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
corporate scope = the overall footprint of the company.
divided into 3 dimensions
Industry value chain
Products and services
Geographic scope
horizontal integration
vertical integration
regional, national, global markets
what it is going to be? (diversification)
what stages of value chain?
what in the world to compete?
example:
PepsiCo
CocaCola
example:
General Electric
Vertical Scope
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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
Part 1
Outsourcing
Motivation for outsourcing
Resources and capabilities
Ability to aggregate demand
Motivation for Vertical Integrating
Market power
Entry barriers
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
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
for ex : information technology
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Part 2
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
Transaction cost economics(TCE)
Comparative Organizational Analysis
(the optimal scope of the firm)
Theory about the scope of the firm
Deere
having to do with agriculture
mining
lean on Hitachi as a partner
two questions
vertical integration
horizontal scope
Whether the same company shouldbe integrated across a set of businesses？
Which businesses a company should operate in？
Deal with both the
PepsiCo and Coca-Cola
Transaction costs
(associated with
economic exchange)
Administrative costs
(associated with
organizing within a hierarchy)
negotiating, monitoring,
and enforcing contracts
(market exchanges/outsourcing)
Vertically Integrated
working with independent bottler
stand-alone model
bureaucracy, weak incentives, sclerotic
(vertical integration)
easy to get everyone working in the same direction
becomes more challenging when you're part of a larger enterprise like a university
incentivize and knows well their local markets and business condition
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?
may hustle more and better at penetrating market
has lower routine operating cost
Mode
comparative organizational analysis
bigger population
friends from different backgrounds,different cultures,different majors
get more exposed to other fields
has more control on overall quality of service
can ensure that new technology or marketing investments are made
horizontal scope
the firm's footprint across a set of different,not the same business
implications for diversification
Way to achieve the objective
by the Market(Buy)
by Vertical integration(Make)
better-off test
ownership test
provide better adaptation
hierarchies or doing things inside a firm
provides better coordination
The importance of resource-based synergies
relatedness in diversification
similar implications for how companies manage related units when diversify or not
Example
make Waymo as independent subsidiaries
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
3 Key transaction costs
the best approach depends largely on the nature of synergies
3 Key administrative costs
Moral Hazard
Hold-up Problem
Adverse Selection
Information asymmetries
Information asymmetries
EX.
ante
Market for Lemons: used-car market
resource scalling may require more coordination and operating control of units
"Abuse" of the benefit
Transaction partner has private information about the performance that is not measurable or contracted for.
Uncertainty of environment & Opportunism
EX.
Asset specificity
exposing the company's core knowledge or
technology to the supplier/buyer
resource redeployment may allow more autonomy and financial control of units
Principal-Agent problem
Lack of dynamism
Weak Incentives
expectation of continuity
make Alphabet as parent company
give internal units more slack on performance
Owner-manager / Manager-subordinate
unable to selectively intervene
similarly Amazon may need lots of coordination across their different businesses lines
coordination of shared resources requires more obtrusive operational control of the units
resources were cash and each business will be managed almost independently by focusing mainly on financial performance
Conclusion
the manager could have significant autonomy to achieve the desired performance
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,
one resources that company continuously develop and redeploy is managerial talent
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
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.
value
a set of management tools
transfer of resources between a company's businesses
emphasized the redeployment of cash from businesses that had too much
With the larger bubbles representing larger businesses by revenue.
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%
first mode
second mode
operate as one company
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.
investors felt
that the separate companies would be able to do much better
which mode is better?
depends on what market you are going to get in