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Corporate Scope, ex ante: based on forcasts ex post: based of…
Corporate Scope
Horizontal Scope
BREAKING UP COLONGMERATES
Diversification discount: Value of a diversified firm is less than its SBUs separately
Gecko's strategy: Create value by taking over and breaking up
conglomerates with a diversification discount
GE strategy
got rid of most staff and corporate headquarters
brought very strong focus and incentives to each SBU in GE's portfolio
diversification
motivation to diversification
synergies
scale common resource
redeploy slack resource
reduce risk
market power
pursue profitable opportunity
example
80s the farm crisis in the US.
get out of our very cyclical market
how
partnership
globalization
competitive organizational analysis
utility: can be use to multi firm
testing method
the better off test
the ownership test
resource and relatedness
resource
link between resources and the idea of relatedness in diversification.
relatedness
diversification implies relatedness in the underlying firm specific resources
Advantage
interdisciplinary learning and diverse persepective
Connect with facultty and college
Generate new ideas
learning more another major
Popullation student fom different backgroung culture etc
Disadvantage
lost in large pool of student
Diverted various other acitivies
Wouldn't have resources be more specific
BGC growth-share matrix
Corportaion need to be active in different business
Various stage of their industry life cycle
Graphed on the horizontal axis is the market share
sometime graphed as relative market share , market share of the focal company relative to its largest competitor
Two axis interpreted as market or industruy attractiveness
Key resource of value
set of management tools
based primarly in accounting and financial analysis
Frameworks form strategy like the BCG matrix
Compatative Organization
Two model for ITT businesses to operate
One company with internal cassh transfer as seperate companies using financial markets for investing and raising cash
Financial markets allocate cash more efficiently diversified firms have bureacartic inefficienies
Vertical Scope
Vertical Scope & Vertical Integration
business strategy questions
Which parts of the value chain or value network should a company operate in?
Should the same company be integrated across of the specific stages or network?
Vertical Integration Terminology
Vertical and horizontal integration
Forward and backward integration
At the very front of the
Value Chain
is the customer, and the closer you get to the customer, that's what we think of as
forward integration.
At the back end of the
Value Chain
, where the raw materials come in, the closer we get to that end, that's what we think of as
backward integration.
example of vertical integration choices
Should you build the system yourself that supports your business internally?
Or should you outsource this to someone else?
Motivations for outsourcing
Lack of resources and capabilities
Bigger scale of the ability to aggregate demand
Responsive to market and technology trends
Motivations for vertical integrating
Market power
Entry barriers
Downstream or upstream price maintenance
Improving quality and cost
Planning, coordinating, control
Investments in specialized assets
Oliver Williamson Theory about Vertical Integration
Transaction Cost Economics, or TCE (theory of the firm / Vertical Integration)
definition
Theory about the scope of the firm.
optimal scope of the firm
comparative organizational analysis.
De-link two Problems:
What is the purpose? What market forces, resources, efficiency, etc. are you looking for?
What form of organization (outsourcing or vertical integration) would best achieve the objectives
objectives
To make or to buy
core ideas
1 more item...
Administrative costs
Associated with organizing within a hierarchy
Bureaucracy, weak incentives, Sclerotic
3 KEY ADMINISTRATIVE COSTS
Weak incentives : Continuity expectations, Zone of indifference (fiat)
Principal-agent problems : Owner-manager, or manager-subordinates, performance is unobservable
Lack of dynamism : Impossible to "intervene selectively"
Transaction costs
Associated with economy exchanges
Negotiating, monitoring, enforcing contracts
3 KEY TRANSACTION COSTS
Selection Adverse : Information asymmetry (ex ante)
Moral hazard : Information asymmetry (ex post) “Abuse” of a benefit
Hold Up Problem (Williamson) : Asset specificity, Uncertainty and opportunism
Managing Integrated Firms
Strategy extends beyond make-buy
recognizing the issues that affect the vertical integration decision also has implications for how company manage their outsourced operations or vertically integrated businesses
Beyond diversification
Diversification approaches vary
more autonomous to more coordinated
market incentives can be replicated to a degree
approach depends on nature of synergies
resource scalling (sharing)
may require more coordination and more operating control units
resource redeployment (transferring)
may allow more autonomy and financial control of units
introduction
variety of activities or businesses company engaged in and how they managed it
dimensions of corporate scope
vertical integration
stages of industry value chain
horizontal integration
products and service
geographic scope
regional,national,global markets
ex ante: based on forcasts
ex post: based of actual results
