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CS1 – Horizontal Diversification, G5 (林奧都 - Aldo, 廖莉琪 - Angela, 陳威霖 -…
CS1 – Horizontal Diversification
Corporate Scope
corporate strategy
coordination of a company's multi-business/market activities
the way a company creates a value through the configuration
divided into 3 dimensions
Industry value chain
vertical integration
what stages of value chain?
example:
PepsiCo
CocaCola
Products and services
horizontal integration
what it is going to be? (diversification)
example:
General Electric
Geographic scope
regional, national, global markets
what in the world to compete?
corporate scope = the overall footprint of the company.
Vertical Scope
Part 1
Outsourcing
for ex : information technology
Motivation for outsourcing
Resources and capabilities
Ability to aggregate demand
Motivation for Vertical Integrating
Market power
Entry barriers
a value chain that's oriented
from the bottom to the top
Backward Integration
the raw materials come in, the closer we get to that end
decides to integrate into intermediate stages (making components, get
into supplier logistics, get into raw material production)
Forward Integration
the closer you get to the customer
for ex : decides to get into distribution and logistics, or even further down into marketing and sales itself
Part 2
Transaction cost economics(TCE)
Theory about the scope of the firm
vertical integration
horizontal scope
Deal with both the
Transaction costs
(associated with
economic exchange)
negotiating, monitoring,
and enforcing contracts
(market exchanges/outsourcing)
Administrative costs
(associated with
organizing within a hierarchy)
bureaucracy, weak incentives, sclerotic
(vertical integration)
Comparative Organizational Analysis
(the optimal scope of the firm)
de-link two questions
What is the objective of integration?
(What market power, resources,
efficiencies, etc, are being sought?)
What the optimal organizational form
(outsourcing/vertical integration)
best achieves this objective?
Way to achieve the objective
by
the Market(Buy)
provide better adaptation
by
Vertical integration(Make)
hierarchies or doing things inside a firm
provides better coordination
3 Key transaction costs
Moral Hazard
Information asymmetries
"Abuse" of the benefit
Transaction partner has private information about the performance that is not measurable or contracted for.
Hold-up Problem
Uncertainty of environment & Opportunism
EX.
Asset specificity
exposing the company's
core knowledge or
technology
to the supplier/buyer
Adverse Selection
Information asymmetries
EX.
ante
Market for Lemons:
used-car market
3 Key administrative costs
Principal-Agent problem
Owner-manager / Manager-subordinate
Lack of dynamism
unable to selectively intervene
Weak Incentives
expectation of continuity
give internal units more slack on performance
Conclusion
There is no general prescription that outsourcing or vertical
integration is always better, so the company have to align
the attributes of the transaction with the governance mode
to decide either vertical integration or outsourcing,
Horizontal Scope
Unrelated diversification
lower performance
diversification discount
the value of the diversified firm is less than the sum of its SBU's
leveraged buyouts
a lot of debt at very high interest rates
Private equity firms use a version of this approach even today
GE CEO, Jack Welch
All businesses were required to become number one or number two
would be divested
why companies may enter into diversification?
synergies
firms can scale common resources that can be used in multiple businesses
firms can develop slack resources in one business and redeploy these resources to other businesses
complementarities between businesses or so-called economies of scope from operating more than one business at the same time
Managers may also sometimes diversify to reduce risk or grow the size of the firm
shareholders are generally able to reduce risk by diversifying their asset portfolios
to reduce managers risks rather than those of shareholders
increase their market power
an alliance, long-term contract, licensing, etc, that might be a plausible alternative to diversification
Deere
having to do with agriculture
mining
lean on Hitachi as a partner
two questions
Whether the same company shouldbe integrated across a set of businesses?
Which businesses a company should operate in?
stand-alone model
easy to get everyone working in the same direction
becomes more challenging when you're part of a larger enterprise like a university
Mode
comparative organizational analysis
bigger population
friends from different backgrounds,different cultures,different majors
get more exposed to other fields
horizontal scope
the firm's footprint across a set of different,not the same business
implications for diversification
better-off test
ownership test
The importance of resource-based synergies
relatedness in diversification
Portfolio Management
BCG Matrix
at various stages of their
industry life cycle
relative market share
relative to its largest competitor
strategic business units or SBUs
well balanced between current and
future success
resource availability and resource needs.
emphasized the redeployment of cash from businesses that had too much
With the larger bubbles representing larger businesses by revenue.
value
a set of management tools
transfer of resources between a company's businesses
SBUs
questions marks
stars
cash cows,
dogs
ITT
T began looking for that general management knowledge
Was not
enough to manage businesses well
needed more specialized knowledge
management capabilities
in 2011
split into three
parts
defense business-Exelis
remaining ITT
business as Engineered Parts
water business-Xylem
but stock zoomed up almost 20%
investors felt
that the separate companies would be able to do much better
first mode
operate as one company
internal
cash transfers from cash cows to stars to fund their growth
second mode
operate as separate companies
Using financial markets for
investing surplus cash, or raising cash as needed.
which mode is better?
depends on what market you are going to get in
Managing Integrated Firms
vertically integrated or horizontally diversified has similar broad playbook
1.dealing the benefits sought through integration from the governance mode to achieve those benefits
2.conduct a dispassionate comparative organizational analysis
PepsiCo and Coca-Cola
Vertically Integrated
has more control on overall quality of service
can ensure that new technology or marketing investments are made
working with independent bottler
incentivize and knows well their local markets and business condition
may hustle more and better at penetrating market
has lower routine operating cost
similar implications for how companies manage related units when diversify or not
Example
Google
make Waymo as independent subsidiaries
make Alphabet as parent company
Amazon
acquiring Whole Foods Market to develop online grocery business
Integration of Amazon's IT system with Whole Foods is major priority
allowing Whole Foods to operate almost independently and ensure managers have the right incentives
vary diversification approaches
more autonomous
replicate market like incentives
more coordinate
reduce transaction costs through more hierarchical organization
the best approach depends largely on the nature of synergies
resource scalling may require more coordination and operating control of units
2 more items...
resource redeployment may allow more autonomy and financial control of units
3 more items...
G5
林奧都 - Aldo
廖莉琪 - Angela
陳威霖 - Willie
劉津綝 - Alice
甄㛩媄 - Yvonne
林美娜 - Hana
黃子芸 - Delia