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SMMCG1[CS-1] Corporate Scope, 🏢 ITT- CEO Harold Geneen(1950s), forward…
SMMC
G1
[CS-1] Corporate Scope
Introduction
WHAT
coorporate strategy
the pursuit of competitive advantage
configuration, coordination
HOW
operating in
scope(footprint)
geographic
regional, national, global markets
horizontal
products and services
General Electric (GE)
2001(Jack Welch)
various cross-border industries
2019(Larry Culp)
1 more item...
vertical
stages of industry value chain
definition
Pepsi vs Cocacola
Pepsico acquired bottlers in 2009
vertical integration
as did cocacola in 2010
3 dimensions
Horizontal Scope
Diversification and Performance
Single Business Firms
Dominent Business Firms
Related Diversified Firms
diversification discount
(in the US)
Unrelated Diversified Firms
Diversification Discount
value of a diversified firm is less than its SBUs separately
Gekko's Strategy
create value by taking over and breaking up conglomerates with a diversification discount
Diversification
increase market power
synergies (essentially economics of scope)
scale common resources
brands, IT systems, etc.
redeploy slack resources
supply chain, distribution, etc.
reduce risks / grow the size of the firm
pursue profitable opportunities
Williamsonian -
Comparative Organizationl Analysis
consider
market arrangement
as alternatives to integration
Implications
Diversification safety two keys
The better-off test
does combination create value?
The ownership test
To access this value, does same company need to own the business?
Resources and Relatedness
Resources
often critical for synergygies
If firm-specific
resources may be scaled or redeployed across business
relatedness in diversification implies relatedness in the underlying resources
Vertical Scope
what is the objective of integration?
market power
resources
efficiencies
achieve it by
by vertical integration (make)
by the market (buy)
three key transaction costs
adverse selection
"lemons problem"
second hand car's information asymmetries
moral hazard
"abuse" of a benefit
information asymmetries
hold up problem
uncertainty and opportunism
asset specificity
three key administrative costs
weak incentives
principal-agent problem
lack of dynamism
Horizontal scope
BCG Matrix
Relative market share(B)
Market growth rate(A)
Quistion Marks
High A+Low B
Has the potential to bring considerable revenue to the company
make a choice
divest
invest
Stars
High A+High B
company’s future leading business
invest more money
Dogs
Low A+Low B
it fails to bring significant revenue to the company
would be divested to raise cash
Cash cows
Low A+High B
company has a strong presence but in markets that aren't growing as quickly
Maintain basic expenses and would be yielding excess cash
larger bubbles representing larger businesses by revenue
Manage integrated firms
Diversification approachs
autonomous
replicate market-like incentives
The nature of synergies
resource
scaling/sharing
requires more ongoing coordination and more obtrusive operational control of the units
resource
deployment/transferring
allow more autonomy of units and financial controls
coordinated
reduce transaction costs through more hierarchical organization
Google, Amazon
Vertically integrate
PepsiCo, Coca-Cola
challenges
Independent bottlers
penetrate the market better
lower routine operating cost
strength
has more control over the overall quality of service
make new technology or marketing Investments
Vretical Scope/Vertical Integration
Vetical Scope
Dynamic nature of choises
A retail chain adjusts its product offerings in response to changing consumer preferences and market trends.
Profitability considerations
A manufacturing company shifts production to focus on high-margin products to improve overall profitability
Selecting value chain stages
A software company decides to integrate customer support
Vertical Integration
Forward Integration
Closer to the customer
Distribution, Marketing, Sales
Backward Integration
Closer to raw materials
Raw material production, Supplier logistics
Motivation
Market power
Entry barriers
Dowstream or upstream price naintenace
Improving quality,cost
Planning
Coordinating
Control
Investments in specialized assets
Motivations for outsourcing
Ability to aggregate demand (scale)
Responsive to market and technology trends
Resources and capabilities (lack of)
horizontal scope or diversification
diversification
the firm's footprint across a set of different
related
The field related to the company's own business
ex:Merger of two insurance companies
unrelated
Fields not related to the company's own business
example
comprehensive university (University of Illinoi Gies College)
minor
the movie Wall Street
buys up
create value
🏢 ITT- CEO Harold Geneen(1950s)
strategy of diversification
hotels with the Sheraton group-Starwood
training Services and car rentals
insurance company-Hartford
completely different industries
Requires
professional management skills
🏢 ITT- (1980s)
defense business - Exelis
engineered part - remaining ITT business
⭐️ star
water business - Xylem
🐄 cash cows
Why split ?
Be more efficient and create higher value
forward integration
transformations
Example
Buy
Strategic Alliances
Make
less integrated
more integrated
Better
adaptation
Better
coordination
