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[CS-1] Corporate Scope- Horizontal Diversification, G7 (陳譽方 Sophie, 陳湘琳…
[CS-1] Corporate Scope- Horizontal Diversification
Horizonal scope
Diversification
Motivation
Market power
By reducing competition from related products.
Synergies
Economies of scope
Scale common resources: Brand, IT systems, etc
Redeploy slake sources: Supply chain, distribution, talent, etc
Reduce risks
Pursue profitable opportunities
Comparative organizational analysis
Consider market arrangement: alliance, long-term contract licensing as alternative to integration
Implications
The better-off test
Does the combination of businesses create value?
Do synergies exist?
The ownership test
The outcome of comparative organizational analysis.
To access the value from the presumed synergies, does the same company need to own the businesses?
Relatedness
In the underlying firm specific resources
Resources
Be critical for synergies
Highly firm-specific and not available in the market.
Resources are either scaled or redeployed across businesses.
Diversification discount
The value of the diversified firm is less than the sum of its SBUs
Gecko's strategy is to increase its value by taking over and breaking up conglomerates.
BCG matrix
Types
Star
Neutral
Hold or invest for growth
Dog
Harvest／divest
Negative or Neutral
Question Mark
Negative
Increase market share or harvest／divest
Cash Cow
Hold
High and Stable
Example：ITT
Pros and Cons
Advantage
ITT were able to transfer resources between their many businesses, which was not available to specialized non conglomerate companies.
Disadvantage
conglomerates like ITT began to find that general management knowledge was not enough to manage businesses well.
Early stage
Selling both telecom equipment and telecom services at first.
Starting in the 1950s, ITT undertook an aggressive strategy of diversification into many unrelated businesses.
Hartford was a major ITT insurance company, into hotels with the Sheraton group. For a time ITT owned Evans rental car.
Late stage
ITT began to sell off businesses starting in the early 1980s, after Geneen stepped down as CEO and chairman.
By the late 1990s, the company had even sold off its insurance and hotel businesses.
In 2011, the company was again split into three parts.
A defense business called Exelis.
The remaining ITT business that was mainly in the engineered parts.
A water business called Xylem.
Central idea
a corporation needs to be active in different businesses, that are at various stages of their industry life-cycle.
1.Which businesses a company should operate in?
Exit current businesses and enter into other more profitable ones
Start new businesses and diverse them
2.Whether the same company
should be integrated across a set of businesses?
The modern multi-specialty university-Illinois at Urbana–Champaign
Business Schools that are independent stand-alone entities
Interdisciplinary learning and diverse perspectives
Get lost in a large pool of students
The opportunity to connect with faculty and college across the campus
Get everyone working in the same direction
The firm's footprint across a set of different, not the same business, that is the firm's diversification
Managing Integrated Firms
Vertically integration
outsource bottling
if not
Coca-Cola, maintain some of market-like features
PepsiCo,ensure to have more control overall quality
valuable to have
may hustle more, penetrate better, and lower operation cost
require annual marketing
go through mandatory trainings
has implication on management of outsource operation or their vertically integrated business
Horizontally diversification
Google and Amazon have independent units
to develop online grocery business
want to operate quasi independently
ensure to have incentives to make a great organic goceries
vary from more autonomous to more coordinated
more autonomous seeks to replicate market-like incentives
more coordination seeks to reduce transaction costs
delink the benefit sought through integration from governace mode used to achieve those benefits
conduct dispassionate, comparative and organizational analysis
Conclusion
focus on the choices of vertical integration and diversification
look at alternatives and compare pros and cons of these alternatives
market-like organization generally provides more autonomy
within hierarchies, more coordination and better control
diversifications are related in resources
vertical scope
Transaction Cost Economics (TCE)
a theory about the scope of the firm
Oliver Williamson (Nobel Prize 2009)
administrative costs
associated with organizing within a hierarchy
weak incentives
sclerotic
bureaucracy
transaction costs and economic exchanges
monitoring
enforcing contracts
negotiating
comparative organizational analysis
What is the objective of the integration?
What market power, or efficiencies, or control, or coordination is being sought?
core ideas
What organizational form best achieves the objective?
outsourcing
vertical integration
For any objective, there is a way to achieve it by vertical integration (make) or by the market (buy).
All organizational forms are flawed.
examine the advantages and disadvantages
William's main mantra
Markets provide better adaption, while hierarchies (firms) provide better coordination.
three key transaction costs
adverse selection
information asymmetries
George Akerlof (Nobel 2001)
Lemons
moral hazard
abuse of a benefit
hold up problem
Williamson
asset specificity
uncertainty and opportunism
three key administrative costs
principal-agent problem
lack of dynamism
weak incentives
which parts of the value chain does the company operate in?
direction
forward integration=closer to the customer
ex: business in final production and decides to get down into marketing and sales
backward integration=raw materials come in(closer to the end)
ex: company decides to integrate into making components or raw material production
should the same company be integrated across specific stages of the value chain?
outsourcing
when business don't have the quality of the needed resources or capabilities to handle the activity
companies often outsource primary material supplies or downstream activities
What is corporate scope?
Horizontal scope
What range of products and services?
GE ( general Electric )
Become a very different company after changing their products and services system
No longer in media business and in plastic
GE became a big healthcare business because they changed their strategic action
Geographic scope
Where in the world to compete?
Vertical scope
What stages of value chain (or network)?
Pepsi acquired bottlers that is changing their vertical scope (2009) and Coca Cola also did in 2010
G7
陳譽方 Sophie
陳湘琳 Michelle
米蘭 Thel Hsu
米雪 Thonn
曾姿綺 Vicky
丁莞家 Ashley
王素玲 Ling
best approach depends on the nature of synergies
from scaling or sharing
the change in any particular unit
Sharing technology platform
the interests are not undermined
need more ongoing coordination
from deploying or transferring resources
suggested by BCG matrix
more autonomy
Do it by themselves
It wouldn't have resources be more specific for only the business students
Business Strategy
Advantages
Disadvantages
For Amazon
Coca-Cola & PepsiCo
the reason to diversify into groceries by acquiring whole food market
It became a conglomerate.
TCE can be applied to vertical scope
