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S12 (5/10): [CS-1] Corporate Scope, 11, FE72C9BA-E3DD-451E-9DB5…
S12 (5/10): [CS-1] Corporate Scope
Managing Integrated Firms
Vertically or Horizontally diversifed
delink benefits through integration from government
dispassionate, comparative and organizational analysis
For example, PepsiCo and Coca-Cola
(bottling operations)
benefit from market arrangement with independent bottlers
bottlers may hustle, penetrate market and lower routine operation cost
Features - valuable, incentivized
if choose to outsource bottling
require mandatory training programs or annual marketing investment by bottler
For example, Google and Amazon (Independent companies)
quasi independent unit - synergies with parent company
Alphabet (parent company) like Waymo - independent subsidiaries under Google
Integration of Amazon's IT System - major priority
Diversification vary from more coordinated approaches
best approach - nature of synergies through diversification
Diversification Approaches Vary
autonomous to more coordinated
resource scaling require more coordination
redeployment autonomy and financial units
suggested by BCG matrix
managed quasi by focusing on financial performance
propose plans and targets
don't require real-time management
pay attention to resources
For example, GE - talent - corporate resource and not under control of individual units
To use Williamson's description
more towards left of spectrum
more autonomy and adaptation
more towards right
more coordination and control
Vertical Scope
Which parts of the value chain should a company operate in?
Another part of the value chain might be more profitable then the one they were in
Stopping operations and refocusing on different part
A set of business strategy questions
Integration
Forward
Close to customer
Backward
Close to raw material
To outsources or vertically integrate
Motivation for outsourcing
Lack of resources and capabilities
The partner firm better able to aggregate demand and build scale
Responsive to market and technology trends
Motivation for vertical integrating
Market power
Entry barriers
Downstream or upstream price maintenance
Improving quality and cost
Planing,coordinating,control
Investment in specialized assets
Transaction cost economic
Transaction cost
Associated with economic exchange
Negotiating monitoring, and enforcing contracts
Administrative cost
Associated with organizing within a hierarchy
Bureaucracy,weak incentives,sclerotic
Three key transaction cost
Adverse selection
Moral hazard
Hold up problem
Three key administrative
Weak incentives
Principal agent problem
Lack of dynamism
Introduction: Corporate Scope
Corporate strategy
The configuration and coordination of a
company's multi-business activities
Involes decisions and actions:
The scoop of the firm
Coordinating synergies across businesses
Corporate transactions
Corporate Scoop
The "Footprint" of firm
Thee three
key dimensions of corporate scope
vertical integration
(Stages of industry value chain)
PepsiCo acquired most of its bottlers in 2009, as did Coca cola in 2010
Forward integration
Geographic Scoope
(Regional, national, global markets)
Horizontal integration
(Producs and services)
General Electric
Horizontal Scope
Diversification: University
opportunity to connect with faculty and colleagues across the campus
take those ideas and bring them into your teaching or your research.
have friends and students from different backgrounds, different cultures, and also different majors.
BCG Matrix
developed by the Boston Consulting Group for its client GE, General Electric
The central idea : a corporation needs to be active in different businesses
The strategic goal is to create a portfolio of SBUs that is well balanced between current and future success
allowed conglomerates to manage businesses professionally
ITT
Starting in the 1950s, and particularly under CEO Harold Geneen
started out as International Telephone and Telegraph
in 2011, the company was again split into three parts
A water business called Xylem
A defense business called Exelis
A engineered business called New ITT
undertook an aggressive strategy of diversification into many unrelated businesses
two modes for ITT's businesses or strategic business units to operate
one company, with internal cash transfers
from cash cows to stars to fund their growth
operate as separate companies, using financial markets
for investing surplus cash, or raising cash as needed
internal transfers of cash using the
BCG matrix approach is less efficient
financial markets may be quite efficient at allocating cash
diversified firms have bureaucratic inefficiencies
Diversification and performance
Related Diversification
The better performance
Unrelated Diversification
Diversification discount
Lower performance
Breaking up conglomerates
The first example
The movie (Wall Street)'s main character Gordon Gekko
He break up conglomerates and get rid of their headquarter's staff who are not adding much value.
The second example
GE
GE CEO, Jack Welch, he got rid of most staff and corporate headquarters in order to make his all company become number one or number two in the industry.
How can companies create value through diversification
The company can enter related business to increase their market power by reducing competition from related products.
Synergies
Firms can scale common resources that can be used in multiple business.
Firms can develop slack resources in one business and redeploy these resources to other business.
Motivation of diversification
The core motivation for diversification that are generally accepted to create value for the company.
The plausible alternatives to diversification: alliances,long-term contract licensing,etc.
The example
John Deere and company
Tend to lean on Hitachi as a partner
It's nice example of highlighting that acquiring or diversifying yourself is not necessarily the only solution to achieve the same goal.
Comparative organizational analysis
we can use it to analyze the relative advantage and disadvantage of organizing within a firm.
Implication for horizontal scope
two key tests
better-off tests
Does the combination of business create value?
Ownership tests
The outcome of comparative organizational analysis,does the same company needs to own the business?
Resource and relatedness
Relatedness in diversification implies relatedness in the underlying firm-specific resource.
