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[ASM] G2 - Diversification Strategy (ABS) (What limits firm scope?…

- - - - been around over 100years
      - have involved in a number of different business.
        
        Washing Machines, Light Bulbs, Wind Turbines, etc.
      - Buying and developing new business, selling off old business, maintain a diverse collection of business under one company.
  - - - Coorparate Strategy
        
        Compete across the lines, the exentation of Business Strategy
    - - Business Strategy
        
        Complete individual lines
    - - Low
        
        Single Business
        
        has 90% revenues come frome a single line of business.
        
        Example : Google & Coca Cola
        
        Dominant Business
        
        has 70-95% revenues from a single line business but might having other business.
        
        Example : Pepsi
      - High
        
        Related
        
        Business that are operating in multiple business but there's some shared value chain.
        
        Example : Disney
        
        Unrelated
        
        Not clear where the value sharing is occuring across those business.
        
        Examp;e : General Electric
- - - - Argument
        
        Lower costs, for example, by eliminating duplicate effort
    - - Argument
        
        Share technology, know-how, reputations( ex: put underutilized rent- producing assets into use )
    - - Argument
        
        Create broad incentives for cooperation and information exchange
    - - Synergies hard to realize in practice; often achievable through contracts rather than integration.
    - - Outsourcing
      - Alliances
  - - - Argument
        
        Through backward or forward integration
      - Caution
        
        Vertical foreclosure
    - - Argument
        
        Multipoint competition reduces incentive s to fight
      - Caution
        
        Complexity makes tacit collusion difficult
    - - Argument
        
        Competitors have limited access to capital
      - Caution
        
        Antitrust Violation
        
        Microsoft
    - - Argument
        
        Impossible to write complete contract
      - Caution
        
        Trust is difficult in market exchange
  - - - Shareholders can diversify for themselves
      - Firms can reduce volatility of earning
    - - Employment and financial costs may fall with reduced risk of bankruptcy
      - Combining units can compound risk across units
        
        raising the costs of volatility
        
        the risk of bankruptcy
    - - unrelated market
        
        Firms can reinvest retained earnings achieve growth target
        
        Shareholder can choose where to invest
      - related market
        
        Firms may have private information about profitable opportunities
        
        Little evidence that internal capital market are more efficient
- - - - 2-2. Creates common incentives and mechanisms for coordination - minimize transaction costs
      - 2-1. To choose course when disagreements or unforeseen contingencies occur
      - 2-3. Minimize risks and frictions of transacting through markets
        
        Potential for relationship-specific assets and hold-up
        
        Inseparability of resources expended
        
        Contracting on information - risk of leakage/stolen
        
        Information Asymmetry - adverse selection
        
        Uncertainty about future contingencies
- - - - creates synergies and shared value creation
- - - - the use of power and social networking within an organization
  - - - market transaction is less costly
    - - firms transaction is less costly