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(Horizontal Scope (Diversification), Corporate scope, Vertical integration…
Horizontal Scope (Diversification)
Unrelated diversification
lower performance
diversification discount
the value of the diversified firm is less
than the sum of its SBU's,
leveraged buyouts
companies were financed with a
lot of debt at very high interest rates
ex：GE company
All businesses were required to become number
one or number two in their industry or they would be divested.
motivation
increase their market power
by reducing competition from related products.
synergies
(resource and capability-based)
meaning
economies of scope
from operating more than one business at the same time.
complementarities between businesses
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
top managers are often compensated in
proportion to the size of the company they manage.
grow the 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 ?
Corporate scope
Vertical integration
Comparative organizational analysis
Horizontal Scope (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
top managers are often compensated in
proportion to the size of the company they manage.
grow the 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 ?