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SMMCG9[CS-1] Corporate Scope - Coggle Diagram
SMMC
G9
[CS-1] Corporate Scope
Group Members
Anna
Phoebe
Pete
Adiyasa Gao
Fion
Levi
Jerry
Introduction
Corporate Scope
Vertical
Transaction Cost Economics / TCE
Transaction Costs
Associated with economic exchanges
Market Exchanges
3 Key Transaction Costs
Adverse Selection
Moral Hazard
Hold Up problem
Administrative costs
Associated with organizing within a hierarchy
Vertical integration
3 Key Administrative Costs
Weak Incentives
Principal-agent problem
Lack of Dynamism
When to vertically integrate?
No general prescription
Attributes of "the transaction" are key
Align "Governance mode" with these attributes
Corporate Scope
Three dimensions
Horizontal Scope
How many
The range of
products / services
Diversification
Geographic Scope
Where
Regional
→ Local Market
National
→ Market of a country
Global
→ International Market
Vertical Scope
The stage of the value chain / network
Horizontal Scope
Horizontal Scope Part 2
BCG Matrix
Horizontal Axis
Market share
Company's strength
Vertical Axis
Market/ industry attractiveness
Market growth
Strategic Business Units (SBUs)
Create a portfolio of SBUs
well-balanced
Resource availability
Resource needs
BCG Matrix Emphasis
The cash deployment
Four Types of SBUs
Stars :star:
Fast-growing markets and strong market share
Future of the company which should be invested
Question Marks :question:
Fast-growing market
choice
Invest and strengthen position by investing more cash
Give up and divest the business
Dogs
Neither in growing industries nor an area of strength for the company
Divested to raise cash
Cash Cows
Less need to invest
A strong presence but in markets that aren't growing as quickly
Yesterday stars
International Telephone and Telegraph
Telecom equipment and telecom services
1950s
An aggressive strategy of diversification into many unrelated businesses
A conglomerate :explode:
General management knowledge :red_cross:
//
Specialized knowledge :check:
1980s
Sell off businesses
2011
Defense business (Exelis)
Remaining ITT (engineered parts) ":star:"
Water business (Xylem)
Comparative organization
First mode
One company → with internal cash transfers from cash cows to stars to fund their growth
Second mode
Separate companies → after the breakup, using financial markets for investing surplus cash, or raising cash as needed.
More efficient
modern financial markets
Allocating cash
Diversification Discount
Value of the combined business is lower than the sum of its parts
Example
Gordon Gekko
Take over these conglomerates and then create value by breaking them up into their component parts
Leveraged Buyouts
Financed with a lot of debt at very high interest rates
GE
Trying to figure out how it can create a diversification premium
Best performance is associated with firms that undertake related diversification
Enter related businesses to increase their market power by reducing competition from related products
Synergies
Example
Pizza Hut, Taco Bell, and KFC
Yum brands can lower costs by
→ Buying supplies in bulk
→ Developing restaurant sites together
Firms can scale common resources that can be used in multiple businesses
Example
Nike and Under Armour
→ Sell both clothes and shoes at the same time
Amazon
→ Technology platform originally created to sell books to sell a wide range of different products
Uber
→ Redeploy some of its fleet of cars and drivers to its food delivery business and possibly
→ Diversification of the firm level may serve mainly to reduce manager's risks rather
Diversification
Alternative to and be compared
Such a comparative organizational analysis would again return us to analyzing the relative advantages and disadvantages of organizing within a firm
Globalization is a form
Two Questions
Business Strategy
How to solve
Exit current businesses
Enter into other more profitable ones
Start new businesses and diverse them
A company should be horizontally diversified
:question:
Diversification example
Modern multi-specialty university
University of Illinois at Urbana–Champaign
What is the value of business schools :!:
Great synergies
The opportunity to connect with faculty and college across the campus.
3 more items...
We are more exposed to other fields and other grounds.
Different majors
Different backgrounds
Different cultures
We can talk to people in other fields with different expertise
To generate new ideas
Integrate all resources
1 more item...
We can get double major in something outside of business
The resources that we can diverted to various other activities
Downsides
They will though they are not as special as other people
Wouldn't have resources be more specific for only the business students
Diversification
Not the same business :red_cross:
A set of different footprint across
Unrelated
Related
Example：Wall Street
Greed for being good
Because of greed, it brings motivation for progress
Pursue maximum profit
The best resource is information
The most valuable commodity
Corporate strategy
The pursuit of competitive advantage
Configuration
Multi-business activities
What activities / businesses a firm operates in?
Corporate Scope
Coorporation
What is corporate strategy?
A set of business question
Try to stay profitable and value stages
Evaluation of value chain or network
Find new stages
Cut the stages not profitable
They can change over time
Motivations for vertical scope
ability to aggregate demand
Walmart
lack of resources and capabilities
Chemical industry to cosmetics industry
Responsive to market trends
Coursera and University of Illinois
Improving quality or cost
Cleaners in university
Category of corporation strategy
Horizontal
Buy other companies in same industry to gain its competitiveness
Vertical
Buy its upstream and downstream firm to gain competitiveness
Forward / Backward
Forward : close to upstream
Backward : close to downstream
Managing Integrated Firms
Dealing the benefits
Integration from the governance
Conduct a dispassionate comparative organizational
Understand their local markets and business conditions well
Diversification
The process of a business enlarging or varying its range of products or field of operation.
More coordinated approaches
Minimising risk of loss
Growth assets include investments
Get more coordination
Disadvantage
Market Risk
Too Complicated
Below Average Returns
Lack of Focus or Attention to Your Portfolio
Conclusion
Focused primarily on the vertical and horizontal
Market-like organization provides better adaptation and more autonomy
Diversification into businesses that are related in their resources
