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Transaction Cost Economics (TCE), G2 (DICE4 Becky, DFLL3 Keely, DFLL4…
Transaction Cost Economics (TCE)
Divestment
Objectives
Cutting the financial losses of a failed acquisition
Redirecting focus on the firm’s
core
businesses
Freeing up resources to spend on more attractive alternatives
Raising cash
to help fund existing businesses
Successfully
executing a divestiture
Communicate your company’s story effectively
Review every aspect of the asset(s) to be divested
Build a
systematically
data office
Removing emotion from the decision
Selling Timing the deal right and maintaining a sizable pool of potential buyers
Motives
To concentrate its resources in markets deemed more profitable or promising by the firm
What is
Divestment
:question:
:one: The common result of an
acquisition
:two: The process by which a company sells off or disposes of a portion of its business or assets
e.g. Divesting business units, subsidiaries, non-core assets, or assets that
no longer align with the company's strategic objectives
Mergers and Acquisitions (M&A)
Why M&A :question:
Access to new expertise / technologies
Reduce consuming time and cost to develop internally
Diversification
Diversify product offerings
Enter new markets
Reduce risk
Synergy
Economies of scale
Economies of scope
Cut cost & raise efficiency
Inorganic growth
Acquire a competitor
Expand faster than organic growth
Acquire a company with complementary products / services
:star: Definition
Merger
Two relatively equal companies combine to form a new single company
Acquisition
A larger company purchases a smaller one and absorbs it into its operations
How to build a
GOOD
Strategic Alliance
Absorptive Capacity
Knowledge transfer
Prevent excess
Learning
Aware of each others' vision for the
purpose
Trust
Fair
Contract
Eliminate
opportunism
Information Asymmetry
Break selfish
A level playing field
Bar from competing
Swap valuable technologies
Cross licensing
Creditable commitent
Equity involved
TOYOTA x Panasonic
Primearth EV Energy
Strategic Alliance
Strategic alliances and networks
Three stage decision model of formation
Stage 1
Pursue cooperative interfirm relationships
Stage 2
Equity
Contract
Stage 3
Contract
5 more items...
Equity
3 more items...
Specifying the relationship:!:
Contract or equity :question:
Mergers and acquisitions
Market transactions
To cooperate or not :question:
Advantages v.s. disadvantages
Disadvantages
Possibilities of choosing the wrong partners
Costs of negotiation and coordination
Possibilities of partner opportunism
Risks of helping nurture competitors
Advantages
Gain access to complementary assets and capabilities
Opportunities to learn from partners
Reduce costs, risks and uncertainties
Possibilities to use alliances networks as real options
The reasons of forming an alliance
Market Access
Reducing barriers and risks
Entry into new markets
Cooperative relationships between firms 🤝
Achieving common business goals
Globally or regionally
Cooperative agreements
Partnerships
Formal joint ventures
Cost Reduction
Sharing fixed costs and innovation risks
Increasing efficiency
Capability Sharing
Complementary assets
Enhancing competitiveness of the firms involved
Value Creation
Jointly invest in innovation and market development
Realizing mutual benefits
Organizational Learning
Building lasting partnerships
Mutual growth :beer_mugs:
T
ransaction
C
ost
E
conomics
(TCE)
Ronald Coase (1937) - The Nature of the Firm
There are transaction costs in the market
In addition to the costs of acquiring goods and services,
there are search and information costs, discount negotiation costs,
trade secret maintenance costs, and security and law enforcement costs
Companies grow and merge to avoid transaction costs through internal arrangements and to optimize the costs of reduced compensation and misplacement
Total Cost Minimization
Transaction Cost
Administrative or Bureaucracy
(agency & influence) Cost
Transaction Cost Economics
Uncertainty: Technology or Market
Frequency
Asset Specificity: Site, physical, human assets/investments
Opportunism:
self-interest seeking with guile
Assets have a specific purpose
Cannot be transferred to another business relationship without retaining the same value
Transaction Cost
Essential to running a company
The time and expense of negotiating, writing,
and enforcing contracts of transactions
Firms take advantage of incomplete contracts to act opportunistically
Make investments specific to specific relationships
Be in a minority negotiation situation
Hold-up
e.g. Automotive industry
Physical capital and human capital are specific, and parts companies can easily become dependent on the procurement of vehicle companies
Bounded Rationality,
Asymmetric Information,
Contract Law
Decision❓
1️⃣ Make or Buy
2️⃣ Market or Hierarchy
Vertical integration
Reason
Markets bring trading risks
Enforcement Costs
Vertical integration
Reduce dependence on external markets
Reduce transaction costs
Better control product quality and supply chain risks
:two: Administrative mechanism
(Visible hand)
:check: Administrative efficiency will be greatly improved
Technology
(ICT, transportation)
Management
(Accounting, Financial Markets)
:green_cross: Reduced flexibility
Choice Costs
Negotiation Costs
Risk Costs
Search Costs
:one: Market mechanism
(Invisible hand)
How to integrate :question:
Market governance
Long-term Agreements on Supply or Distribution
Non-equity based Collaboration (or Strategic Alliance)
Licensing or Franchising (or Turnkey Project)
Arm’s length Contracts
Hierarchical governance
Equity based Collaboration (or Strategic Alliance)
Joint Venture (JV)
Merger & Acquisition (M&A)
Greenfield Venture (by recruiting)
Porter‘s value chain
How to achieve?
Acquiring or establishing their own suppliers, manufacturers, distributors, or retail locations
Obtain greater control
Reduce
long-term flexibility
Increasing the size and complexity
Capital investment
Forward integration
Owns and controls direct distribution or supply of the company's products
"Cutting out the middleman"
Backward integration
Buying or merging with another company that supplies its products
:check: Cost savings
:green_cross: Requires large sums of money
E.g. Netflix
:check: Improved efficiency
G2
DICE4 Becky
DFLL3 Keely
DFLL4 Cathy
IBS3 Lizzie
IPCM3 Vivian
DSEAS3 Dora
DFLL3 Tina
IBS3 Cyndy
:warning: Advantages must be greater than disadvantages
:fire: Creating values
Succeed by single opportunity