Whole or parts

But we must now refer to one question about systems in general, and about organization systems in particular, the answer to which is of fundamental importance. I refer to the questions as to whether the whole is more than the sum of the parts--- whether there emerge from the system properties which are not inherent in the parts
-- Chester Barnard, The Functions of the executive (1938) p. 79

T: Choosing Corporate Scope

Learning Objectives: Horizontal Scope The Better-Off Test The Best-Alternative Test

Introduction
So far all the cases and concept we have discussed is based on one industry. Is it enough? Take example of GE, P&G, HUL, Tata, Birlas, Reliance; operating in multiple industries successfully; so what is the logic? Logic is examining choices of corporate scopes.

Corporate Scopes
In what industries should a company compete? What Scope it is? Horizontal Scope Should a company make its own inputs? What Scope it is? Vertical Scope Where should a company compete? What Scope it is? Geographical Scope

Corporate Strategy
Why Corporate Strategy is important and cant be ignored? Several reasons: The estimated corporate-level effects on performance, while smaller than direct business-level effects, are far from negligible Inferences to be drawn from such estimates remain somewhat controversial

Corporate Strategy
It is hard to deny the success of GE, P&G, HUL, ITC, Tata, Birlas, Reliance; operating in multiple industries

We have learnt core competence from C K Prahalad and Gary Hamel; they recommended a corporate-wide strategic architecture for competence building and asserted that the successful organizations of the future would be ones that shifted their focus from SBUs to core competencies, because these formed the foundations of future growth

Two Tests
Introduction ITCs failures and success: Classical Finance and Welcome Group Therefore, corporate strategy succeeds or fails to the extent that it aids or undermines business units as they strive to win in their respective markets How can we know? We find two test specifically telling:

Two Tests
The Better-Off Test: Do combining and coordinating the activities of multiple business units enable the units to create more value than they could as independent, unassociated units? In other words, what is the corporate added value?

Two Tests
The Best-Alternative Test: Suppose the units pass the better-off test, and coordinated action is valuable. Is the common ownership by a single corporation the best way to reap benefits of coordinated actions --- better than alternatives like JVC, strategic alliances, licensing deals, and arms-length transactions? Conceptually, this test focuses on value appropriation than value addition

The Better-Off Test

Industry Attractiveness Competitive Advantage -- Cost Effects -- Willingness-to-pay/Price Effects -- Dual Effects -- Risk Considerations

The Better-Off Test

Industry Attractiveness First and simply, broad horizontal scope can improve structure directly by mitigating the five forces Second and more subtly, broad scope may give a firm an opportunity to migrate out of a structurally poor industry into more attractive setting.

The Better-Off Test

Industry Attractiveness But decision maker can use this as management tool only if they have better foresight than other potential entrants about what industries will be attractive in the future

The Better-Off Test

Competitive Advantage We have already learnt creating CA depends crucially on its driving wedge between the costs it incurs and WTP it generates

The Better-Off Test

Effects of Horizontal Diversification on Competitive Advantage Component Cost Effects Levers for Value Creation Shared cost economies across businesses Shared activities Shared resources - One-stop shop/one-vendor sales and support - Cross-promotion/cross-selling - Umbrella branding - Bundling, particularly of complements Limits Diseconomies of scale or scope -Costs of Conflict/politicking Compromise Coordination Mixed motives Cognitive conflicts Reputational risk

Willingness-toPay/Price Effects

Dual Effects

- Superior internal resource markets/transfer mechanisms - Other superior skills and capabilities - Cross-business learning/innovation - Size-based political influence

-Availability of market / inter-firm alternatives - Typical breadth versus depth trade-off - Internal/inside-the-box biases - Antitrust laws/political backlash

The Best-Alternative Test

Transaction Costs and Ownership -- Contractual complexity and incompleteness -- Unclear property rights -- Poor enforcement of contracts and property rights -- Relationship specific or co-specific resources

What we have learnt?

Stakes and level of difficulty are high
when choosing range in which to compete

Corporate-level scope choices

overlay on business-unit strategies choices of scope are effective or ineffective
depending on the extent to which they contribute to the success or failure of individual business units in their specific industries

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What we have learnt?

Broad scope must pass two tests
breadth must bring together business units that are made better off by their union 2. joint ownership must capture the benefits of breadth better than alternate arrangements
1.

arms-length trade licensing strategic alliances joint ventures

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What we have learnt?

Examples demonstrate enormous power of corporate strategy to
create value destroy value

Will see more examples of both

given the complexities of scope choices

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What we have learnt?

Managers can improve odds of value creation and capture
ask whether SBUs are better off
under same corporate umbrella separated coordinated by alternative outright ownership

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