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