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SMMC G4 [CS-1] Corporate Scope, G4 (Mandy, Wendy, Thalia, Allison, Charlie…
SMMC G4 [CS-1] Corporate Scope
Vertical Scope
Vertical integration
Value chain ( value network )
Value chain can change over time.
To company, if another part of the value chain might be more profitable than the one they are in, they will change.
Forward integration or backward integration
Forward integration
Close to the customer
Currently in final production and decides to get into distribution and logistics or even further down into marketing and sales itself
Backward integration
Close to the end
Deciding to integrate into intermediate stages like making components or get into supplier logistics, or even get into raw material production
Why might it makes sense for companies to integrate?
Market power
Creating entry barriers by controlling a key resource
Improve quality or cost
More control over the operations of the platform
Investments in specialized assets
Resolve a hold-up problem that if the buyer need
investments from the supplier
Outsourcing
TCE theory
What is TCE theory?
Transaction Cost Economics is a theory about the scope of the firm
Applications
Transaction cost
Administration cost
Transaction cost
Economic exchanges
Enforcing contracts
Monitoring
Negotiating
Problems
Moral hazard
The transaction partner has private information about its performance
Contracted for which leads to abuse
Information asymmetries
One party may know something that the other doesn't, which then affects how it transacts
Opportunism
After the parties enter into a transaction, something changes. So that one party gains an upper hand
Administration cost
Organization
Sclerotic response to changing environments
Weak incentives
Hierarchy bureaucracy
Problems
Principle-Agent problem
Owner-manager or manager- subordinate performance is unobservable
The reasons of outsourcing
Learn from outsourcing partners to develop their own capabilities in the long run
The partner firm is better at aggregating demand and building scale
Horizontal Scope
BCG Matrix
Main Idea
A corporation needs to be active in different business
Emphasize the redeployment of cash,
Graphed
Vertical axis : market or industry attractiveness
Horizontal axis : company's strength
Goals
To create a portfolio of SBUs
well-balanced between current and future success
to balance resource availability and resource needs
SBUs Four Category
Stars
Fast-growing markets and strong market share
The future of the company which it should be investing in
Cash Cow
Businesses with strong presence in slow growing markets
Unnecessary to invest
Dogs
Should be divested to raise cash
Business that are neither in growing industries, nor an area of strength for the company
Question Mark
Businesses with weak presence in fast-growing markets
Choose to invest or divest
Example : ITT
Starting in the 1950s under CEO Harold Geneen
Took an aggressive strategy of diversification into many unrelated businesses
Geneen's motto : All these businesses were the same
By analyzing the financials, you could manage any business
1980s
Began to sell off businesses
Geneen stepped down as CEO and chairman
International telephone and telegraph
(Selling both telecom equipment and telecom services)
1990s
Sold off its insurance and hotel businesses
2011
ITT breakup
a water business Xylem, a defense business Exelis and the main engineered parts of ITT
ITT stock zoomed up almost 20%
ITT using financial markets for investing surplus cash, or raising cash as needed
The separate companies would be able to do much better by focusing on the respective businesses
Horizontal scope terminilogy
Diversification
Related (and unrelated) diversification
view historical lens
1960-1970 conglomerates were quite common in the United States
1980 The heyday of conglomerates came to an end
the firm's footprint across a set of different, not the same business
Horizontal mergers
Merging with another company in the same industry
increasing the size of the company in the same business.
Diversification and Performance
Unrelated diversification associated with lower performance
Dominant business firms are diversified firms with revenues come from single dominant business
Diversification discount implies that the value of the combined business is lower than the sum of its parts
Motivations
Synergies
Scale common resources
Develop slack resources
Reduce risk
Market power
Pursue profitable opportunities
Two key test
Better off test
Does the combination of business create value?
Ownership test
To access the value, does the same company need to own the business?
Example
Yum brands
Entered related businesses
Increase their market power
Uber
Redeploy its fleet of cars and drivers to its food delivery business
Reduce cost
Managing Integrated Firms
Broad playbook
Dealing the benefits sought
Conduct a dispassionate comparative organizational
analysis
Features
Have independent bottlers
Incentivized
Inherently
Hustle more and
penetrate the market better
Lower routine operating costs more effectively
Recognizing the issues how companies manage their
outsourced operations
Diversification
Managed with some degree of autonomy
More autonomous to more coordinated
Seek to replicate market
Approach depends on nature of synergies
Coordination of shared resources
requires more obtrusive operational control of the units
May allow more autonomy units and financial controls
being used to manage them
A spectrum of organizational modes
Vertical integration
Diversification
Corporate strategy
Definition
The pursuit of competitive advantage through the configuration and coordination of a company's multi-business activities
Corporate scope
Overall footprints of company
What businesses or activities the company is actually operating in?
Three dimension
Vertical Integration
Industry value chain
Horizontal Integration (Diversification)
Products and services
All kinds of markets
Geographic scope
G4
Mandy
Wendy
Thalia
Allison
Charlie
Emily