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SMMCG8[CS-1]LN10-Corporate Strategy - Horizontal Diversification,…
SMMC
G8
[CS-1]LN10-Corporate Strategy - Horizontal Diversification
Managing Integrated Firms
How
First
delink the benefits sought through integration from the goverance mode
Second
conduct a dispassionate,comparative,organizational analysis
identify which makes sense
integration
diversification
market-based alternatives
Awarness
features of the bottling operation
working with independent bottlers
incentivized to understand local markets & business conditions
more effectively
being more vertically integrated
more control over the overall quality of service
will ensure that new technology or marketing investment are made
Synergies
Quasi independent unit
Type
resource scaling or sharing
need more active ongoing coordination to manage
E.g.
Amazon's different business lines
requires more obtrusive operational control of the units
to realize the associated synergies in diversified firms
resource deployment or transferring
more autonomy of units
only financial controls being used to manage them
E.g.
Amazon & Whole Food Market
diversify into groceries
develop an online grocery business
Approach
autonomous
replicate market-like incentives
coordinated
more hierarchical organization
reduce transaction costs
In practice
there exists a range of possibilities from full integration at one end to
pure market modes at the other
Vertical Scope
[ 1 ]
Companies need to know which parts of the value chain should they operate in.
Companies need to know whether the same company should be integrated across specific value stages.
vertical integration
Companies need to think about whether an activity is part of the value creation process for the business.
choice
vertical integrating
market power
the possibility of creating
entry barriers
by controlling a key resource
e.g.
The University of Illinois might reduce the extent of competition in the online educational space by owning a popular online platform.
downstream or upstream price maintenance
improve quality or cost
planning, coordinating, or control
investments in specialized assets
e.g.
hold-up problem
outsourcing
Companies don't have the quality of the needed
resources or capabilities
to handle an activity.
e.g.
The University of Illinois contracts with Coursera
The partner firm may be better able to
aggregate demand
and build scale.
e.g.
upstream
companies often outsource primary material supplies
downstream
distribution and retail
Responsive to market and technology trends
focus on a narrow specific activity
value chain
front end
the closer companies get to the customer
forward integration
back end
the closer companies get to the raw materials
backward integration
[ 2 ]
vertically integrate
(transaction cost economics
/theory of the firm)
strong statistical validation
Example. TCE
deals with both the cost of transactions, economic exchanges
administrative costs, which are associated with organizing activities in a more hierarchical command and control fashion
hierarchies can be costly, involving much administrative costs
But there may be some overlaps in these costs, depending on the exact way in which outsourcing, or vertical integration is done
Company have an objective
Adopt
market essentially buying it
vertical integration making it
compare relative advantages
and disadvantages
using markets, or outsourcing
provides better adaptation
doing things inside a firm provides
better coordination
understand where
these costs come from
search costs
haggling costs
The cost rises due to
information asymmetries
strategic costs
Example. car market
sellers of used cars know
more about the car
than the buyer
more likely that the
owners of bad cars
make buyers more
suspicious and less willing
to pay more for a used car
companies have to step in to offer certified pre- owned cars.
How to solve?
one party may know something that the other doesn't, which then affects how it transacts
moral hazard
transaction partner has private information about its performance that is not measurable, or contracted for which leads to abuse
Example. total sales
after the parties enter into a transaction, something changes
one party gains an upper hand, and can therefore engage in what Williamson calls opportunism
opportunism:self-interest seeking with guile
party has to only wait for the next opportunity to change the terms of the contract it originally entered into
holdup problem
How to slove?
Build up long-run consequences and reputational effects
exposing your company's core knowledge, or technology to your supplier, or buyer after some time
internal unit
Introduction
an internal unit will generally have to comply with
often governed by fiat
more slack on performance, which means that their incentives are less strong
Problem
principal-agent problem
Conclusion
no general prescription that outsourcing, or vertical integration is always better
the important thing is to align the attributes of their transaction with the governance mode vertical integration or outsourcing that is appropriate for these attributes
Horizontal Scope
[ 1 ]
Question
Whether a firm should be horizontally diversified?
Example: modern multi-specialty university
University of Illinois at Urbana–Champaign
having the Gies College of Business be part of a larger university
Advantages
opportunity to connect with faculty and college across the campus
Abundant resources
3 more items...
make friends from different backgrounds, different cultures, and also different majors
Disadvantages
not a clarity of focus
1 more item...
get lost in a large pool of students
1 more item...
Horizontal mergers
merging with another company in the exact same industry
increasing the size of the company in the same business
Example
one automobile insurance company merging with another automobile insurance company
Firm's diversification
firm's footprint across a set of different business
related diversification
unrelated diversification
through historical lens to understand it
A brief history of conglomerates and explain the movie "Wall Street"
In the 1960s and 1970s
Conglomerates were quite common in the United States and popular in many others part of the world
In the 1980s
the end of the heyday of conglomerate
A hard charging corporate raider called Gordon Gekko buys up conglomerate and bakes them up
In one famous scene, Gekko comes in to this meeting of shareholders, and boast how much value he's created by breaking up other companies.
He talks about how the company has lost a lot of value and has made losses for many years.
So how exactly does Gekko propose to create value from this company?
[ 2 ]
BCG matrix(BCGGE)
central idea
corporation needs to be active in different businesses, that are at various stages of their industry life-cycle
be developed by the Boston Consulting Group
ITT
1950s undertake unrelated businesses
managing by the numbers
Evans rental car
Sheraton group
1980-1990sell off businesses
2011
3 more items...
Hartford
four type
stars
fast-growing markets/strong market share
These businesses are the future of the company which it should be investing in
Question marks
in fast-growing markets, but where the company is yet to establish a strong presence.
Should it invest and strengthen its position by investing more cash or give up and divest the business?
cash cow(yesterday stars)
company has a strong presence but in markets that aren't growing as quickly
Dogs
be businesses that are neither in growing industries nor an area of strength for the company
[ 3 ]
Gordon Gekko Strategy
Forcibly take over these conglomerates
Leveraged buyouts
financed with a lot of debt at very high interest rates
add to the company's balance sheet.
create value by breaking them up into their component part
by getting rid of a lot of not adding.
Implications
Two key tests
Better-off test
Does the combination of businesses create value?(do synergies exist)
Ownership test
To access the value, does the
same company need to own the businesses?
The importance of resource-based synergies
Relatedness
in diversification
The underlying firm-specific resources
Diversification may be better than market alternatives
GE
Jack Welch
GE's CEO
Got rid of most staff and cooperate headquaters
Brought very strong focus and incentives to each SBU in GE's portfolio.
Become first and second in their industry.
Avoid elimination
2008 recession exposed the risk
GE trying to create a diversified premium.
1980~1990
Be a stock market darling
Survive as a conglomerate.
Create value through diversification
Consider the different motivations.
Enter related business.
Reduce competition form related products to enhance its market power.
Synergiers
Operate multiple enterprises at the same time.
Two types
Develop slack resources in one business.
redeploy these resources to other businesses
Ex: The allocation of cash between SBUS in a
conglomerate.
Scale common resources
used in multiple business.
Expample
Pizza Hunt
Supplies in bulk or co-developing restaurants.
Conclusion
The core motivation of diversification to create value for enterprises is related to the synergy between enterprises based on resources and capabilities
In the case of diversification
Have some market types of arrangements and alliances, long-term contracts, licenses, etc.
alternative to diversification
Introduction: Corporate Scope
Definition
The pursuit of competitive advantage
The configuration and coordination of a
company's multi-business activities
Coordinating synergies across business
Corporate transactions
The scope of the firm
The overall footprint of the company
What activities in businesses is the company engaged in?
how should they be managed?
3 key dimensions
Vertical
Industry value chain
e.g.
PepsiCo
acquired most of its bottlers in 2009
Coca-Cola
did something very similar soon after in 2010
Horizontal
Products and services
e.g.
GE or General Electric
Geography
Regional national and global markets
strategic value
SBUs
BCG martrix
y-axis
market share(company's strength)
x-axis
market growth(market/industry attractiveness)
To balance..
current and future success
resource availability and resource needs
redeployment/transfer of resources
accounting/financial analysis
when the company announced the split.....
conclusion
focusing on their respective businesses and therefore bid up the company's stock price.
G8
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劉友福 Ben
彭竑愷 Joshua
陳臻慧 Sally
柯瑋婷 Jenny
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