Module 1: Corporate Scope

Key Concepts:

 Corporate Strategy
 Vertical Integration
 Diversification
 Comparative Organizational Analysis

Module 2: Corporate Transactions

Key Concepts:

 Mergers and Acquisitions (M&A)

 Divestitures
 Strategic Alliances
 Corporate Transaction Portfolios

Module 3: Global Strategy

Key Concepts:

 Globalization
 Modes of Foreign Market Entry
 Diamond Model of National Competitive Advantage
 Global Integration-Local Responsiveness Framework

Module 4: Corporate Governance

Key Concepts:

 Characteristics of Public Firms

 Stakeholder Impact Analysis
 Corporate Social Responsibility
 Corporate Governance
Module 1

Administrative costs: costs of organizing an exchange within a company. Also called internal transaction
costs. Examples include costs of bureaucracy, providing incentives, achieving coordination within firms.

Adverse selection: Adverse selection describes a situation where market participation is affected by
asymmetric information. When buyers and sellers have different information, it is known as a state of
asymmetric information. Traders with better private information about the quality of a product will
selectively participate in trades that benefit them the most at the other trader's expense. These
information asymmetries increase the likelihood of selecting inferior alternatives –as compared to
markets with complete information. (Wikipedia)

Asset specificity: Characteristic of assets that are unique and have high redeployment costs –e.g., it is
very costly to redeploy the asset to an alternative (next-best) use. It is usually defined as the extent to
which the investments made to support a particular transaction have a higher value to that (specific)
transaction than they would have if they were redeployed for any other purpose. Asset specificity has
been extensively studied in various management and economics areas such as marketing, accounting,
organizational behavior, and management information systems. (Wikipedia)

Backward vertical integration occurs when a company controls subsidiaries that produce some of the
inputs used in its products' production. For example, an automobile company may own a tire company,
a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable
supply of inputs and ensure consistent quality in their final product. It was the primary business
approach of Ford and other car companies in the 1920s, who sought to minimize costs by integrating the
production of cars and car parts, as exemplified in the Ford River Rouge Complex. (Wikipedia)

Conglomerate: a conglomerate is a combination of multiple business entities in entirely different

industries under one corporate group, usually involving a parent company and many subsidiaries. Often,
a conglomerate is a multi-industry company. Conglomerates are often large and multinational.
(Wikipedia)

Corporate scope: the "footprint" of a company, such as what activities or businesses is a company
engaged in and how they should be managed. There are three critical dimensions along which corporate
scope may vary: vertical, horizontal, and geographic.
Corporate strategy: corporate strategy pursues competitive advantage through the configuration and
coordination of a company's multi-business activities.

Diversification: diversification is a corporate strategy to enter into a new market or industry in which the
business doesn't currently operate while also creating a new product for that new market. (Wikipedia)

Diversification discount: occurs when a diversified company's value is less than the sum of the value of
its strategic business units separately.

Fiat: when both parties of a transaction or exchange are organized under the same company (e.g., two
business units from the same company participating in an exchange), the transaction can be governed
by internal authority or managerial fiat. The final authority to settle disputes, adjust terms, mediate and
make decisions regarding the exchange resides within the company's managers (not the courts).

Forward vertical integration: when a company controls distribution centers and retailers where its
products are sold. An example is a brewing company that owns and controls several bars and pubs.
(Wikipedia)

High-powered incentives: the ability to incentivize high effort from a transacting party. Market
transactions provide high-powered incentives because the gains/profits from a particular transaction go
directly to the parties that are eliciting the effort, i.e., the transacting parties. In hierarchies
(organizations), incentives are less powerful (low-powered) because the parties eliciting the effort are
agents that do not appropriate all the gains/profits from their efforts –because the owners/shareholders
have the ultimate claim to profits. Inside organizations, the specific parties involved in an
exchange/transaction (e.g., employees, managers from different divisions) can get a raise, a promotion,
or a bonus but generally cannot claim all the gains from their efforts in the exchange. (Wikipedia)

Hold-up problem: in economics, the hold-up problem (or commitment problem) is central to the theory
of incomplete contracts and shows the difficulty in writing complete contracts. A hold-up problem can
arise when parties to a future transaction must make non contractible relationship-specific investments
before the transaction occurs. Often the specific form of the optimal transaction (such as quality-level
specifications, time of delivery, what quantity of units) cannot be determined with certainty beforehand.
Thus, the hold-up problem arises when two parties may work most efficiently by cooperating but refrain
from doing so because of concerns that they may give the other party increased bargaining power and
thus reduce their own profits. When party A has made a prior commitment to a relationship with party
B, the latter can 'hold up' the former for the value of that commitment. The hold-up problem leads to
severe economic costs and might also lead to underinvestment. (Wikipedia)
Horizontal integration: a company produces several items that are related to one another. (Wikipedia)

Horizontal merger: a horizontal merger is a process of a company increasing production of goods or

services at the same part of the supply chain. A company may do this via internal expansions,
acquisitions, or mergers. (Wikipedia)

Horizontal scope: the range of products or services that a company offers.

Information symmetry: a situation in which one party has more information than another. This
information asymmetry can happen because one party holds private information, creating a power
imbalance in the transaction/exchange. Examples of information asymmetry include adverse selection
and moral hazard. (Wikipedia).

Market power: a company's ability to change the prices in a marketplace. This pricing power often stems
from an ability to control the level of supply, demand, or both. Market power can result in a company's
power to reduce competition by increasing entry barriers, controlling profit margins or quantities in an
industry. Companies will have no market power in perfectly competitive markets and will have the
highest market power in monopoly or monopsony industry structures. (Wikipedia).

Moral hazard: in economics, moral hazard occurs when someone increases their risk exposure when
insured, especially when a person takes more risks because he/she is insured and someone else bears
the cost of those risks. In this setting, one party decides how much risk to take, while another party
bears the costs if things go badly. Moral hazard can occur under a type of information asymmetry where
the risk-taking party to a transaction knows more about its intentions (and actions) than the party
paying the consequences of the risk. Moral hazard also arises in a principal-agent problem, where one
party, called an agent (e.g., a manager), acts on behalf of another party, called the principal (e.g., the
owner). The agent usually has more information about their actions or intentions than the principal
because the principal usually cannot thoroughly monitor the agent. The agent may have an incentive to
act inappropriately (from the principal's viewpoint) if the interests of the agent and the principal are not
aligned. (Wikipedia)

Opportunism: the practice of taking advantage of a situation to profit. It is based on the idea that
transacting parties are self-interested and may take advantage of various market and information
failures to profit themselves. (Wikipedia).
Principal-Agent problem: The principal-agent problem (also known as agency dilemma or the agency
problem) occurs when one person or entity (the "agent") can make decisions and/or take actions on
behalf of, or that impact, another person or entity: the "principal." This dilemma exists in circumstances
where agents are motivated to act in their own best interest, and the agents' best interest can be
contrary to the principals' interest. An example of moral hazard. (Wikipedia)

Related (and unrelated) diversification: a diversification strategy in which companies pursue various
business opportunities that share (or not) several linkages (e.g., shared resources and core
competencies).

Synergies: complementarities between businesses or economies of scope. Two types of synergies: scale
common resources and redeploy slack resources among different businesses.

The Lemons problem: "The Market for Lemons: Quality Uncertainty and the Market Mechanism" is a
well-known 1970 paper by economist George Akerlof which examines how the quality of goods traded
in a market can degrade in the presence of information asymmetry between buyers and sellers, leaving
only "lemons" behind. Buyers cannot distinguish between a high-quality car (a "peach") and a bad-
quality car (a "lemon"). Then they are only willing to pay a fixed price for a car that averages the value of
a "peach" and "lemon" together (average-market-price). The problem is that sellers know whether they
hold a peach or a lemon. "Peach" sellers will not be willing to sell at the average-market-price (that is
lower than the value of their "peach"), but "lemon" sellers will have every incentive to sell at the
average-market-price (because their "lemon" is worth less than that price). Eventually, as enough sellers
of "peaches" leave the market, the average willingness-to-pay of buyers will decrease (since the average
quality of cars on the market decreased), leading to even more sellers of high-quality cars leaving the
market until the market collapses. The uninformed buyer's price creates an adverse selection problem
that drives the high-quality cars from the market. (Wikipedia)

Transaction Cost Economics: a theory about the firm's scope, which can be applied to explain and
predict the vertical and horizontal scope of companies.

Transaction Costs: include external and internal costs of exchanges. Examples of external transaction
costs are the costs of searching, negotiating, monitoring, and enforcing contracts. Examples of internal
transaction costs are the administrative costs of bureaucracy, incentives, and coordination within firms.
Some strategic transaction costs are those related to adverse selection, moral hazard, and hold-up
problem.

Vertical scope: stages of the value chain (or network) that a company operates in.
Vertical integration: vertical integration is an arrangement in which a company's supply chain activity is
owned by that company. (Wikipedia)

Zone of indifference: is a "zone" within which individuals accept orders without conscious questioning of
their authority. The zone of indifference will be wider or narrower depending upon the degree to which
the inducements exceed the burdens/sacrifices. It usually determines the individual's adhesion to the
organization. (Chester Barnard)

Module 2

Carve-out: is a divestiture mode in which a corporate parent company turns a business unit into a new
and separate company. Parent companies often divest a minority stake in the newly separated business
unit (parent typically retains control).

Corporate transactions: corporate transactions involve actions with other entities that change or
manage the scope of the firm.

Divestiture (or divestment): firms use divestitures to reduce existing businesses for strategic, financial,
ethical, or political objectives. A divestment is the opposite of an investment. It includes the sale of an
existing business by a firm. (Wikipedia)

Equity Alliance: strategic alliance where at least one firm invests in the other.

Joint Venture: strategic alliance that establishes a new separate legal entity that firms co-invest in.

Licensing: contractual arrangement for access to technology, typically in exchange for royalties.
Merger and acquisition (M&A): Mergers and acquisitions (M&A) are transactions in which the ownership
of companies, other business organizations, or their operating units are transferred or consolidated with
other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize
and change the nature of their business or competitive position. (Wikipedia)

Organic growth: is the expansion that companies achieve by growing internally and excludes growth
through mergers and acquisitions (Wikipedia).

Private equity: refers to private investment funds from a limited partnership that is not traded on a
public exchange. A private equity investment can be made by a private-equity company, a venture
capital company, or an angel investor. Private equity often provides capital to expand into new
technologies, markets, make acquisitions, or improve its working capital. Private equity investors often
make money by turning-around the operations of the businesses they invest in, charging management
fees, and/or selling the business at a profit. (Wikipedia).

Relational contract: long-term contract for services or products with another company.

Spin-off: is a divestiture mode in which a corporate parent company turns a business unit into a new and
separate company. Parent companies divest a majority stake in the newly independent business unit (at
least 80% by law).

Strategic alliance: an agreement between two or more parties to pursue a set of agreed-upon objectives
needed while remaining independent organizations. (Wikipedia)

Unit sale: is a divestiture mode in which a corporate parent company sells a business unit to another
company (corporate parent, private equity firm, among others).

Module 3
Brownfield: occurs when a company acquires or leases existing fixed assets in a foreign country and
reuses them for their production facility.

Exporting: sale into foreign markets. Direct exports or Export via an agent.

FDI: stands for Foreign Direct Investment, an investment in the form of a controlling ownership in a
business in one country by an entity based in another country. (Wikipedia)

Globalization: a process of closer integration and exchange between countries and peoples worldwide.

Global-standardization strategy: a strategy used when a company offers the same product/service
across all countries, standardizing and achieving economies of scale. Other advantages include
efficiencies from centralizing standard activities like design and marketing and simplifying the supply
chain.

Greenfield: occurs when a company builds a new unit in a foreign country from scratch.

International Acquisition: occurs when a company acquires or buys a local company and integrates it.

International Joint Venture: jointly owned independent company. Two firms from different countries,
such as one local and one foreign partner, contribute resources (money, knowledge, IP, relationships,
PPE) and manage the independent company jointly, sharing profits.

International Licensing and International Franchising: contract involving two firms from different
countries, for example, one local and one foreign partner. The objective is to transfer intangibles
(technology, knowhow, IP). These types of contracts often allow for high levels of partner-monitoring.

International Strategic Alliance: an alliance between two firms from different countries, for example,
one local and one foreign partner. This agreement often allows for active coordination and a broader
scope of joint activities (e.g., R&D, marketing).

International strategy: a strategy that involves selling the same products/services in domestic and
foreign markets.
Liability of foreignness: extra costs of doing business in foreign countries. Often, multinational
enterprises face unfamiliar foreign environments, in which they are at a disadvantage compared to local
competitors. The liability of foreignness includes the costs of adapting to a foreign environment and
coordinating across different countries.

Localization strategy: an international business approach in which a company tailors products/services

to fit local consumer preferences and (foreign) country requirements.

Location economies: the benefits that firms accrue from locating their value chain activity in the optimal
geographic local for that specific activity. Such location can be anywhere in the world. Benefits include
lower costs, differentiation of product offering, among others.

MNEs: stands for Multinational Enterprises that operates (owns or controls) in at least two different
countries (Wikipedia).

Multidomestic strategy: a strategy pursued by multinational companies to establish in a foreign market

by tailoring their products/services to the local customers.

OECD: stands for Organization for Economic Co-operation and Development, is an intergovernmental
economic organization with 36 member countries, founded in 1961 to stimulate economic progress and
world trade. (Wikipedia)

"Race to the bottom": a phrase that describes government deregulation of businesses. An example is a
reduction of taxes –that attracts local and foreign producers. (Wikipedia).

Transnational strategy: a strategy in which a company keeps its headquarters and core
technologies/capabilities in its local country while also establishing full-scale operations in foreign
markets. This strategy allows for local responsiveness and some standardization.

Wholly owned subsidiary: a unit that is 100% owned by a company in a foreign country.
Module 4

Agency costs: are the sum of incentive costs, monitoring costs, enforcement costs, and individual
financial losses incurred by principals because it is impossible to use governance mechanisms to
guarantee total compliance by the agent.

Balanced Scorecard: a strategic management tool aimed at measuring performance and facilitating
planning within companies. It includes financial measures and performance in customer relationships,
internal business processes, and innovation and learning. (Wikipedia)

Business Ecosystem: An economic community supported by a foundation of interacting organizations

and individuals—the organisms of the business world.

Corporate governance: represents the relationship among stakeholders used to determine and control
organizations' strategic direction and performance.

Corporate Social Responsibility (CSR): a framework that helps companies be accountable to society in
general –to the company, shareholders, stakeholders (employees, customers, suppliers, partners,
communities), and the public. Using this framework of accountability, companies are expected to
consider their economic, legal, social, and philanthropic impact. (Wikipedia).

Dual-class shares: companies that issue stock with different (dual) types of rights. Typically, a company
can issue stock (a) with and/or without voting rights and (b) with and/or without dividend payments. For
example, one share class can be issued to the general public with dividend rights but no voting rights;
and one share class can be issued to the founders and company executives with more voting power and
dividend rights. (Wikipedia)
Mechanisms of Governance: are corporate governance and market governance mechanisms, processes,
and relations used by various parties of a transaction to control and coordinate transactions. For
example, rules, procedures, incentives, a board of directors' controls, regulations, activist (shareholder
and society) check-ups, conflict resolution mechanisms, monitoring procedures, and prices are part of
governance mechanisms.

Poison pills: a shareholder rights plan referring to a target firm's defense tactic against an attempt of a
hostile takeover (by a potential acquiring company). Potential target companies use poison pills to
discourage a takeover by making themselves look less attractive –e.g., allowing current shareholders to
buy additional shares at a discount, diluting the ownership, and making it harder for the hostile party to
acquire the target. (Wikipedia).

Public Firm or Corporation: a publicly-traded company that is listed in a stock exchange. Its ownership is
held in shares owned by shareholders that can trade their shares in the stock market. (Wikipedia).

Shareholder primacy: shareholder primacy is a corporate governance theory holding that shareholder
interests should be assigned priority relative to all other corporate stakeholders. (Wikipedia)

Sustainability goals: a set of 17 global goals designed by the United Nations to focus societal efforts
towards society's improvement and sustainability. The current goals are (1) No Poverty, (2) Zero Hunger,
(3) Good Health and Well-being, (4) Quality Education, (5) Gender Equality, (6) Clean Water and
Sanitation, (7) Affordable and Clean Energy, (8) Decent Work and Economic Growth, (9) Industry,
Innovation and Infrastructure, (10) Reducing Inequality, (11) Sustainable Cities and Communities, (12)
Responsible Consumption and Production, (13) Climate Action, (14) Life Below Water, (15) Life On Land,
(16) Peace, Justice, and Strong Institutions, (17) Partnerships for the Goals. (Wikipedia).

Unicorns: is a privately held startup company (i.e., not listed in the exchange market) with excellent
growth prospects reflected in a current (private) valuation of 1 billion dollars. (Wikipedia)