mgt 3830 exam 2

other opportunities which exploit the value of product differentiation

- trends or fads - social causes - gov policy

Value of Diversification: 2 criteria

1) There must be some economy of scope. 2) The focal firm must have a cost advantage over outside equity holders in exploiting any economies of scope.

product differentiation in fragmented industry

Branding: commodity -> differentiated product Example: Kellogg's Corn Flakes

The Office of the President 3 components

Chairman of the Board (monitoring) Chief Executive Officer (strategy formulation) Chief Operating Officer (strategy implementation)

Substitution of Economies of Scope

Competitors may use these strategies to arrive at a position of diversification without buying another firm Internal Development - start a new business under the corporate whole - avoids potential cross-firm integration issues Strategic Alliances - find a partner with the desired complementary assets - less costly than acquiring a firm

Rareness of Diversification

Diversification per se is not rare. Underlying economies of scope may be rare. - Relationships that allow an economy of scope to be exploited may be rare. - An economy of scope may be rare because it is naturally or economically limited.

Governance Responses to the Challenges of Value Creation and Allocation: FORMAL

Explicit Contracts & Legal Sanctions - creates mutual understanding - imposes costs for cheating - conflict resolution Joint Ventures - aligns interests of partners through ownership of independent firm - direct effect Equity Investments - aligns interests of partners through ownership in each other - indirect effect

product differentiation in declining industry

Exploiting niches: serving those with strong needs

product differentiation in emerging industry

First mover advantages: captures market share Example: apple cell phones

Information Filtering

Information about the divisions' businesses is filtered as it rises to the senior executive. The senior executive can "manage" the information flow

Market vs. Integrated Economic Exchange

Integration makes sense when the focal firm can capture more value than a market exchange provides

Financial Economies of Scope

Internal Capital Market - insiders can allocate capital across divisions more efficiently than the external capital market Risk Reduction - counter cyclical businesses may provide decreased overall risk however, individual investors can usually do this more efficiently than a firm Tax Advantages

Economies of Scope: Managerialism

Managers of larger firms receive more compensation (larger scope = more compensation).

Equity Holders and Economies of Scope

Most economies of scope cannot be captured by equity holders. (risk reduction can) Managers should consider whether corporate diversification will generate economies of scope that equity holders can capture.

Anticompetitive Economies of Scope

Multipoint Competition - mutual forbearance: a firm chooses not to compete aggressively in one market to avoid competition in another market - competing regional airlines example Market Power - using profits/buying power from one business to compete in another business

product differentiation in mature industry

Refining product or adding services

Governance Responses to the Challenges of Value Creation and Allocation: INFORMAL

Trust Firm Reputations

Organizing for Product Differentiation: Organizational Structure

U-Form with cross-functional teams

limited corporate diversification (2)

When all or most of a firm's business activities fall w/in a single industry and geographic market - single business firms: > 95% of sales in single business - dominant business firms: 70% to 95% in single business

economy of scope

a proportionate saving gained by producing two or more distinct goods, when the cost of doing so is less than that of producing each separately

3 forms of Misappropriating Value

adverse selection moral hazard holdup

backward vertical integration

away from customer side of production example: bluebell buys dairy farms

if office of president split into 2 people

chairman, CEO and COO OR COO, chairman and CEO

leverage capabilities

choosing to distribute products because you believe you have a knack for informing the customers and training service reps, or you think you name recognition will bring people to you (APPLE)

two generic business level strategies

cost leadership and product differentiation

The Logic of Value Chain Economies

create synergy with other firm - cost reduction - revenue enhancement capture above normal economic returns & avoid perfect competition

agents

executives, staff, managers

firm-customer relationships

exploiting relationships with customers -customization -consumer mkt (est. brand loyalty) -reputation

product attributes

exploiting the actual product -product features -product complexity -timing of introduction -location

firm linkages

exploiting the relationships within the firm and/or relationships with other firms -Linkages among Functions in the Firm -Linkages with other Firms -Product Mix -Distribution channels -Service and support

holdup

exploiting the transaction-specific investment of partners

product differentiation

generate economic value by offering a product that customers prefer over competitors' product

How Strategic Alliances Create Value

improve current operations shape the competitive environment facilitate entry and exit

Integration and Diversification

integration relates to forward and backward movement within a production of firm diversification relates to relationships between related and unrelated firms

Substitutes for Strategic Alliances

internal development mergers/acquisitions

monitor

keeps relationship in check - board of director

Duplication of Economies of Scope (imitability)

less costly: tangible economies of scope more costly: intangible economies of scope

Three Value Considerations of Vertical Integration

leverage capabilities manage opportunism exploit flexibility

levels of corporate diversification

limited, related, unrelated

adverse selection

misrepresenting the value of inputs

3 types of alliances

nonequity alliance - contracts equity alliance - cross equity holding joint venturing -joint equity holding - independent firm is created

4 types of economies of scope

operational, financial, anticompetitive, managerialism

M-form structure

organizational structure by which the firm is separated into several semi autonomous units which are guided and controlled by (financial) targets from the center. pro: Divides Information Processing Requirements Into Manageable Blocks con: Divides Owners From Managers

3 categories of product differentiation

product attributes firm-customer relationships firm linkages

Types of Corporate Diversification

product diversification geographic mkt diversification product mkt diversification

moral hazard

providing inputs of lesser value than promised

related corporate diversification (2)

related-constrained: all businesses related on most dimensions related-linked: some businesses related on some dimensions

Organizing for Product Differentiation: Compensation Policies

reward: - cross-functional cooperation - creativity - risk taking

principals

seeking individual - shareholders

Operational Economies of Scope

sharing activities - exploiting efficiencies of sharing business activities - example of airasia and airasia X spreading core competencies - exploiting strategically relevant core competencies in other businesses - example of Nikon cameras and scopes

forward vertical integration

toward customer end of production example: bluebell creates own storefront, cuts out grocery middle man

exploit flexibility

usually vertical integration = less flexibility

manage opportunism

vertical integration can reduce threat of opportunism opportunism is when a firm is unfairly exploited in an exchange, typical when dealing with few suppliers who can "squeeze" profits

Facilitating Entry and Exit

- low cost entry into new industries - low cost exit from industries - managing uncertainty - low cost entry into new geographic mkts

imitability: alternative modes of entry to vertical integration

Acquisition and internal development *Strategic alliances can be viewed as a substitute for vertical integration—without the costs of ownership

Organizing for Product Differentiation: Management Controls

- flexibility - broad guidelines - creativity encouraged

Sources of costs of imitation (i.e. barriers)

- historical uniqueness - causal ambiguity - social complexity - patents

Improving Current Operations

- Exploiting economies of scale - Learning from partners - Risk and cost sharing

Shaping the Competitive Environment

- Facilitating technology standards - Facilitating tacit collusion

Bases of Differentiation

A differentiated product fills one or more needs better than the products of competitors. Almost anything can be a base of differentiation. -tangible -intangible

vertical integration

A form of corporate organization in which one firm controls multiple aspects or phases of a commodity chain. (value chain economics)

agency relationship

A relationship involving a principal, a monitor, and an agent.

strategic alliance

Any cooperative effort between two or more independent organizations to develop, manufacture, or sell products or services