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G3-[ABS3]Diversification Strategy (Limitation on a firm scope (Government…
G3-[ABS3]Diversification Strategy
Limitation on a firm scope
Government and Antitrust
Reduce monopoly power for political reasons
Bureaucratic cost
Slower decision making and inflexibility due to increased layers of management
Agency cost
Harder monitoring and sanctioning of employees and managers due to opportunistic behavior
The Reasons to Diversify
operational
scale & scope
duplicating effort to low cost
share
know how
technology
reputation
coordinate
cooperation
information exchange
caution
hard to realize
contract V.S. integration
alternatives
outsources
alliance
Strategic
eliminate competition
create barrier
antitrust violation
forclosure
vertical integration
monopoly position maintained ( antitrust )
reduce rivalry
multi-point competition
complexity
competing multi-market
reduce cost
transaction cost
antitrust again
Financial
capitalize on opportunity in
related
market
privileged info. & opportunity
little evidence that internal capital is more efficient
reduce volatility
reduce volatility of earnings
shareholders can do it by themselves
capitalize on opportunity in
unrelated
market
enter new market
shareholders choose themselves
reduce risk
don't put the eggs in the same bucket
combining units can compound risk
High
Low
Firms exists
Why do firms exists?
Ex:Construction / Film industry
Ownership imparts residual rights of control
Gain the ability to choose course
Economic activities is a series of transactions
Firms are diversified
Where the scope of the firm might lie
Arrow's paradox
The only way to contract an information was to reveal that information
Minimize risks and frictions of transacting through the market
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Risks and frictions of using markets
Bureaucratic and agency costs of using firms
Diversification
Revenues coming from a single line of business
Example: Coca-cola, Google
Still have other business as well that contribute to their revenues.
Example: Pepsi
Some relatedness between it's multiple lines of business
Example: Disney
distinct businesses value sharing not quite clear
Example:GE
Theory of the firm
"Complexity" of transaction
Markets ←
→ Firm
