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SMMCG1[LN-9] Corporate Strategies: Vertical Integration, Transaction cost…
SMMC
G1
[LN-9] Corporate Strategies: Vertical Integration
Taper integration
vertical integration + market exchange
input suppliers
1️⃣in-house, 2️⃣outside suppliers
Assembly and Manufacturing
Retail and Sales
ex. Pepsico & Cocacola
integrated bottling subsidiaries
GE's changing product scope
2001 (Jack Welch)
varios cross-border industries
2019 (Larry Culp)
core activities
Backward and Forward Vertical Integration
Backward (Upstream)
Definition
the ownership of controlling its products
Process
raw materials
1️⃣design
2️⃣manufacturing
ex. Amazon
online retailer
publisher
private label, Amazon Basics
Forward (Downstream)
Definition
expands by gaining control of the distribution
Process
3️⃣marketing & sales
4️⃣after-sales services & support
car wash, tissue...
gas station
ex. CPC refinery
The scope of the firm
3 dimensions
vertical integration
stages of industry value chain (categories)
ex. Disney, Nike
geographic expansion
regional, national, global markets (countries)
ex. Mcdonalds, Coca-cola
product diversification
(un)related-products (both products and countries)
ex. Disney, GE
different types of diversification
single business (>95%)
dominant business(70-90%)
related constrained/ linked (<70%)
unrelated diversification(<70%)
Value proposition canvas(V-P-C)
Value Map
Pain relievers
Products and services
Gain creators
Achieving fit
value proposition canvas, customer profile
Customer Profile
Pains
Customer jobs
Gains
identify opportunities for differentiation
Governance Choice
Arm’s length Contracts
Long-term Agreements on Supply or Distribution
Licensing or Franchising (or Turnkey Project)
Non-equity based Collaboration (or Strategic Alliance)
Equity based Collaboration (or Strategic Alliance)
Joint Venture (JV)
Merger & Acquisition (M&A)
Greenfield Venture (by recruiting)
Why vertically intregate?
Administrative mechanism
By use of employment contracts with a central (hierarchical) authority (visible hand)
Benefit of vertical integration
Technology economy
Superior Coordination
Avoid transaction costs
Extending market power
Market mechanism
By use of market contracts guided and coordinated efficiently by market price
Transition Costs economics
Asset specificity
Uncertainty
Frequency
Designing Vertical Relationships
joint Ventures
Vertical Integration
Franchising
Supplier/ customer partnerships
Long-term Contracts
Informal supplier/ customer relationships
Spot sales/ purchases
TCE ( Transaction Cost Economics.)
Asset specificity
Types of Transaction Costs
Bargaining and decision costs
reaching agreement with the parties drafting the contract
cheap
buy newspaper
expemsive
player transactions
Policing and enforcement costs
Ensure that both parties do not violate the terms of the contract
Lawyer fees
Search and information costs
meeting with agents
looking for relevant information
stock exchange
Frequency
Transaction Costs
Uncertainly
personal opportunism
The nature of firm
Ronald Coase (1937)
Using markets incurs some costs that can be eliminated by using companies.
Williamson
Total Cost Minimization
Transaction Cost
Administrative or Bureaucracy Cost
bounded rationality
Transaction cost of market
Search cost
Negotiating cost
Contracting cost
Internet
Enforcement cost
Monitoring cost
SMMC
G1
[LN-12] Strategic Alliances & Merges and Acquisitions
Strategic Alliance
What?
a cooperative relationship between firms
between potential or actual competitors
two firms have equity stakes to short-term contractual agreements
Eg.
joint research, shared production, joint marketing etc.
firms corporate can create more value and profit
Variety
short-term (pure market transactions)
long-term (pure organizational solutions)
Why?
market access
facilitate entry into a foreign market
reducing cost
share the fixed costs / associated risks of innovations
competence access
bring together complementary assets and skills which is difficult to depend by itself
increasing value
which help to establish the standards for the industry that will benefit
organizational learning
the purpose of acquiring the partner’s capabilities
Mergers and Acquisitions
Definition
Mergers
"merger" between companies
Similar scale
new stock issued
name may be one of the parents’ or a combination
original organization(parents) can be
dominant management
Acquisitions
Large companies ''acquire'' small companies
friendly or hostile
Whether consider
the target company’s willingness
M&A
advantage
obtain resources
expand
Increase production capacity
Purpose
Leveraging core competencies
Develop (or expand) potential markets
enter new market segments
acquiring is faster than building
Build long-term competitive advantage
example
TP company [L’Oréal]
L’Oréal has been building a unique portfolio of brands (Acquisitions)
37 global brands (1964~2023)
Consolidated Group revenues in billion euros
Strategic Alliance
Key elements
for Make Alliances Work
partner selection
shared vision
alliance structure
Establishing contractual safeguard
No excessive transfer of technology
credible commitments
management alliance
trust and learning
Advantages and Disadvantages
Advantages
reduce costs, risks, and uncertainties
gain access to complementary assets and capabilities
opportunities to learn from partners
possibilities to use alliances networks as real options
Disadvantages
possibilities of choosing the wrong partners
costs of negotiation and coordination
possibilities of partner opportunism
risks of helping nurture competitors
Evolution of Strategic Alliance /Network
Combating Opportunism (as well as Information Asymmetry)
Evolving from strong ties to weak ties
Divestment
the common result of
an acquisition
Objectives
Cutting the financial losses of a failed acquisition
Focus more directly on the firm’s core businesses
Providing the firm with more resources to spend on more attractive alternatives
Raising cash to help fund existing businesses
Elements
Rational decision-making
The understanding of the business you’re selling
Optimal timing
A sizable pool of potential buyers
Storytelling about the deal
Systematic approach
Clear and frequent communication
Administrative costs of the firm
Technology
Management
Flexibility and speed of response
Intermediate Goods and Components
contractual alliances
Equity-based alliances
Specialized economic activities of firms
Transaction freedom
