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SMMC_G1[CS-1]_Corporate Strategy, Group member, when to vertically…
SMMC_G1[CS-1]_Corporate Strategy
[3] Horizontal Scope
Definition
Horizontal Scope Terminology
horizontal mergers
increasing company size by merging companies in the same industry
diversification
the firm's footprint across a set of different business
related & unrelated diversification
through historical lens
example
1980s conglomerates came to an end
Gekko buys and bakes conglomerates up
due to social harm he caused
to fix the mismanaged and destroying value of companies
created value by breaking up companies
corporate conglomerates
collections of unrelated business
Diversification
modern multi-specialty university
advantages
the opportunity to connect and learn with faculties
interdisciplinary learning
diverse perspective
generate new ideas
double major
bigger population of different culture and major
disadvantages
not east to get in the same directions
not focus
resources need to be diverted
easily to get lost in people
Horizontal Scope & Diversification
the integration across a set of business
horizontal diversified
the products, services(business) of a company
start new business and diverse them
possible to exit and enter to profitable ones
BCG matrix
central idea
active in different businesses
chart
vertical axis
market growth
market or industry attractiveness
horizontal axis
relative market share
company strength
strategic goal
well-balanced
current and future success
resource availability and needs
emphasize
the redeployment of cash
SBU
larger bubbles, larger businesses
star
fast-growing markets, strong market share
should be investing in
cash cow
yesterday stars
less need to invest in
yielding excess cash can be redeployed elsewhere
dog
not growing industries
be divested to raise cash
question mark
fast-growing markets / yet to establish a strong presence
investing more cash / divest the business?
conclusion
divest / invest
star businesses -> cash cows -> next stars
case of ITT
professional management
managing by the numbers
won't create value from unrelated businesses
breakup
two modes
one company
internal cash transfer
separate companies
investing surplus cash / raising cash as needed
market reaction
stock market
less efficient
modern financial market
quite efficient
split
focus on respective businesses
Diversification
Unrelated diversification
lower performance
diversification discount
the value of the diversified firm is less than the sum of its SBU's,
motivation
increase their market power
by reducing competition from related products
synergies
(resource and capability-based)
meaning
complementarities between businesses
economies of scope
from operating more than one business at the same time
types
scale common resources
that can be used in multiple businesses
develop slack resources
and
redeploy these resources
to other businesses
e.g. Uber redeploy some of its
fleet of cars and drivers
to its
food delivery business
reduce managers risks
empire building
grow size of the firm
comparative organizational analysis
market arrangement
plausible alternative to diversification
ex: an alliance, long-term contract, licensing
satisfy two test
the better-off test
Does the combination of business create value?
Do synergies exist?
the ownership test
Does the same company need to own the business?
Can we do it better with a market like arrangement?
[4] Managing Integrated firms
vertically integrated
horizontally diversified
integration
organizational analysis
Intetrated firms
PepsiCo
new technology or marketing investments
Google
alphabet
Waymo
Amazon
Whole Foods Market
online grocery business
Amazon's IT systems
diversification approaches
more autonomous
incentives be replicated
more coordinated
reduce transaction costs
best approach
depends on the nature of synergies
sharing
coordinated with
operational control
deployment or transferring
autonomy
financial controls
Spectrum of organization Modes
strategic alliance
Relational contracts
Licensing
franchising
joint ventures
Make
coordinated
Autonomous
more integrated
buy
Spot market transaction
less integrated
Short term contracts
[2] Vertical Scope
When
introduce
transaction costs
market exchanges
outsourcing
administrative costs
vertical integration
optimal scope of the firm
organizational analysis
separate
What is objective of integration?
What are being sought?
efficiencies
control
market power
coordination
different from optimal organizational form
key
better control/efficiency
by vertical integration
making
by market essentially
buying
better adaptation
markets
outsourcing
better coordination
hierarchies
Internal affairs
strategic costs
hold-up problem
opportunism
self-interest
situation
invest in specific assets
expose core knowledge to suppliers
Vertical integration problem
administrative costs
weak incentives
principal-agent problem
manager-subordinate context
lack of dynamism
less responsiveness to trends
overall takeaway
timing
outsourcing
vertical integration
align attributes of transaction
governance mode
strong incentives for performance
Why
Vertical Integration terminology
forward
closer to customer
backward
closer to raw materials
Motivation for outsourcing
resources and capabilities
not have quality to handle activity
kind of reliance on another firm due to capabilities can self-reinforcing
learn from their outsourcing to develop their own capabilities and stop outsourcing
ability to aggregate demand
partner firm maybe better able to build scale and demand
upstream and downstream of vertical
upstream (made product)
downstream (distribution and retail)
responsive to market and technology trends
focus on narrow specific
Motivation for vertical integrating
market power
entry barriers
control key resource
downstream or upstream price maintenance
control over price it want to change
improving quality and cost
planning, coordinating ,control
control over the operation of platform
investment in specialized
specific investors might call a hold-up problem
[1] Corporate strategy
definition
the pursuit of competitive advantage through
the configuration and coordination of
company's multi-business activities
corporate scope
vertical integration
the industry value chain
diversification
products and services
geographic scope
regional national and global markets
Group member
國企三 郭儀中 Eva
國企三 姜依伶 Elain
國企三 吳育修 Amy
國企三 葉冬婷 Teresa
國企三 王煒絢 Sharon
國企三 羅修銓 Chuan
when to vertically integrate
transaction cost economics
theory of the firm
strong statistical validation
moral hazard
abuse private information
ex-post
Information Asymmetry
adverse selection
ex-ante