MGT 499 : Exam 3
least integrated --> most integrated
(BUY) Less integrated - Short term contracts (least integrated) - Long term contracts - Licensing - Franchising Equity alliances (MAKE) More integrated - Joint ventures - Parent subsidiary relationships (most integrated)
strategic alliances
A voluntary arrangement between firms for a certain period of time - Not permanent It involves the sharing of - Knowledge, Resources, and Capabilities To develop - Processes, products, services
strategic alliances
Alternative of make and buy Long term contracts Equity alliances Joint ventures
outsourcing integration
Alternative to vertical integration Moving one or more internal non-core value chain activities outside the firm's boundaries Offshoring - outsourcing outside the home country Onshoring - outsourcing inside the national borders
taper integration
Alternative to vertical integration (back vs forward) Doing both Ex: In house distributor and outsourcing distributor - Apple has their own store / can also buy from best buy
M&A merger & acquisition
Can be friendly but also hostile Size can matter as well - If companies are comparable in size, often described as merger - If a target company is smaller, often described as acquisition
producing in house disadvantages
Can take longer time High level of investment Need expertise Administrative costs (internal transaction cost)
transaction cost internal
Companies doing things on their own Within boundary of your company cost associated with organizing an economic exchange within a firm; administrative costs, etc. often increase as a firm becomes more vertically integrated.
M&A don't always work
Culture clash Customer service Different products and services Bad management Recessions Stock market fails
corporate venture capital (CVC)
Defined as corporate minority equity investment in private startups Manufacturing firms / not capital Tradition venture capital just wants to make money Corporate venture capital wants knowledge
types of diversification
Depends on two key variables The percentage of revenue from the dominant/primary business - Single business - Dominant business The relationship of the core competencies across the business units - Related diversification - Unrelated diversification
risk of vertical integration
Disadvantage of doing things alone Increasing cost Over time, internal suppliers may lose the incentives to increase quality or come up with innovative new products compared to external suppliers Reduces a firm's strategic flexibility in the face of changing environment (technology or demand in the market) Increasing the potential for legal repercussions - A high level of vertical integration vs. monopoly concerns
vehicles for executing corporate strategy
Firms implement corporate strategy to drive growth using one of the three options 1. Organic growth through internal development ("make/build") (in-house) 2. External growth through alliances ("borrow") 3. External growth through acquisition ("buy")
purpose of CVC
For corporations: to learn new technologies that new ventures develop For new ventures: to access complementary assets as well as capital
BCG growth share matrix boston consulting group
Helpful guide for corporate portfolio planning for managers This matrix locates a firm's individual strategic business unit in two dimensions - Relative market share (horizontal) - Speed of market growth (vertical) SBUs are plotted into four categories each of which warrants a different investment strategy. - dog - cash cow - star - question mark
business level strategy
How to compete in a single product / service market
diversification discount
If you go too far (unrelated diversification) → performance decreases On average, the stock price of such highly diversified firms is valued at less than the sum of their individual business units
corporate diversification & firm performance
Increase level of diversification → increases firm performance
economies of scale
Increase output so production cost decreases
using market advantages
Increased flexibility - Comparing price and services among dif providers High power incentives Useful options for small - medium size firms / those with no expertise
why do firms use M&A with competitors
It reduces competitive intensity because the M&A leads to fewer competitors in the market and excess capacity is taken out of the market It could lower costs as firms pursue economies of scale increase the differentiation of a firm's product and service offerings
equity alliances
Like buying a nice necklace for your girlfriend → more serious relationship Money involved At least one partner takes partial ownership position in the other partner - stronger commitment involve exchange of personnel, so they allow the sharing of tacit knowledge that cannot be codified, in addition to explicit knowledge Tends to produce stronger ties and greater trust than non-equity, contractual relationship
manager level causes of failure
Managerial hubris: 'we can manage the acquisition effectively', 'this acquisition will be the exception' Principal-agent problems: CEOs/managers, as agents, do M&As mainly because of their own idiosyncratic interest or desire to increase firm size ("their own empire"), which is positively correlated with prestige, power and pay, as opposed to increase the value of shareholders (principals)
producing in house advantages
More control through coordination of high complex tasks Ability to make demand and control decisions along hierarchical line of authority Investment for specialized assets Creation of community of knowledge - Employees exchange ideas and work closely together
non equity alliances
Most common forms of alliance - supply agreements, distribution agreements, and licensing agreements vertical strategic alliances, connecting different parts of the industry value chain Because of their contractual nature, it is flexible and easy to initiate and terminate, but due to its temporary nature, it can result in a lack of trust and commitment
how do firms grow
New value chain activities New geographic markets New products/services firms need to formulate a corporate strategy to guide continued growth
level of knowledge sharing
Non equity alliance: explicit knowledge - Patents, user manuals and fact sheets, scientific publications - Short term contracts - Long term contracts - Licencing - Franchising Equity alliance: explicit + Tacit knowledge - Equity alliances - Joint ventures
different types of strategy alliances
Non-equity alliances - Based on contracts (short term vs. long-term) Equity alliances - One firm takes partial ownership in the other Joint ventures - Standalone organization owned by 2 or more firms
human specificity
Occurs when investments made in human capital to acquire unique knowledge and skills
diversification premium
On average, the stock price of related diversification is valued at greater than the sum of their individual business units
make or buy continuum
Outsourcing → buy - Less integrated - Arm's length market transactions In house (vertical integration) → make - More integrated - Perform activities in house companies do not always choose between these extremes. not always easy to figure out the costs and benefits beforehand
transaction cost external
Partnering Outside your company cost of searching for a firm/individual with whom to contract, and then negotiating, monitoring and enforcing the contract
diversification enhances form performance must do at least one
Provide economies of scale, which reduces costs Exploit economies of scope, which increases value Or both
using market disadvantages
Search costs Incomplete contracting - Specifying and measuring performance Difficulty enforcing contracts
transaction cost key question
Should a firm produce in-house (make) or outsource (buy)? COST(in-house) > COST(market) --> should outsource COST(in-house) < COST(market) --> should make internally Do whatever is cheaper This theory suggests that the answer depends on transaction costs; a firm should choose an option that entails 'less' transaction cost.
types of corporate diversification
Single business: low level of diversification. Dominant business: additional business activity pursued. Related diversification: - Constrained - Linked Unrelated diversification (conglomerate): no businesses share competencies.
vertical integration industry value chain stages
Stage 1 - Raw materials Stage 2 - Components - Intermediate goods Stage 3 - Final assembly - Manufacturing Stage 4 - Marketing - sales Stage 5 - After sales service and support Stages 1-3: upstream industry / backward vertical integration Stages 3-5: downstream industry / forward vertical integration
joint venture
Standalone organization created and owned by two or more parent companies Long-term commitment - Exchange both tacit and explicit knowledge via frequent interactions of personnel Steppingstone toward full integration of the partnership Often used to enter foreign markets Parents company 1, 2,... come together to make a new company
horizontal integration through M&A
The process of merging with a competitor at the same stage of the industry value chain, leading to industry consolidation A type of corporate strategy that can improve a firm's strategic position in a single industry
why strategic alliances are attractive
They enable firms to achieve goals faster and at lower costs than going it alone They complement or augment the value chain In contrast to M&A, they allow firms to circumvent potential legal repercussion
why do firms use M&A with other firms in general
To access new markets & distribution channels. - To overcome entry barriers. To access a new capability or competency. To preempt rivals. - Prevent other rivals from buying the same company
why do firms enter strategic alliances
To strengthen competitive position: to change industry structure in their favor To enter new markets (esp. for global expansion) To hedge against uncertainty in dynamic markets To access critical complementary assets of partner firms To learn new capabilities from partner firms early strategic alliance evaluates the match two parties' complementary assets and eventually lead to the acquisition if the match works
three dimensions the scope of the firm uses to determine boundaries
Vertical integration Geographic scope Horizontal integration
economies of scope
When companies are diversifying they want to take advantage of it cost advantages/savings that come from producing an increasing range of products/services at less cost than producing each individually by sharing same resources / capabilities (if possible)
corporate strategy
a quest for competitive advantage when competing in multiple areas concerns the scope of the firm in terms of: - Industry value chain - Products and services - Geography
benefits of vertical integration
advantages of doing things on your own Securing critical supplies Facilitating scheduling and planning Improving quality Facilitating investments in specialized assets Assets can have different types of specificity 1. site specificity 2. physical specificity 3. human asset specificity
types of diversification related diversification : constrained
all businesses share competencies. related through common resources, capabilities and competencies
transaction cost
all internal and external costs associated with an economic exchange
principal agent problem
an agent such as a manager, performing activities on behalf of the principal pursues his or her own interests that are not the best interest of the principal Due to the separation of ownership and control in public companies --> almost inevitable Overcome --> give stock options to managers, thus making them owners.
complementary assets
assets such as marketing, manufacturing and after-sales service that are needed to commercialize a new product or service successfully often prohibitively expensive and time-consuming, and thus frequently, not an option for new ventures
horizontal integration
broadening your product portfolio Concerns about the range of a firm's products and services Three diversification strategies: - Product diversification: selling different kinds of products - Geographic diversification: selling the same product in different markets / regions - Product - market diversification: selling different kinds of products in different regions/countries
tacit knowledge
concerns the "know how" (as opposed to information) Know-how: skill of how to communicate, solve problems etc. learning through social interactions vs Information: facts / who knows what
SBU strategic business unit
dog - Low market growth and low market share - Strategy: harvest / divest cash cow - Low market growth and high market share - Strategy: hold star - High market growth and high market share - Strategy: increase market share or harvest / divest question mark - High market growth and low market share - Strategy: hold or invest for growth
benefits of taper integration
exposes in-house suppliers and distributors to market competition so that performance comparisons are possible It enhances a firm's flexibility in the face of changing technology/demand It allows a firm to combine internal and external knowledge, which could pave the path for innovation
site specificity
occurs when assets are required to be jointly located in the same specific place (co-locating)
physical specificity
occurs with assets whose physical and engineering properties are designed to satisfy a particular customer
vertical integration
ownership of its inputs, production, or outputs in the value chain backward vs forward integration Not all industry stages are equally profitable Costly in the short term → can pay off in the long run
restructuring
process of reorganizing and divesting business units and activities to refocus a company to leverage its core competencies more fully Strategic managers could restructure the portfolio of their firm's businesses, much like an investor can change a portfolio of stocks BCG (boston consulting group) growth share matrix
acquisition
purchase or takeover of one company by another Can be friendly or unfriendly (hostile takeover) a target firm is absorbed under the acquiring firm's existing organization
types of diversification related diversification : linked
some businesses share competencies. share some resources
merger
the joining of two independent companies Tend to be friendly approach
specialized assets
unique assets that are highly valuable within a focal firm, but of little value or no use in the external market difficult to persuade independent companies in the market to make investment When firms are vertically integrated, they are willing to make investments