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SMMCG4[CS-1]LN10-Corporate Strategy - Horizontal Diversification, ［SMMC…

- - - - Where in the world to compete
    - - What range of products and services
        
        GE
        
        2001.Jack Welch
        
        Diversify GE business activities
        
        129b Revenue
        
        2019.Larry Culp
        
        Focused on few core activities
        
        120b Revenue
    - - What stage is the value chain or network is the firm in
        
        Pepsi.co and Coco-cola
        
        Acquired bottlers
        
        it added another stage of activity to its business from within its value chain.
- - - - started in one part and then stop to other part
        
        find the significant sustainable competitive advantage
        
        for much more porfitable
    - - integration or backward integration
        
        vertical
        
        a value chain that's oriented from the bottom to the top
        
        horizontal
        
        many vertical businesses in different industries, side-by-side, integrating across those businesses
        
        forward integration
        
        example
        
        from production to customer services
        
        backward integration
        
        example
        
        from customer services to production
  - - - the partner firm becomes harder and harder to catch up
    - - company don't have the quality of the needed resources
      - company don't have capabilities to handle an activity
      - the partner firm maybe better able to aggregate demand and build scale
      - responsive to market and technology trends
    - - learn from their outsourcing partners to develop their own capabilities
  - - - improving quality and cost
      - market power
        
        control key resources
        
        create entry barriers
        
        downstream or upstream price maintenance
      - planning, coordinating, control
      - investment in specialized assets
        
        if we need investments from the supplier that are specific to the buyer
        
        creates hold-up problem
- - - - independent stand-aline
        
        adventage
        
        easy to get everyone working in the same direction
        
        disadvantage
        
        that becomes more challenging when you're part of a larger enterprise like a university, as you know faculty will often be asked to engage in other activities for the good of the campus
      - connected or located with the larger university
        
        adventage
        
        the opportunity to connect with faculty and college across the campus.
        
        It's interdisciplinary learning, and diverse perspectives that come with all the classes and projects
        
        disadvantage
        
        you can get lost in a large pool of students
- - - - We've looked at have implications that extend beyond the simple question
  - - - Understand their local markets and business conditions well.
      - Penetrate the market better
      - Lower routine operating cost
    - - Ensure that PepsiCo has more control over the overall quality of service that retailers and consumers receive from bottlers.
      - Ensure that new technology or marketing Investments
        
        if the company chooses to outsource bottling
        
        Require that all customer-facing personnel of the bottler go through mandatory training programs
        
        Require some level of annual marketing investment
        
        An affect the vertical integration decision also has implications for how companies manage their outsourced operations
  - - - Example
        
        Google
        
        Parent company：Alphabet
        
        Independent subsidary
        
        Ex.Waymon unit
        
        Amazon
        
        Acquiring Whole Foods Market is to develop an online grocery business.
        
        A integration of Amazon's IT systems with that of Whole Foods is a major priority.
        
        Allowing Whole Foods to operate quasi independently in other areas
        
        Ensuring that its managers have the right incentives to make it a great organic grocery store.
        
        Empasize
        
        3 more items...
  - - - Examples
        
        Considering the sharing of a brand across multiple units.
        
        Any changes need to be coordinated with all the other units
        
        Sharing a technology platform like Amazon's
        
        Amazon's different business lines if the platform needs to be upgraded at any given point.
    - - A coordination of shared resources requires more obtrusive operational control of the units in order to realize the associated synergies in diversified firms.
      - If the synergies are from resource deployment or transferring resources, it may allow for more autonomy of units and only financial controls being used to manage them.
        
        Suggested by the BCG matrix
        
        Resource being transferred was cash.
        
        Each business would be managed quasi independently by focusing mainly on its financial performance.
        
        Managers of the unit would propose plans and targets
        
        Achieving the performance
        
        Having significant autonomy
        
        What make it possible?
        
        The energy is generated by resource transfers don't require active real-time management to realize the synergies.
        
        Simply paying attention to the resources
        and treating them as in needed.
        
        GE
        
        1 more item...
- - - - a corporation needs to be active in different businesses, that are at various stages of their industry life-cycle.
    - - based on accounting and financial analysis
        
        manage businesses professionally
      - what we will focus on now
        
        emphasize the redeployment of cash
    - - vertical axis
        
        market growth
        
        market or industry attractiveness
      - horizontal axis
        
        market share/relative market share
        
        company's strength
    - - well-balanced between current and future success, and between resource availability and resource needs.
    - - business units or SBUs of a company
        
        stars
        
        fast-growing markets & strong market share
        
        cash is put into these SBUs
        
        Cash cows
        
        yesterday stars
        
        less need to invest in & be yielding excess cash
        
        company strong position & cash can be redeployed elsewhere
        
        the idea with the BCG matrix is to either divest businesses or invest in fast-growing ones in order to build strong positions in them.
        
        Dogs
        
        neither in growing industries nor an area of strength for the company
        
        divested to raise cash
        
        question marks
        
        fast-growing markets
        
        make a choice
        
        invest?
  - - - insurance company
      - hotels with the Sheraton group
        
        They found general management knowledge was not enough to manage businesses well.They needed more specialized knowledge.
      - training Services
      - car rentals
    - - Geneen stepped down as CEO and chairman
      - 1990s,sold off insurance and hotel businesses
    - - Xylem
        
        a water business
        
        cash cows
        
        The stock market reaction to the news that ITT were splitting up in 2011.This is real money we're talking about. It created a few billion dollars of wealth here.
      - Exelis
        
        a defense business
      - ITT
        
        engineered parts
        
        a star SBU
    - - two modes
        
        internal cash transfers from cash cows to stars
        
        ITT's businesses operate as separate companies
        
        using financial markets for investing surplus cash, or raising cash as needed.
        
        which one is more efficient, and why?
    - - pre 2011 ITT
        
        adding inefficiencies, and suppressing the value
      - after 2011
        
        the company announced the split
        
        It would be able to do much better by focusing on their respective businesses and therefore bid up the company's stock price.
- - - - "All organizational forms are flawed."
        Examine the relative (dis)advantages
  - - - can be applied to vertical integration/the horizontal scope
        
        deal with
        
        economic exchanges
        
        administrative costs
        
        cost of transactions
  - - - information asymmetries
      - Market for Lemons paper
        
        explains why transactions in the used car market are problematic
    - - make market transactions costly
      - private information about its performance that is not measurable
      - contracted for which leads to abuse
      - arising from governments being willing to bail out banks
    - - asset specificity
      - uncertainty and opportunity
- - - - the value of the diversified firm is less than the sum of its SBU's
      - Taking over and breaking up conglomerates with a diversification discount
      - All businesses were required to become number one or number two in their industry or they would be divested.
    - - Increase their market power
        
        Reducing competiton
      - Synergies
        
        Scale common resources
        
        Develop slack resources in one business
        
        Redeploy these resources to other businesses.
      - Reduce risk or grow the size of firm
      - Pursue profitable opportunities
        
        If these opportunities have no relation with the firm's other businesses
        
        it may be optimal to spin out these new businesses at the earliest chance
  - - - Alliance
      - Long-term contract
        
        Plausible alternative to diversification
      - Licensing
    - - Firm & Markets
      - Advantage & Disadventages
  - - - Does the combination of businesses create value(synergies exist)?
    - - To access the value from the presume synergies, does the same company need to own the businesses?
  - - - Relatedness in diversification implies relatedness in the underlying firm-specific resources
      - Diversification may be better than market alternatives
        
        Synergies arise out of resources that are highly firm-specific and not available in the market.