SMMCG1[CS-1]LN10-Corporate Strategy - Horizontal Diversification
Horizontal Scope Part 2
BCG matrix
corporate strategy framework
A corporation needs to be active in different businesses that are at various stage of their industry life-cycle.
Strategic Business Units（SBUs）
Stars
ITT case
Cash cows
Dogs
question marks
The businesses that are neither in growing industries nor an area of strength for the company
divested to raise cash
SBUs with fast-growing markets
strong market share
These businesses should be investing in future
Businesses has a strong presence
in markets that aren't growing as quickly
less need to invest in these businesses
yield excess cash due to the company strong position
cash can be redeployed elsewhere
in fast-growing markets
but where the company is yet to establish a strong presence
BCG matrix
either divest businesses
invest in fast-growing ones in order to build strong positions in them
star businesses would mature
become cash cows
aggressive strategy of diversification into many unrelated businesses
became a conglomerate
general management knowledge was not enough to manage businesses well
needed more specialized knowledge
conglomerates were not effective in creating value from unrelated businesses
separate companies
using financial markets for investing surplus cash
do much better by focusing on their respective businesses
bid up the company's stock price
transaction cost economics/theory of the firm
TCE deals
administrative costs
hierarchical command
control fashion
bureaucracy
costly
transaction costs
administrative costs
market exchanges
outsourcing
vertical integration
Costs
administrative costs
higher transaction costs
markets
firms
source
search
mundane transaction
haggling
find and reach a deal
moral hazard
information asymmetries
private information not measurable
contracted for which leads to abuse
under vertical integration context
opportunism
common situation
only service their needs
transaction hazards
exposing company's core knowledge or technology
click to edit
Managing Integrated Firms
whether or not to vertically intergrate?
PepsiCo&Coca-Cola havn't owned their bottlers
benefit from a market type arrangement working with independent bottlers
be valuable to have independent bottlers
understand their local markets and business conditions well
independent bottlers
penetrate the market better
lower routine operating cost
hustle more
comparison between vertically intergration&choose to outsource bottling
vertically intergration
choose to outsource bottling
have more control of quality in service that retailers& consumers receive from bottlers
ensure the new technology or marketing investment are made
hesitation from bottlers
because the investment are specific to PepsiCo
require their employee go through mandatory training program
require annual marketing investment directed by PepsiCo
How copany take diversification to manage their related units?
autonomy for the unit
coordinated approaches
Take Google & Amazon for instance
Amazon
create Waymo as independent subsidiaries
Major Priority
allow Whole Foods to operate quasi independently in other areas
diversify into groceries
acquire Whole Foods Market
develop an online grocery business
intergration of Amazon's IT systems with Whole Foods'
to have the right incentives to make it great
more autonomous approaches
replicate market-like incentives
reduce transaction costs through more hierarchical organization
synergies
resource scaling
resource sharing
resource deployment
transferring resource
coordination to manage the sharing of the resource
allow more autonomy of units& only financial controls being used to manage them
Vertical Scope
Main Question
Operate in which value chain?
Integrated across specific value stage?
Profitable
Attractive business
Suitable
Based on
Can change over time
sustainable competitive advantage
other framework
Five Forces analyze
Create more value
Managed across separate company
Value Chain
Supplier Logistics
Intermediate Production
Final Production
Distribution Logistics
Marketing Sales
Customer Services
Support Activities
Procurement
HR
Accounting
Financing
Information Systems
Research
Development
Forward Integration
Backward Integration
Close to Customers
Far from cusomers
Outsourcing
Don't have Quality
Don't have capability
Partner Firm
Rely on
learn from
Why integrating?
Create entry barriers
Control Key Resources
Horizontal Scope Part3
Unrelated diversification is generally associated with lower performance
Breaking up Conglomerates
A diversification discount
the value of the diversified firm is less
than the sum of its SBU's
Motivations of diversification
Gecko's Strategy
Create Value by taking over and breaking up conglomerates with a diversification discount
To increase their market power
Synergies
Complementarities between businesses or so-called economies of scope from operating more than one business at the same time.
Reduce Risks or Grow the size of the firm
scale common
resources that can be used in multiple businesses.
Develop slack resources in one business and redeploy
these resources to other businesses.
diversification at the firm level may serve mainly to reduce managers risks rather than those of shareholders
it is often argued that diversification driven by empire-building
Pursue Profitable opportunities
it may be optimal to spin out these new businesses at the earliest chance
resource and capability-based synergies
Comparative organizational analysis
an alliance, long-term contract, licensing, etc, that
might be a plausible alternative to diversification.
Implications For Horizontal Scope
Diversification must satisfy two key tests
better-off test
ownership test
does the combination of business create value?
Does the same company need to own the business?
Resources and Relatedness
relatedness in diversification implies relatedness in the underlying firm-specific resources
Horizontal Scope Part 1
Two questions
Which businesses a company should operate in?
Whether the same company should be integrated across a set of businesses?
example of diversification : If a Business School...
Be an independent stand-alone entity
Be closely connected or located with the larger university
advantage
disadvantage
advantage
disadvantage
easily get everyone working in the same direction
opportunity to connect with faculty and colleagues across the campus and learn from them
Students may feel as though they're not as special as other people and get lost in the large crowd.
receive interdisciplinary learning and diverse perspectives in classes and projects
can't have the great synergies with with faculty and college across the campus
bigger population from different backgrounds, different cultures, different majors
learn from other ideas and bring them into your teaching or your research
get more exposed to other fields and have such strong programs outside of Business
Be more possible to double major in other departments
horizontal mergers
horizontal scope
merging with another company in the exact same industry
increasing the size of the company in the same business
firm's diversification (footprint across a set of different business)
a nice way to understand diversification
View it through historical lens
example: the movie, Wall Street
member
Jim 謝融俊
Jason 簡翔軒
Oscar 胡醒嵐
Raymond 吳閎睿
Antonio 蔡承佑
Frank 魏瑋慶