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SMMCG10[CS-1]LN10-Corporate Strategy - Horizontal Diversification, G10…
SMMC
G10
[CS-1]LN10-Corporate Strategy - Horizontal Diversification
Transaction Cost Economic
key transaction cost
moral hazard
information asymmetries e.g. post
'' abuse'' of benefit
hold up problem
asset specificity
uncertainly and opportunism
adverse selection
information asymmetries e.g. ante
lemon problem
administrative cost
hierarchies organization within a single company
lack of dynamism
impossible to selectively intervene
principal agent problem
owner-manager
manager subordinate
weak incentives
expectation of continuity
zone of indifference
when to vertical integrate
no general prescription
attributes of ''the transaction''
align ''government mode'' with these attributes
economic exchange
cost of transaction
Managing Integrated Firms
Integration as an alternative to "market forms"
Comparative organizational analysis
Separate benefits sought from governance modes
More autonomous to more coordinated
Even market incentives can be replicated to a degree
Approach depends on nature of synergies
Resource scaling may require more coordination and more operating control of units
Resource redeployment may allow more autonomy and financial control of units
Horizontal Scope
Diversification
diversification discount
value of the diversified firm is less than the sum of its separate businesses
how to solve?
breaking up conglomerates into component parts
leveraged buyouts
- adding the debt at very high interest rates to the company's balance sheet.
motivation
synergies
economies of scope from operating in more than one business at the same time
making market power by reducing competition from related products.
reducing risk or growing the size of the firm
pursuing profitable opportunaities
diversification premium
creating value from a set of fewer and more related businesses
summarizing the diversification to be considered value creating.
the better-off test
do synergies exist?
the ownership test
do we need a hierarchy organized within a single company?
resources and relatedness
the synergies arise out of resources that are highly firm-specific and not available in the market
either scaled or redeployed across businesses in order to generate synergies and this can only be done inside a company.
The BCG Matrix
emphasize the redeployment of cash
dog
cash flow: neutral or negative
strategy:harvest/divest
low market growth and low relative market share
cash cow
low market growth and high relative market share
cash flow: high and stable
strategy:hold
star
high market growth and high relative market share
cash:neutral
strategy:Hold or invest for growth
question mark
cash flow: negative
strategy:Increase market share or harvest/divest
high market growth and low relative market share
ITT Case
"The only unforgivable sin in business is to run out of cash."
ITT's breakup
two modes for ITT's businesses or strategic business
businesses operate as separate companies, like they did after the breakup, using financial markets for investing surplus cash, or raising cash as needed
operate as one company, with internal cash transfers from cash cows to stars to fund their growth
Vertical Scope
which is related to...
which parts of value should a company operate in?
Should the same company be in integrated across specific stages of the value chain?
Motivation of Choosing....
Vertical Integration
Market power: Creating entry barriers by controlling a key resource
Investing in specialized assets in order to resolve hold up question
Planing and coordinating on their own, instead of working with others
Outsourcing
The partners maybe better able to aggregate demand
and build scale.
Trying to learn from the companies' outsourcing partners to develop their own capabilities in the long run.
Types
Backward Integration
integrating with the producing process of the last step
Forward Integration
integrating with the producing process of the next step
Cooperate Strategy
Merge
Diversification
Communication
Cooperation
Cross-domain
Opertunities
More resources
G10 members
DFLL Lucy
DSEAS Peggy
IBS Bryant
DFLL Eva
DFLL Esther
DFLL Vivian