STRAT 302 Exam #2

Good organizational design does the following

1) Influences individual behavior so that people do what the organization needs 2) Controls information flow (for ex: the CIA doesn't want free flowing information ) 3) Allocate decision-making authority to people who will use it well

A multi-business firm can improve overall performance by

1) Portfolio Management/Resource Allocation: requires the firm to have an informational advantage over the market (external investors) 2) Improve the performance of the portfolio by exploiting linkages across businesses (synergies) 3) Restructuring: Improve the performance of individual businesses without necessarily exploiting the linkages between them. This requires the firm to be able to add value in the way that individual businesses could not do on their own 4) Reduce costs at the corporate center

Value creating diversification: Ownership benefits

1) Should there be joint ownership to exploit synergies 2) Does ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce?

Common Test of Scope in Corporate Strategy: For corporate strategy to create shareholder value, it must meet these tests:

1. Attractiveness Test: industry must be attractive (potentially) --> (comp strategy) 2. Cost of Entry Test: Future profits must justify cost of entry ---> (comp strategy) 3. Better-off test: the company needs to be better off with the new business. That is, the new business needs to help the company create value ---> (Corp strategy) 4. Ownership test: the businesses have to perform better under common management than they could perform operating as independent stand-alone enterprises! ---> (corp strategy)

Who captures value in M&A?

Acquiring firms: value is often destroyed (negative) Target firms: value increases about 25% M&A creates value, but target firms capture it

Causes of failure in M&A

Adverse selection: someone dramatically overpays or underpays because of asymmetric information Bad executive decision making: managerial hubris or principal-agent problems (higher salary to lead big company) Insufficient due diligence: insufficient research into the partner firm Culture clash: different cultures make it too difficult to integrate operations Loss of key personnel: many of the most important employees leave Insufficient seriousness: integration should start immediately, have dedicated personnel/resources, long process, how to make new communication channels, etc.

Common reasons for failure in alliances (incentives to cheat/opportunistic behavior): Moral Hazard

After signing deal, partner firm doesn't have incentives to live up to the deal (for example, providing lower quality skills than promised) Definition: when an actor lacks incentives to reduce risk exposure because they don't internalize costs Companies lack incentive to protect partner from risk -Before deal is signed, companies promise to help each other -Once contract is signed, incentives change

Why are these alliances structured the way they are? ▪Non-equity: Apple, Mastercard, Goldman Sachs ▪ Equity: Panasonic invests $30 million in Tesla (2013) ▪ Joint Venture: BMW with Chinese automaker to sell cars in China

▪Non-equity: Apple, Mastercard, Goldman Sachs ---> gives more control over other companies operations ▪ Equity: Panasonic invests $30 million in Tesla (2013) ---> Tesla doesn't want Panasonic to use technology with other EVs ▪ Joint Venture: BMW with Chinese automaker to sell cars in China ----> Can't do on their own, want to have local company selling goods Another example: Joint venture between Uber & Volvo --> both have things other doesn't and need data to run their operations

Gates' Talent: seeing the industries

-make product that people understood would be the only way to digital world -gatekeep the digital world

Is the following merger vertical, horizontal, product extension, market extension or conglomerate? 1. Ferrero and Nestlè 2. Tesla and Solar City 3. LVMH and Hermès (attempted) 4. GE and NBC 5. Alphabet and Motorolla

*Note: there is not right answer, you can make arguments for many different cases* 1. Ferrero and Nestlè: horizontal 2. Tesla and Solar City: vertical 3. LVMH and Hermès (attempted): Product extension 4. GE and NBC: Vertical 5. Alphabet and Motorolla: Vertical/product extension

When markets are most inefficient

-Asymmetric information allows for opportunism -Lots of coordination required through vertical chain (difficulty specifying terms of coordination in a contract) -High asset-specificity (transaction-specific investments) -Asset specificity: the degree to which an asset's value is tied to one context/transaction

Types of advantage in global context: Business-specific advantages

-Increasing WTP -Cost reduction

Types of advantage in global context: country-specific advantage

-Input Access (raw materials, labor etc. -Regulations (taxes, subsidies)

Multi-Domestic Structure

-Products are customized to each national/local market -Decisions regarding business-level strategies are decentralized to the strategic business unit in each country in order to tailor products to the local market -Strategic business units (SBU) are relatively independent -Ex: Lays chips are different in each country

Global Structure

-Products are standardized across national markets -Business-level strategies are centralized in HQ -Strategic business units (SBU) are interdependent -Emphasizes economies of scale, less responsive -Requires resource sharing and coordination across borders (which also makes it difficult to manage) -Ex: Boeing airplanes

Types of advantage in global context: multi-business advantages

-Scale and scope benefits -Proprietary assets (ex: intellectual property, knowledge) -Customer needs and preferences

Transnational strucuture

-Seeks both global efficiency and local responsiveness -Difficult because of simultaneous requirements for strong central control & coordination (for efficiency) & local flexibility & decentralization (for local market responsiveness) -Success hinges on leadership, management systems and effective implementation (difficult balancing act)

Acquisitions

-The firm buys another firm's stock using any (or mix) of cash, debt, and equity -Acquiring firm takes a controlling, majority or complete share in target firm -An acquisition can be friendly or hostile -Mostly through an open tender by offering a premium over the current stock price of the target firm

Mergers

-The firms purchase a fraction of each other's assets -Typically, they are not unfriendly ("Merger of Equals") -One of the parent firms usually emerges as the dominant management

Value Creation through Alliances (Sources of Value Creation): Improve performance of a firm's current operations

1. Exploit economies of scale 2. Learn from competitors 3. Manage risk and sharing costs 4. Access complementary R&C (risk and compliance)

Value Creation through Alliances (Sources of Value Creation): Create an environment for superior performance

1. Facilitate development of tech standards 2. Facilitate tacit collusion 3. Share customers

Tools of Organizational Design

1. Incentive design: rewarding or punishing employees based on performance (reporting structure changes incentives) 2. Management control systems: controlling employees behavior through formal or informal control mechanisms 3. Organizational structure: deciding who makes decisions and who reports to whom

Value Creation through Alliances (Sources of Value Creation): Facilitate entry and exit

1. Low-cost entry into new industries (partner provides access and legitimacy) 2. Low-cost exit from industries (partner is an informed buyer) 3. Managing uncertainty (real options) 4. Low-cost entry into new geographic markets

Due Diligence (what it helps to do and common errors)

A "Due diligence" review is an investigation by a buyer of a business to be acquired and is part of the buyer's risk management tool set. Due diligence helps for: -Verify the strategy and assumptions behind the acquisition -Identify risk exposure; give info relevant to negotiate the price, terms, and structure of the deal -Prepare for implementation of the acquisition and future successful operation Common errors include: -limitation to 1) financial 2) legal matters and 3) go/no go decision -review done by consultants or inexperienced/underresourced employees not realizing that realized synergies < anticipated synergies -winners curse: the buyer needs to have unique ability to get value from the customer

Innovation

An innovation is invention + commercialization. It is an idea, practice, or object that is perceived as new by an individual or other unit of adoption

Global Strategy

At simplest level: treating the world as a single market: standard products, distributed & marketed worldwide (ex: Honda during 1970s and 1980s) -At more sophisticated level: strategy that recognizes and exploits linkages between countries (ex: exploits global scale, differences in resources and taste)

Incentive Systems

Authority: who makes decisions? Performance measure (objective or subjective) Accountability: rewards or punishments (monetary or non-monetary) An incentive system links AUTHORITY and ACCOUNTABILITY

Costs of vertical integration: compounding risk

Business risk compounds for a vertically integrated firm

What does each letter stand in the CAGE framework for assessing country differences

C: Cultural Distance A: Administrative and Political Distance G: Geographic distance E: Economic differences

Frameworks to Analyze Global Expansion of a Firm's Scope: What does each framework help us do? (CAGE, AAA, Integration responsiveness)

CAGE (Cultural, Administrative, Geographic and Economic): helps us identify the country level differences between host and home country AAA (Adaptation, Aggregation, Arbitrage) examines the optimal organization of each activity from a global efficiency perspective Integration responsiveness: offers ways for a firm to organize in order to achieve its strategic objective. The firm's organization structure reflects the strategic activity choices made by firm. Based on the firm's strategy, firms use the multi-domestic, global, or transnational structure to indicate where decisions are made to implement the firm's strategy

CAGE Framework: Geographical distance

Distance between two countries increases with: -lack of common border, or transportation or communication links -Physical remoteness Industries most affected by source by distance: -Products with low value-to-weight (cement), or fragile (glass) or perishable (milk), or where communication is vital (financial services) Ex: Russia can easily sell natural gas

Types of Alliances: Non-equity

Cooperating firms agree to work together using contracts but do not take equity positions in each other or form an independent firm to manage cooperation

Types of Alliances: Joint Venture

Cooperating firms create a legally independent firm in which they invest and share any profits thereof Ex: Disney India: hard to enter India on their own, needed a huge sales force Ex: Streaming services joint venture, scared of digital piracy in music industry, fearful it would happen to tv shows

Types of Alliances: Equity

Cooperating firms supplement contracts with equity holdings in alliance partners Apple: in the 90's apple was doing bad and scared that Microsoft would stop making word for Mac Facebook: Didn't know how to run ads, Microsoft, through equity alliance, helped them

Costs of vertical integration: coordinating costs

Coordinating cost: cost of coordinating activities across industries. Includes managerial activities & difficulty of knowing how to manage different domains

Challenge of corporate strategy

Cost incurred by ownership of multiple businesses -Cost of the headquarters facilities and personnel (including C-suite) -Cost of coordination -Cost of distraction -Cost of social comparison

Choosing scope: ownership test

Does ownership of the business unit in a geographic market produce greater competitive advantage than an alternative arrangement would produce?

Choosing Scope: Better Off

Does the presence of the corporation in a given geographic market improve the total competitive advantage of business units over and above what they would achieve on their own?

Value creating diversification: demand-side economies of scope

Demand side economies of scope (cross-selling) exists when: -A single customer can use/buy multiple products from the firm, increasing revenue. It reduces search costs for the customer and reduces customer acquisition cost for the firm -Sometimes about convenience for customer (ex: Grocery store sells all the products you need) -Other times about consumer valuing the good more because it comes from the same company

Disruptive innovation

Disruptive innovations create inferior products targeting over-looked customers/non-user. Later, the entrant moves up the market as its product improves. Importantly, disruption is about the combination of technologies and business model innovation. -target low-end consumers -Ex: Airbnb

CAGE Framework: Economic differences

Distance between two countries increases with: -Different consumer incomes -Differences in resources -Different information or knowledge Industries most affected by source by distance: -Products with income elastic demand (luxuries) -Labor intensive product (clothing) Ex: Android is not vertically integrated whereas Apple is vertically integrated

CAGE Framework: Cultural Distance

Distance between two countries increases with: -Different languages, ethnicities, religions, social norms -Lack of connecting ethnic/social networks Industries most affected by source by distance: -Industries with high linguistic content (TV, publishing) and cultural content (food, wine, music) Ex: Europa League failure -People in Europe don't love American football -American Football is a cultural thing that is hard to start without a pre-established fanbase

CAGE Framework: Administrative and Political Distance

Distance between two countries increases with: -absence of shared political or monetary association -Political hostility -Weak legal and financial institutions Industries most affected by source by distance: -Industries viewed by government as strategically important (ex: energy, defence, telecom)

Strategic reasons for M&A: The overcapacity M&A

Eliminate overcapacity, gain market share, and create a more efficient operation (ex: movie theaters merging together)

Related diversification

Enables a firm to benefit from (leverage and exploit) horizontal relationship across different businesses -Decreasing search costs for common customers resulting in higher revenues across businesses -Exploiting economies of scope resulting in reduced costs through common tangible and intangible resources and organizational capabilities

Unrelated Diversification

Entering a business that has little interaction with other businesses of a firm -Bad rationale: risk reduction -CEO's salary usually exceeds fees of index fund -Often a result of managers building empires, not maximizing profits -Reduces shareholder value on average -Hierarchical relationships w/ no economic rationale

Hold-up problem

market disincentivizes transaction-specific investments Hold-up: when one party in a transaction takes advantage of the other party's lack of options to get a better deal -Transaction-specific assets lack options outside of the deal -For-seeing hold-up, companies underinvest in transaction-specific assets -Vertical integration incentivizes investment by elimination hold-up

Strategic reasons for M&A: The geographic roll-up M&A

Expands geographically by buying many small units; operating units remain local (funeral homes, one company buying them up means they can take what they learn to better adopt to local customer needs)

Strategic reasons for M&A: The product extension M&A

Extend a company's product line or its international coverage (Amazon buys Roomba)

AAA Framework

Factor cost differences (Arbitrage) - locating overseas to exploit lower prices of inputs Economies of scale (Aggregation) - selling in other countries can increase total number of units produced, potentially enabling economies of scale (ex: Hagoromo chalk) Exploiting knowledge around the world (Adaptation) - allows the firms to adapt a product or a strategic capability into a new market OR access ideas from other parts of the world (ex: Indian matchmaking show on Netflix)

Forward integration

moving ownership downstream, closer to the end consumer -when a company or focal firm owns the distribution or retail

Managing Ownership through Organizational Structure in a Multinational Firm: The Integration Responsiveness Framework

Helps firms know how to organize global enterprise. The framework focuses on the following tradeoff: -Integration allows the company to standardize features of the products or operations in ways that can help the entire organization's performance -Responsiveness allows the company to adapt to local needs to improve the organization's performance in specific location

Examples of related vs unrelated diversification Honda makes both autos and motorcycles Penguin publishes both adult non-fiction & children's books: Michelin both makes tires & reviews restaurants: Disney owns both ABC and ESPN:

Honda makes both autos and motorcycles: related Penguin publishes both adult non-fiction & children's books: related Michelin both makes tires & reviews restaurants: unrelated Disney owns both ABC and ESPN: related

Corporate strategy

How a firm coordinates activities across multiple markets to create and capture value -E.g. which industries to participate in, how to govern different business units, how to structure a platform -Goal: corporate advantage

Weighing the merits of global expansion: Ownership

How should the firm organize its home & host country operations in global expansion? Integration Responsiveness Framework (Value Capture)

Weighing the merits of global expansion: ownership

How should the firm organize its home & host country operations in global expansion? Integration Responsiveness Framework (Value Capture)

Backwards integration

moving ownership upstream, closer to the inputs -when a company or focal firm owns the supplier

Globalization

Increasing interdependence and homogeneity among countries

Incremental innovation

Incremental innovations are small improvements to existing products or processes. They are competence enhancing, meaning they build on incumbents' existing capabilities -Ex: computer chips -Ex: Ruby chocolate: new type but builds on existing innovation Incremental Innovations: LED light bulbs, smartphone food delivery apps, evolution of smartphone camera quality.

Value creating diversification: supply-side economies of scope - Intangible resources

Intangible resources: such as brand, corporate reputation, and technology, can be extended to additional businesses at a low marginal cost. For example, brand recognition may make it easier to get distribution -Ex: if Coke wanted to create a new soda, it wouldn't be as difficult as a local start-up because of their brand and distribution

Strategic control & reward systems

Internal governance mechanisms -Culture -Sanctions -Ex: Nordstrom diamond story or Chick-fil-A customer service Input controls -Rules and standard operating procedures -Budgets -Behavior guidelines -Ex: Disney princess need to fit certain requirements

Weighing the merits of global expansion: better off

Is the product tradable & what are barriers to trade? What transaction costs are involved? (negotiating, monitoring, enforcing, transportation, tariffs & communication) - CAGE Framework (Implications for value creation and capture) Is the firm's competitive advantage based on firm specific or country specific resources? Does the firm have the resources & capabilities to establish competitive advantage in the overseas market? AAA Framework (Value Creation)

Ronald Coase's Insight Key Question: If markets are so efficient, why do firm's exist?

Key Question: If markets are so efficient, why do firm's exist? Key Insight: Transactions cause inefficiencies (Transaction costs) because of the need to coordinate exchange in the transaction. • NOTE: here 'transactions' can be between or within firm • Markets: search, negotiate, monitor, & enforce contracts • Within firm: poor communication, misaligned incentives Solution: Integrate if transactions more costly in markets than firm Coase asked, "If markets are so efficient, why do firms even exist?" His answer: transactions have costs, like searching for the right partners, negotiating, and enforcing agreements. These costs can be high in a market, so sometimes it's cheaper to organize work within a firm rather than deal with those costs in the market. In a firm, though, you might face other challenges like poor communication or misaligned incentives. So, the choice is about comparing which option—using the market or forming a firm—has lower costs. In short: If it's cheaper to manage transactions inside a firm rather than through the market, you form a firm.

Costs of vertical integration: Flexibility

Market allows more flexibility to make big changes (ex: change type of input). Vertical integration allows more flexibility to make small changes (ex: customize an input)

Market transactions are governed by __________ Benefits of market transactions:

Market transactions are governed by contracts Benefits of market transactions: -Market prices aggregate information, may be more accurate than firm -In competitive markets, firms must be efficient to survive (suppliers get economies of scale by having more buyers)

Is this forward or backwards integration? • Netflix makes its own content • LVMH buys duty free shops • Amazon enters book publishing • Microsoft makes the surface 'laptop' • Microsoft makes internet explorer in the 1990s

Netflix makes its own content → Backward Integration Netflix used to license content from studios, but by producing its own content, it integrates backward into the supply chain. LVMH buys duty-free shops → Forward Integration LVMH (a luxury goods company) moves closer to the consumer by acquiring retail distribution. Amazon enters book publishing → Backward Integration Amazon, originally a book retailer, moves into the supply side by publishing books itself. Microsoft makes the Surface laptop → Forward Integration Microsoft traditionally provided software, but by manufacturing laptops, it integrates forward into hardware production. Microsoft makes Internet Explorer in the 1990s → Backward Integration Microsoft initially relied on third-party browsers (like Netscape) but developed its own, integrating backward into software development.

How can incumbent firm successfully innovate

Radical innovations -Central problem: need new competencies -Solution: aggressively look to expand competencies, some autonomy Disruptive innovations -Central problems: info, recognizing value, cannibalization -Solution: spinoff or very independent organization

Downsides of intrinsic motivation (non-profits, start-ups, Steve Martin)

Non-profits: poorly run, difficult to have everyone work together (different motivation) Start-ups: Very motivated in beginning, company has to grow up over time, can't rely on people being empowered, transition to hyper-specialized tasks Steve Martin: economist, professor at Harvard, originally intrinsically motivated by research, after receiving tenure started focusing on communist propaganda, he was given too much freedom where what he wanted to do didn't align with what they wanted him to do

Steve Jobs' talent: seeing the product

Obsessive about computer design -Product: need to plan, need to be compatible with technology that doesn't exist yet

Value creating diversification: supply-side economies of scope - Organizational Capabilities

Organizational Capabilities: like capabilities in design, marketing, manufacturing, can be transferred within a diversified company and lowers cost of acquiring superior capabilities

Why do entrants prefer the new context?

Radical innovations -Expensive to compete with incumbent's capabilities Disruptive innovation -Entrants can be as informed as incumbents -Entrants as likely to recognize value -Entrant don't have short-term profits to cannibalize

Why do incumbent firms often fail in the new context?

Radical innovations -Render existing resourcing useless Disruptive innovations -Difficult for incumbents to have relevant info -Difficult for incumbents to recognize value -Difficult to accept short-term losses (ex: cannibalization) for long term gains

Common reasons for failure in alliances (incentives to cheat/opportunistic behavior): Adverse selection

Potential partner misrepresents its skill to secure better deal. Unskilled partners more likely to accept given terms. Difficult to solve without being able to access skills independently. Definition: when a more informed actor takes advantage of less-informed actor's lack of information to get a good deal Each company has more info about other resources -Lying about resources improves the terms of the deal -The worst partners are the most likely to accept a given deal -Difficult to solve without independently learning -Buyer may have more info about what to do with product (ex: insurance, collector's items, land to be repurposed)

Radical innovation

Radical innovations upend the existing systems/processes and replace them with something entirely new. These innovations are competence destroying. -Ex: Spacex wifi (need new skillset to create it) -Ex: Covid19 vaccine Radical Innovations: Electric cars, first iPhone, Netflix streaming, self-driving cars, first personal computer, first MP3 player (iPod), 3D printing.

What jobs rely heavily on objective performance incentive to motivate employees?

Sales, manufacturing, software development, and logistics where measurable output drives compensation.

Costs of vertical integration: Perverse incentives

unintended consequences of a policy or action that lead to outcomes opposite of what was intended, essentially rewarding undesirable behaviors or creating problems instead of solving them -Common ex: salespeople being heavily rewarded for meeting short-term sales targets without considering customer satisfaction or long-term relationships

What are some ways to Bob Iger revitalized Disney?

Strengthen Core Brands - Focus on revitalizing Disney, Pixar, Marvel, Star Wars, and ESPN with strong content. Improve Streaming Strategy - Enhance Disney+ with better content, pricing, and bundling strategies. Theatrical Comeback - Invest in high-quality films and reduce franchise fatigue. Parks & Experiences Growth - Expand and improve theme parks, cruises, and immersive experiences. Fix ESPN & Sports Strategy - Adapt ESPN for digital and streaming audiences. Content Quality Over Quantity - Reduce oversaturation of Marvel/Star Wars and focus on compelling stories. International Expansion - Grow in emerging markets like India, China, and Latin America. Improve Company Culture - Boost morale, retain top talent, and improve creative leadership. Partnerships & Acquisitions - Explore strategic deals to enhance content and technology. Financial Discipline - Reduce costs, optimize spending, and improve profitability.

Value creating diversification: supply-side economies of scope - Tangible resources:

Tangible resources: such as distribution networks, IT systems, sales force, shared services, and research labs, can reduce duplication. For example, one facility can be shared among several businesses

Sustaining innovation

Sustaining innovations create better products targeting the best customers. They are often used by incumbents in response to disruption -target high-end consumers Apple iPhone (e.g., iPhone 12 to iPhone 13 to iPhone 14) Description: Each new iPhone generation introduces incremental upgrades such as better cameras, faster processors, longer battery life, and sleeker designs. These improvements target high-end consumers who are willing to pay a premium for the latest technology. Apple uses these sustaining innovations to maintain its leadership in the premium smartphone market while competing with other high-end brands. Target: High-end consumers seeking the latest features.

Technology

Technology is the ongoing application of scientific knowledge for practical purposes, especially in industry. Product and process innovation happen throughout the technology life cycle, often giving rise to new technologies

The Federal Trade Commission

The FTC generally disallows any merger or acquisition involving U.S. - headquartered firms that could harm customers by giving a company monopoly power

Strategic reasons for M&A: The industry convergence M&A

To establish position in new industry by culling resources from existing industries whose boundaries are eroding

Business strategy

how a firm coordinates activities within a single market to create and capture value -E.g. how to position against competitors, how to make industry structure more favorable -Goal: competitive advantage

Strategic reasons for M&A: M&A as R&D

Used in lieu of in-house R&D to build market position quickly In simple terms: M&A as R&D means buying another company to get their research, technology, or market share, rather than spending the time and money to create those things yourself. It's a way to grow faster.

Objective of corporate strategy

Using the metric of competitive advantage, we will examine conditions under which presenence of diversified firm in multiple industries or multiple geographies allows the firm to increase the wedge between willingness to pay and costs

Ways to govern a transaction

Vertical integration: manager has full(?) control Market: pre-specified contract has limited control Alliance: separate parties continually negotiate. Contracts and equity may be involved.

Ways to govern a transaction: Question/problem of organization ---> Multiple partiers to coordinate. How do we choose what actions they need to take?

Vertical integration: owner/manager chooses in the moment (tells different groups how they work together) Alliance: parties continually negotiate how to coordinate. Ownership & contract structure vary; made to facilitate negotiations (2 separate groups coming together and forming a good relationship) Vertical Specialization (Market): pre-specified contracts choose. Outside contract terms, each party makes own decisions (no recourse outside contract - basically 0 control once you sign contract)

FTC's Typology of Mergers and Acquisitions

Vertical: suppliers or customers (Microsoft and Activision Blizzard) Horizontal: competitors (Facebook & Instagram) Product extension: complementary products (Disney buys Marvel) Market extension: new geographic market Conglomerate: residual category (unrelated companies)

When does a corporate strategy succeed?

When it enables a firm to improve the average competitiveness of its individual business units, and thus create and capture value that exceeds the sum of the firm's individual parts

Is IKEA selling Swedish meatballs value creating diversification?

Yes. -Keeps customer in store longer which increases furniture sales ("destination experience --> demand synergies) -Strengthens brand & loyalty: reinforce identity and customer connection -creates profitable revenue stream

Goal of organizational design

enable individuals to coordinate their actions to execute the company's strategy -Challenging because individuals may not know how to or even want to coordinate. Communication is difficult

Vertical Integration

firm's ownership and control of multiple vertical stages of the supply of a product or service

Costs of Vertical Integration: Principle Agent problem

someone (agent, often an employee) is hired to act on behalf of someone else (principal, often the shareholders), but their incentives aren't aligned -Weak incentives (firm) vs. strong incentives (the market) -managers, employees, internal suppliers shrink The principals (shareholders) want the company to be as profitable as possible. They want efficient decision-making that benefits the bottom line. But the agents (managers or employees) may not be as motivated by profit—they may care more about things like their salary, job security, or making decisions that benefit them personally, even if it doesn't maximize profits for the shareholders. This misalignment of interests creates the principal-agent problem Weak incentives in a vertically integrated company because employees may not feel the same pressure to perform well as they would in the open market, where companies compete with each other. Shrinking motivation and roles as the company controls more parts of the process, reducing competition and making employees less driven.

Moore's Law

the observation that computing power roughly doubles every two years. (number of transistors or microchips doubles every two years)