Corporate Strategy Diversification - Prof. Dr. Bernd Venohr

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Vertical diversification: Transactions cost exist, when there is market failure (market transactions inappropriate or too costly), which in turn lead to firms vertically integrating � A vertical market "fails" when transactions within it are too risky and the contracts designed to overcome these risks are too costly (or impossible) to write and administer. Where transaction costs are high , the firm is a more efficient means of organization � Examples (causes) of“market failures”: – One Seller, One Buyer – Difficulty in Writing Contracts: Bounded Rationality; Opportunism; Pre – Adverse Selection; Post - -- Moral Hazard – Asset Specificity – Frequency of Transaction: The more frequent a transaction, all else equal, the more likely integration will occur � By vertically integrating a firm makes its resource decisions internally, using management mechanisms, as opposed to using the market . The objective is to adopt the organizational mode that best economizes on transaction costs, minimizes the risk of market failure, while taking into account the expense of governance costs. Firms must balance transaction costs with the cost of governance. � Rapid decline of vertical integration in the last few years: rise of outsourcing – advances of computer technology allow for easy cooperation between companies (lowering transaction costs and incentive and coordination poblems) – increased ability to write more complete and enforceable contracts Source: Coase, Ronald. "The Nature of the Firm".; Wikepedia © 2006 Dr. Bernd Venohr 36
Vertical diversification: The Costs and Benefits of Vertical Integration � Benefits – Technical economies from integrating processes e.g. iron and steel production – Superior coordination – Avoids transactions costs of market contracts in situations where there are: • small numbers of firms • transaction-specific investments • opportunism and strategic misrepresentation • taxes and regulations on market transactions � Costs – Differences in optimal scale of operation between different stages prevents balanced vertical integration – Strategic differences between different vertical stages creates management difficulties – Inhibits development of and exploitation of core competencies – Limits flexibility • in responding to demand cycles • in responding to changes in technology, customer preferences, etc. • Compounding of risk Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004) © 2006 Dr. Bernd Venohr 37
Page 1 and 2: © 2006 Dr. Bernd Venohr Corporate
Page 3 and 4: Where are we today? External Enviro
Page 5 and 6: Key issues corporate versus busines
Page 7 and 8: Goal of Corporate Strategy: create
Page 9 and 10: Corporate strategy: diversification
Page 11 and 12: Two alternative diversification str
Page 13 and 14: Vertical Diversification: Number of
Page 15 and 16: Degree of vertical diversification
Page 17 and 18: Vertical diversification: Some Vert
Page 19 and 20: Vertical diversification: Different
Page 21 and 22: Horizontal diversification: Identif
Page 23 and 24: Horizontal diversification: Transfe
Page 25 and 26: Unrelated Diversification: diversif
Page 27 and 28: Example of unrelated diversificatio
Page 29 and 30: Theory of unrelated diversification
Page 31 and 32: Underrated „good reason“ for un
Page 33 and 34: New Assignment and Outlook next Ses
Page 35: Remarks-Premises of Corporate Strat
Page 39 and 40: Remarks-Theory of unrelated diversi
Page 41 and 42: Empirical results diversification a
Page 43 and 44: Core Competencies: What a firm does
Page 45 and 46: Capabilities: What a firm does �
Page 47: Canon: Products and Core Technical

Corporate Strategy Diversification - Prof. Dr. Bernd Venohr

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