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LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed. LO 8-2 Describe and evaluate different options firms have to organize economic activity. LO 8-3 Describe two types of vertical integration along the industry value chain: backward and forward vertical integration. LO 8-4 Identify and evaluate benefits and risks of vertical integration. LO 8-5 Describe and examine alternatives to vertical integration. LO 8-6 Describe and evaluate different types of corporate diversification. LO 8-7 Apply the core competence market matrix to derive different diversification strategies. LO 8-8 Explain when a diversification strategy creates a competitive advantage, and when it does not.
Chapter Case 8
Refocus on green economy and health care industries Sold majority stake in NBC Universal to Comcast Ecomagination: solar energy, hybrid locomotives, fuel cellsetc. Healthymagination: increase quality and access to health care
Chapter Case 8
Chapter Case 8
configuration and coordination of its multi-market activities Quest for competitive advantage when competing in multiple industries
vertical integration
What range of products and services and degrees of
EXHIBIT 8.1
LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed. LO 8-2 Describe and evaluate different options firms have to organize economic activity. LO 8-3 Describe two types of vertical integration along the industry value chain: backward and forward vertical integration. LO 8-4 Identify and evaluate benefits and risks of vertical integration. LO 8-5 Describe and examine alternatives to vertical integration. LO 8-6 Describe and evaluate different types of corporate diversification. LO 8-7 Apply the core competence market matrix to derive different diversification strategies. LO 8-8 Explain when a diversification strategy creates a competitive advantage, and when it does not.
Transaction Cost Economics and Scope of the Firm Transaction cost economics
Explains and predicts the scope of the firm "Market vs. firms" have differential costs
Transaction costs
Costs associated with economic exchanges
Either in the firm OR in the markets Ex: negotiating and enforcing contracts
Administrative costs
Costs pertaining to organizing an exchange within a
hierarchy
Information asymmetries
One party is more informed than others
Akerlof Lemons problem for used cars Receiving Noble prize in Economics
World demand for lithium-ion batteries for cars Grow from $278 million in 09 to $25 billion in 2014
Toyota wants to secure long-term supply of lithium to power its hybrid fleet
Orocobre holds exploration rights to a large salt-lake area Upfront investment to extract of lithium is very high Should Orocobre make the investment to supply Toyota? To encourage investment, Toyota took an equity position
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LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed. LO 8-2 Describe and evaluate different options firms have to organize economic activity. LO 8-3 Describe two types of vertical integration along the industry value chain: backward and forward vertical integration. LO 8-4 Identify and evaluate benefits and risks of vertical integration. LO 8-5 Describe and examine alternatives to vertical integration. LO 8-6 Describe and evaluate different types of corporate diversification. LO 8-7 Apply the core competence market matrix to derive different diversification strategies. LO 8-8 Explain when a diversification strategy creates a competitive advantage, and when it does not.
downstream
EXHIBIT 8.4
EXHIBIT 8.5
HTCs Backward and Forward Integration along the Industry Value Chain in the Smartphone Industry
LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed. LO 8-2 Describe and evaluate different options firms have to organize economic activity. LO 8-3 Describe two types of vertical integration along the industry value chain: backward and forward vertical integration. LO 8-4 Identify and evaluate benefits and risks of vertical integration. LO 8-5 Describe and examine alternatives to vertical integration. LO 8-6 Describe and evaluate different types of corporate diversification. LO 8-7 Apply the core competence market matrix to derive different diversification strategies. LO 8-8 Explain when a diversification strategy creates a competitive advantage, and when it does not.
Securing critical supplies Lowering costs (efficiency) Improving quality Facilitating scheduling and planning Facilitating investments in specialized assets
Co-located such as coal plant and electric utility Bottling machinery Mastering procedures of a particular organization
Spot Exchange
Yes
No Contract
Managerial Eco. - Rutgers University
Yes
Vertical Integration
6-13
in-store display.
Reversed a 1999 decision to sell off Pepsi bottlers Goal now is faster innovative products launched
Forward integration Enhance flexibility and improve decision making Cost saving and interdependence Coca-Cola did the same: forward integration with bottlers
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Reducing quality
Single captured customer can slow experience effects
Reducing flexibility
Slow to respond to changes in technology or demand
for supplies OR
Forward integrated but also relies on outside market firms
Strategic outsourcing
Moving value chain activities outside the firm's boundaries
Example: EDS and PeopleSoft provide HR services to many firms that choose to outsource it.
Outside suppliers could also be off-shored when they are not located in the home country
Adverse selection
Partners misrepresent skills, ability and other resources Partners provide lower quality skills and abilities than they had promised Partners exploit the transaction specific investment made by others in the alliance
Moral Hazard
Holdup
Diversification strategies:
Product diversification
Active in several different product categories Active in several different countries Active in a range of both product and countries
EXHIBIT 8.7
Environmental change toward clean energy ExxonMobil must react to the change. ExxonMobil to focus on clean energy: natural gas.
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LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed. LO 8-2 Describe and evaluate different options firms have to organize economic activity. LO 8-3 Describe two types of vertical integration along the industry value chain: backward and forward vertical integration. LO 8-4 Identify and evaluate benefits and risks of vertical integration. LO 8-5 Describe and examine alternatives to vertical integration. LO 8-6 Describe and evaluate different types of corporate diversification. LO 8-7 Apply the core competence market matrix to derive different diversification strategies. LO 8-8 Explain when a diversification strategy creates a competitive advantage, and when it does not.
Multi-point competition
R&D and new product development Developing New Competencies (Stretching) Transferring Core Competencies (Leveraging)
Utilizing
excess capacity (e.g., in distribution) Economies of Scope Leveraging Brand-Name (e.g., Haagen-Dazs to chocolate candy)
Examples:
global supply chain Infosys low-cost global delivery system
Wal-mart
EXHIBIT 8.8
Pepsi - Gatorade
Salesforce.com
BoA - NCNB
in current businesses.
Diversification
Issue #1: When there is a reduction in managerial (employment) risk, then there is upside and downside effects for stockholders:
On the upside, managers will be more willing to learn
firm-specific skills that will improve the productivity and long-run success of the company (to the benefit of stockholders).
On the downside, top-level managers may
Diversification
Issue #2: There may be no economic value to stockholders in diversification moves since stockholders are free to diversify by holding a portfolio of stocks. No one has shown that investors pay a premium for diversified firms -in fact, discounts are common.
A classic example is Kaiser Industries that was dissolved
as a holding company because its diversification apparently subtracted from its economic value.
Kaiser Industries main assets: (1) Kaiser Steel; (2) Kaiser Aluminum; and (3) Kaiser Cement were independent companies and the stock of each were publicly traded. Kaiser Industries was selling at a discount which vanished when Kaiser Industries revealed its plan to sell its holdings.
Corporate Diversification
Diversification discount
Stock price of diversified firms is less
Diversification premium
Stock price of diversified firms is greater
EXHIBIT 8.9
EXHIBIT 8.10
EXHIBIT 8.11
BCG Matrix
Corporate Diversification
Internal capital markets
Source of value creation in a diversification strategy Allows conglomerate to do a more efficient job of
allocating capital
Coordination cost
A function of number, size, and types of businesses
Influence cost
Political maneuvering by managers to influence
Bandwagon effects
Firms copying moves of industry rivals
EXHIBIT 8.12
Acquisitions
Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Too large
Ch7-3
there will be many firms bidding on the assets already in the market. Generally the discounted value of future cash flows will be impounded in the price that the acquirer pays. Thus, the acquirer is expected to make only a competitive rate of return on investment.
Oats, in late 1994, purchased Snapple Beverage Company for $1.7 billion. Many analysts calculated that Quaker Oats paid about $1 billion too much for Snapple. In 1997, Quaker Oats sold Snapple for $300 million.
Sustainable Competitive Advantage Under what scenarios can the bidder do well?
Luck
Asymmetric Information
This eliminates the competitive bidding premise implicit in the efficient market hypothesis
Specific-synergies (co-specialized assets) between
the bidder and the target. Once again this eliminates the competitive bidding premise of the efficient market hypothesis.
Take-Away Concepts
LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed. While business strategy addresses how to compete, corporate strategy addresses where to compete. Corporate strategy concerns the scope of the firm along three dimensions: (1) vertical integration (along the industry value chain); (2) horizontal integration (diversification); and (3) geographic scope (global strategy). To gain & sustain competitive advantage, any corporate strategy must support and strengthen a firms strategic position regardless of whether it is a differentiation, cost leadership, or integration strategy.
Take-Away Concepts
LO 8-2 Describe and evaluate different options firms have to organize economic activity. Transaction cost economics help managers decide what activities to do in-house (make) versus what services and products to obtain from the external market (buy). When the costs to pursue an activity in-house are less than the costs of transacting in the market (Cin-house, Cmarket), then the firm should vertically integrate. In the resource-based view of the firm, a firms boundaries are delineated by its knowledge bases and competencies. Moving from less integrated to more fully integrated forms of transacting, alternatives include: short-term contracts, strategic alliances (including long-term contracts, equity alliances, and joint ventures), and parent subsidiary relationships .
Take-Away Concepts
LO 8-3 Describe two types of vertical integration along the industry value chain: backward and forward vertical integration. Vertical integration denotes a firms value addedwhat percentage of a firms sales is generated by the firm within its boundaries . Industry value chains (vertical value chains) depict the transformation of raw materials into finished goods and services. Each stage typically represents a distinct industry in which a number of different firms are competing .
Backward vertical integration involves moving ownership of activities upstream nearer to the originating (inputs) point of the industry value chain .
Forward vertical integration involves moving ownership of activities closer to the end (customer) point of the value chain.
Take-Away Concepts
LO 8-4 Identify and evaluate benefits and risks of vertical integration. Benefits of vertical integration include: securing critical supplies, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets. Risks of vertical integration include: increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions. Vertical integration contributes to competitive advantage if the incremental value created is greater than the incremental costs of the specific corporate-level strategy. LO 8-5 Describe and examine alternatives to vertical integration. Taper integration is a strategy in which a firm is backwardly integrated but also relies on outside market firms for some of its supplies, and/or is forwardly integrated but also relies on outside market firms for some if its distribution. Strategic outsourcing involves moving one or more value chain activities outside the firms boundaries to other firms in the industry value chain. Off-shoring is the outsourcing of activities outside the home country.
Take-Away Concepts
LO 8-6 Describe and evaluate different types of corporate diversification. A single-business firm derives 95 percent or more of its revenues from one business. A dominant-business firm derives between 70 and 95 percent of its revenues from a single business, but pursues at least one other business activity. A firm follows a related diversification strategy when it derives less than 70 percent of its revenues from a single business activity, but obtains revenues from other lines of business that are linked to the primary business activity. Choices within a related diversification strategy can be related-constrained or related-linked. A firm follows an unrelated diversification strategy when less than 70 percent of its revenues come from a single business, and there are few, if any, linkages among its businesses.
Take-Away Concepts
LO 8-7 Apply the core competencemarket matrix to derive different diversification strategies. When applying an existing/new dimension to core competencies and markets, four quadrants emerge, as depicted in Exhibit 8.8.
The lower-left quadrant combines existing core competencies with existing markets. Here, managers need to come up with ideas of how to leverage existing core competencies to improve their current market position.
The lower-right quadrant combines existing core competencies with new market opportunities. Here, managers need to think about how to redeploy and recombine existing core competencies to compete in future markets. The upper-left quadrant combines new core competencies with existing market opportunities. Here, managers must come up with strategic initiatives of how to build new core competencies to protect and extend the firms current market position . The upper-right quadrant combines new core competencies with new market opportunities. This is likely the most challenging diversification strategy because it requires building new core competencies to create and compete in future markets.
Take-Away Concepts
LO 8-8 Explain when a diversification strategy creates a competitive advantage, and when it does not. The diversification-performance relationship is a function of the underlying type of diversification. The relationship between the type of diversification and overall firm performance takes on the shape of an inverted U (see Exhibit 8.9). In the BCG matrix, the corporation is viewed as a portfolio of businesses, much like a portfolio of stocks in finance (see Exhibit 8.11). The individual SBUs are evaluated according to relative market share and speed of market growth, and plotted into one of four categories (dog, cash cow, star, and question mark). Each category warrants a different investment strategy.
Both low levels and high levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance.