capital). Shareholders can tell the banks how to vote their ownership position, but they generally elect not to do so. Banks monitor and control managers both as lenders and as shareholders by electing representatives to supervisory boards. German firms with more than 2,000 employees are required to have a two-tier board structure. Through this structure, the supervision of management is separated from other duties normally assigned to a board of directors, especially the nomination of new board members. Thus, Germany’s two-tiered system places the responsibility to monitor and control managerial (or supervisory) decisions and actions in the hands of a separate group. Though all the functions of direction and management are the responsibility of the management board, appointment to this body is the responsibility of the supervisory tier. Employees, union members, and shareholders appoint members to the latter. Historically, German executives have not been dedicated to the maximization of shareholder value. However, corporate governance in Germany is changing. Due at least partially to the increasing globalization of business, many governance systems are beginning to gravitate toward the US system. Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus. As part of a corporate family, individuals are members of a unit that envelops their lives—even the keiretsu is a family, and certainly more than an economic concept. Consensus, an important influence in Japanese corporate governance, calls for the expenditure of significant amounts of energy to win the hearts and minds of people whenever possible, as opposed to depending on edicts from top executives. Consensus is highly valued, even when it results in a slow and cumbersome decision-making process. As in Germany, banks play an important role in financing and monitoring large public firms in Japan. The bank owning the largest share of stocks and the largest amount of debt (the main bank) has the closest relationship with the company’s top executives. The main bank provides financial advice to the firm and also closely monitors managers. Thus, Japan has a bank-based financial and corporate governance structure compared to the United States’ market-based financial and governance structure. Aside from lending money (debt), a Japanese bank can hold up to five percent of a firm’s total stock; a group of related financial institutions can hold up to 40 percent. In many cases, main-bank relationships are part of a horizontal keiretsu (a group of firms tied together by cross-shareholdings). A keiretsu firm usually owns less than 2 percent of any other member firm; however, each company typically has a stake of that size in every firm in the keiretsu. As a result, somewhere between 30 percent and 90 percent of a typical firm is owned by other members of the keiretsu. Thus, a keiretsu is a system of relationship investments. As is the case in Germany, Japan’s corporate governance structure is changing. For example, because of their continuing development as economic organizations, the role of banks in the monitoring and control of managerial behavior and firm outcomes is less significant than it has been. The Asian economic crisis in the later part of the 1990s substantially harmed Japanese firms, making transparent the governance problems in the system. Corporate governance in China has undergone major changes over the past decade, along with the privatization of business and the development and integrity of the equity market. Though these changes are significant, the state still dominates the strategies that most firms employ. Research indicates that firms with higher state ownership have lower market value and more volatility than those with less. This is because the state imposes social goals on these firms and executives are not trying to maximize shareholder wealth. Overall, the Chinese system of corporate governance has been moving toward a Western-style model. Chinese executives are also being compensated based on firm financial performance. 8. How can corporate governance foster ethical decisions and behaviors on the part of managers as agents? In the United States, the focus of governance mechanisms is on the control of managerial decisions to ensure that shareholders’ interests will be served, but product market stakeholders (e.g., customers, suppliers, and host communities) and organizational stakeholders (e.g., managerial and non-managerial employees) are important as well. Therefore, at least the minimal interests or needs of all stakeholders must be satisfied by outcomes from the firm’s actions. Otherwise, dissatisfied stakeholders will decide to withdraw their support to one firm and provide it to another (e.g., customers will purchase products from a supplier offering an acceptable substitute). MINI-CASE The Imperial CEO, JPMorgan Chase’s Jamie Dimon Jamie Dimon, CEO of J.P. Morgan Chase survived the Great Recession quite well. However, in 2012, the company suffered losses of more than $6 billion due to excessive risk taking by traders in its London operations. Some of the loss was attributed to poor oversight at the top. Shareholder activists sought, unsuccessfully, to split the positions of CEO and Chair of the Board. Executives and board members at J.P. Morgan Chase worked to keep the positions together. The Opening Case speculates that because the same ownership structure exists at seven of the firm’s ten largest institutional investors’ firms, and that because these investors want banks to engage in high-risk activities, these investors prefer the status quo governance arrangement. Whatever the reasons, this case demonstrates how weak shareholder rights are in the U.S. and that Boards seldom act in ways that are counter to effective oversight and control. The focus of the Mini-Case provides an overview of some of the important issues related to corporate governance. At its core, corporate governance deals with the actions of top-level managers and the responsibilities of the board of directors to ensure managers are acting in appropriate ways. Thus, corporate governance is concerned with issues such as organizational effectiveness, transparency, accountability, incentivizing actions, and creating value (for stakeholders and shareholders). Corporate governance is important to individual companies because effective governance should result in superior performance. It is also an important concern to nations because in the global economy, capital flows toward opportunity. Effective governance is part of the equation for ensuring competitiveness and, subsequently, acceptable returns. Teaching Note Effective corporate governance has been a critical issue for the past several decades. Unfortunately, minimal real progress has been made in this area. For all of the grand gestures and corporate/governmental assurances, effectiveness, transparency, accountability, the use of incentives, and value creation all have a lot of room for improvement. Ask students to identify contemporary governance issues/governance breakdowns and to speculate about why the issue/breakdown exists. Ask them to identify the weak points in the system. Though students are probably unfamiliar with governance systems in other countries, they should realize that effective governance is a global concern, not just a national one. ANSWERS TO MINI CASE DISCUSSION QUESTIONS 1. How well do you think the governance system of JP Morgan Chase is working to protect shareholder interests? The government systems of JP Morgan Chace are not working to protect the shareholders interest due to their seemingly excessive risk taking, and their ineffectiveness to make changes when necessary. This point is made when the company failed to discontinue the duality of Dimon’s position. Governance is intended to manage the relationships among stakeholders and control direction. If the company cannot take actions and implement change when necessary, it is ineffective. 2. What particular governance devices are helping or hindering good governance in the JP Morgan Chase situation? The device that is hindering good governance is the board of directors. Morgan’s shareholders pushed for abolishing CEO duality, believing that the shareholders’ interests were not a priority and excessive risk was being taken. The board is responsible for representing shareholders and for implementing measures that reduce risk. However, that has failed. When the cause of the problem was traced to the CEO duality, the board stood in the way and campaigned so that the CEO’s role did not change. These occurrences are examples of corporate governance being challenged. 3. What do you recommend to improve the governance system specifically for JP Morgan Chase, but also the overall system of governance devices described in Chapter 10? To improve the governance system, JP Morgan should introduce an incentive plan that is aligned with the goals of the company and the interests of the shareholders. If aligned properly, the additional risks and unnecessary risks would be reduced. Also, the shareholders will be satisfied that the company’s actions will be focused on bringing shareholder value. The incentives will align executive compensation with performance indicators that will lead to an overall success of the company. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. The roles and responsibilities of top executives and members of a corporation’s board of directors are different. Traditionally, executives have been responsible for determining the firm’s strategic direction and implementing strategies to achieve it, whereas the board of directors has been responsible for monitoring and controlling managerial decisions and actions. Some argue that boards should become more involved with the formulation of a firm’s strategies. How would the board’s increased involvement in the selection of strategies affect a firm’s strategic competitiveness? What evidence can the students offer to support their position? If a corporation’s board becomes more involved in the selection of strategies, it could potentially improve the firm’s strategic competitiveness, provided the board brings valuable insights and experience to the table. The increased involvement can result in better oversight, more rigorous analysis, and a broader range of perspectives that may lead to more innovative and effective strategies. However, too much involvement could also slow down decision-making, as strategic deliberations would take longer with more stakeholders involved. Evidence supporting this view can be drawn from firms where boards have played a significant role in strategy formulation, leading to strong governance and better alignment between strategic goals and stakeholder interests. Conversely, when boards are passive, managerial discretion might lead to poor strategic decisions, as seen in some instances of poor corporate governance. 2. Ask students if they believe that large US firms have been over governed by some corporate governance mechanisms and under governed by others. Provide an example of each. Some large U.S. firms have been over-governed by mechanisms like excessive board oversight, shareholder activism, and regulatory requirements that may constrain managerial autonomy. An example of over-governance could be firms where boards are overly involved in day-to-day operations, which might limit executives’ ability to act decisively. On the other hand, some companies have been under-governed, particularly when there is a lack of effective monitoring of executive compensation, risk management, or ethical conduct. For instance, in cases like the financial crises of 2008, boards failed to effectively oversee risks, contributing to corporate failures. 3. How can corporate governance mechanisms create conditions that allow top executives to develop a competitive advantage and focus on long-term performance? Have students use the Internet to search the business press and give an example of a firm in which this occurred. Corporate governance mechanisms that align executives' incentives with long-term performance and shareholder value can help firms develop a competitive advantage. For example, performance-based compensation, including stock options or long-term incentive plans, encourages executives to focus on sustainable growth. Companies like Apple and Microsoft have used such mechanisms to ensure executives focus on innovation and long-term profitability, contributing to sustained competitive advantages. Evidence of this can be seen in firms where governance structures facilitate clear accountability and long-term planning, promoting shareholder interests while fostering corporate growth. 4. Some believe that the market for corporate control is not an effective governance mechanism. What factors might account for the ineffectiveness of this method of monitoring and controlling managerial decisions? The market for corporate control may be ineffective as a governance mechanism for several reasons. First, it can lead to short-term focus, with hostile takeovers often driven by the desire to extract value quickly rather than promote long-term value creation. Second, the market for corporate control does not always accurately reflect the underlying health or potential of a company, especially when activist investors take control with an agenda focused on immediate profits, often at the expense of long-term sustainability. Additionally, if the takeover target has a strong management team and strategic direction, the intervention may not align with the company’s best interests. Finally, regulatory hurdles and the potential for negative public perception can limit the market for corporate control’s effectiveness. 5. Present the following comment to the class: “As a top executive, the only agency relationship I am concerned about is the one between me and the firm’s owners. I think that it would be a waste of my time and energy to worry about any other agency relationships.” What are these other agency relationships? How would students respond to this person? Do they accept or reject this view? Have them support their position. The other agency relationships a top executive should be concerned about include the relationships with employees, customers, and suppliers. While the relationship with owners (shareholders) is critical, neglecting the interests of employees can lead to lower morale, productivity, and high turnover, which negatively impacts long-term performance. Ignoring customers can harm a firm’s market position and brand loyalty, and neglecting suppliers can disrupt the supply chain and erode competitive advantage. Students would likely reject the view that executives should only worry about the agency relationship with owners, arguing that successful firms balance the needs of all stakeholders. The stakeholder theory of corporate governance highlights the importance of managing these relationships to build sustainable success over time. Ethics Questions 1. As explained in this chapter, using corporate governance mechanisms should establish order between parties whose interests may be in conflict. Do owners of a firm have any ethical responsibilities to managers in a firm that uses governance mechanisms to establish order? If so, what are those responsibilities? Owners of a firm do have ethical responsibilities to managers, even when corporate governance mechanisms are in place. These responsibilities include providing fair compensation, ensuring reasonable working conditions, and fostering an environment of trust and transparency. Owners should also support managers' professional growth and development, recognizing their role in achieving the firm's long-term success. Additionally, owners should avoid creating a power imbalance that could unfairly burden managers, and they should respect managers' autonomy and expertise in decision-making processes. 2. Is it ethical for a firm’s owner to assume that agents (managers hired to make decisions in the owner’s best interests) are averse to risk? Why or why not? It is not inherently ethical for a firm’s owner to assume that managers are averse to risk, as this assumption may not always reflect the individual characteristics or values of managers. While some managers may be risk-averse, others may be more willing to take calculated risks that benefit the firm in the long term. Assuming all managers are risk-averse can limit innovation and hinder the pursuit of growth opportunities. Ethically, owners should provide clear expectations and align incentives so that managers are motivated to act in the best interests of the firm while managing risks appropriately. The key is to foster open communication and mutual understanding regarding risk preferences. 3. What are the responsibilities of the board of directors to stakeholders other than shareholders? The board of directors has several responsibilities to stakeholders other than shareholders, such as employees, customers, suppliers, and the community. The board should ensure that the firm operates in an ethical and sustainable manner, balancing short-term profits with long-term social and environmental responsibilities. They should oversee the firm's adherence to legal and regulatory standards, ensure fair treatment of employees, and encourage the company’s contribution to the community through corporate social responsibility initiatives. The board must also protect the interests of non-shareholder stakeholders in situations where their well-being might be jeopardized by the firm’s decisions. 4. What ethical issues surround executive compensation? How can we determine whether top executives are paid too much? Executive compensation raises ethical concerns, especially regarding the fairness and alignment with the performance of the company. Issues such as excessive pay relative to average worker compensation, bonus structures that incentivize short-term gains over long-term stability, and stock options that may encourage risky behavior can all be problematic. To determine whether top executives are paid too much, one could compare their compensation to industry standards, evaluate the financial performance of the company under their leadership, and consider the relative compensation of employees within the firm. Ethical compensation practices should ensure that pay is aligned with the firm’s long-term goals and the value executives bring to the organization, without contributing to inequality or harming the company’s overall financial health. 5. Is it ethical for firms involved in the market for corporate control to target companies performing at levels exceeding the industry average? Why or why not? Targeting companies that are already performing above industry average in the market for corporate control raises ethical concerns. While firms are entitled to seek opportunities for improvement, targeting high-performing firms simply for the potential to extract value or to eliminate competition may be seen as ethically questionable. It could harm stakeholders by disrupting a company’s culture, innovation, and long-term stability. Such actions may be justified if the acquirer can genuinely improve the target’s performance or if the target firm’s shareholders are likely to benefit, but ethics demand that firms consider the broader consequences of these acquisitions. 6. What ethical issues, if any, do top executives face when asking their firm to provide them with a golden parachute? Golden parachutes, which provide executives with significant financial benefits in the event of a merger or acquisition, raise ethical concerns about fairness and the potential for abuse. Top executives asking for golden parachutes may be seen as acting selfishly, especially when these packages are large and unrelated to the performance of the company. Ethical issues include the potential for executives to make decisions that benefit themselves rather than the company or its shareholders, knowing they have a safety net. Firms should ensure that golden parachutes are tied to long-term performance metrics and that they are transparent and reasonable in relation to the company’s overall financial health. 7. How can governance mechanisms be designed to ensure against managerial opportunism, ineffectiveness, and unethical behaviors? Governance mechanisms can be designed to mitigate managerial opportunism, ineffectiveness, and unethical behavior by establishing clear policies, robust oversight, and accountability measures. These can include performance-based executive compensation, regular audits, and a board that is independent and actively engaged in monitoring executive behavior. Additionally, firms should have strong codes of ethics, clear conflict-of-interest policies, and whistleblower protections to ensure ethical decision-making. Governance mechanisms should also foster a culture of integrity, ensuring that ethical behavior is rewarded and unethical actions are swiftly addressed. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR BRANCHING EXERCISE Branching Exercises are real-world activities that allow each student to work through challenges by choosing from different decision-making options. These exercises provide students with the opportunity to practice strategic management in a business scenario utilizing company case studies. Students are placed in the role of a decision maker and asked to consider the needs and priorities of stakeholders as they determine strategy recommendations for a company. Corporate Governance at a Crossroads: Avon Avon Products, Inc., the beauty supply company is at a crossroads. The customers and employees are vocally unsatisfied with the way the company has neglected their needs solely for revenue. Also, profit and marketshare is down because of a rapid increase in competitors. The company overall is starting to lose their identity. The students will act as if they are the new CEO charges with bringing Avon back to success. The board has challenged the new CEO to use the vision, mission, and values of Avon in order to bring back the identity of the once beauty giant. Vision: To be the company that best understands and satisfies the product, service and self-fulfillment needs of women-globally. Mission: - To be a leader in global beauty - To be women’s choice for buying - To be a premier direct-selling company - To be a “most admired” company - To be a “best place to work” - To have the largest foundation dedicated to women’s causes Values - Belief - Integrity - Respect - Trust - Humility The students will review these concepts: • Shareholder values • Defense strategies • Acquisitions • Incentives and compensation packages • Ethics The ideal path that earns a perfect score is the following: • Choosing to satisfy the sales representatives and employees is the correct first step when trying to rebuild the core values of Avon • Prioritizing the sales representatives is also the correct move as that would be what the Avon of old had as their top priority. • Increasing incentives and commissions will help motivate the reps. Also, common complaints have been that Avon has too large of a selection as is. • Product rationalization will be better received than higher prices, as it is what the customers as a stakeholder want. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Checks and Balances: Placing Regulations on Executive Pay The chapter refers to the importance of strong corporate governance and the benefits of the mechanisms that are a result. A major facet of corporate governance is executive compensation, which is typically related to the firm’s performance. The purpose of this exercise is to have students evaluate the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 on executive compensation. Students are tasked with researching the impacts. Two resources that may be useful to you in understanding the impacts of the Act: • 2012 Trends and Developments in Executive Compensation – See Say and Pay: http://www.meridiancp.com/images/uploads/2012_Trends_and_Developments_in_Executive_Compensation.pdf ] • US trends in executive compensation http://www.towerswatson.com/en-GB/Insights/Newsletters/Europe/executive-compensation-market-watch/2013/04/US-trends-in-executive-compensation-Towers-Watson-webcast-increased-TSR-prevalence Students will be asked to: 1. Research trends in executive compensation of 10 publically trades companies. prior to and since the passing of Dodd-Frank in 2010 2. Prepare to answer the following questions: a. What has happened to executive pay packages since passage of the act? b. What is the total shareholder return and how is it calculated? Provide an example. c. Has there been any impact on long-term incentive pay for executives? d. Do you feel that passage of Dodd-Frank has been effective in connecting executive compensation to company performance? 3. Prepare a case study of one of the publically traded companies you identified and discuss how the passing of the act affected their company. 4. Present a 15-20 slide deck on their findings and how the passage of Dodd Frank has directly affected their business. You can make this exercise for only one student by eliminating the 15-20 slide presentation and having the students simply talk about their findings. Another alternative would be to have individual students research fewer companies. Guide a discussion through the questions in the exercise, and wrap up the discussion by connecting executive compensation to internal governance. What is the effectiveness of executive compensation as a governance mechanism? INSTRUCTOR'S NOTES FOR MEDIA QUIZ The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Title: Alibaba Goes Public RT: 3:18 Topic Key: International Corporate Governance Alibaba, the Chinese internet giant, declares that it is going public on the NYSE. Alibaba is an internet service provider that has similar capabilities to eBay, Amazon, Google, and PayPal. At the time of its offering, Alibaba had more revenue than Amazon and Ebay combined. A major topic of the video is why Alibaba would list on the NYSE and not the Hong Kong stock exchange. It is a controversy because Americans will be benefiting from the listing, and not the internet giant’s home country. Also check out: http://www.alibabagroup.com/en/global/home Suggested Discussion Questions and Answers 1. Why would Alibaba choose to list in the U.S. and not in the Hong Kong Exchange? One possible explanation is a lack of confidence in Chinese government’s commitment to corporate governance. Chinese businesses are growing, and the next wave of growth is speculated to be the western businesses of the UK and US investing in Alibaba to reach the Chinese consumer. If businesses are not confident in the governance of the Chinse company, they will be less likely to invest. 2. The Hong Kong Exchange rejected Alibaba’s application to list on it because of its corporate governance structure. Why would a home country restrict their largest company from going public? The Chinese do not have the best reputation for corporate governance. To bring back confidence, the nation has become much stricter and has even turned down companies that would benefit from listing with it due to the poor corporate governance. If this tactic works to build confidence among investors, more businesses will utilize corporate governance structures and list on the exchange in their home countries. 3. Alibaba is a company that is very profitable and has a large market value. What would be a beneficial use of the funds generated by the IPO? Diversification and reinvestments would be the best use of these funds to help the company and its stock grow, which will benefit all stakeholders. Alibaba may already be a giant, but now with shareholders, it will have to continue to grow to keep the shareholders happy. Solution Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838