16 - Corporate Strategy - Disney - Pixar S21-Cosway.pptx -...

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Boston University Questrom School of Business Please have your Name Card out today & every day!!! Thanks! Session 16: Corporate Strategy – Vertical Scope & Disney - Pixar SI422: Strategy, Innovation and Global Competition
Boston University Questrom School of Business Today: Final content before the exam Reminder: if you received a “1” on any part of Assignment #1 and would like to discuss, sign up for a slot Friday or next week. Monday: Dedicated to review of course topics Wednesday: “Classroom Drop In” for questions. I’ll be in Zoom during all three section times. Feel free to stop in to ask/listen. Or not. Extra time? Other accommodations? Let me know ASAP!
Boston University Questrom School of Business Two key tests to apply to any expansion in corporate scope The Better-Off Test Do the business units create and capture more value if they are related than they could as separate, single-business entities without formal ties? Factors that matter: Lower costs: shared activities, shared resources, economies of scale or scope Increased willingness-to-pay! The Ownership Test Do the business units create more value under common ownership than they would through if they were related in other ways Are any alternative relationships superior to common ownership?
Boston University Questrom School of Business Another summary: BO & O tests in context of Horizontal Scope Better Off Test in context of Horizontal Scope: can firm achieve lower average costs or higher average prices by including multiple business units in same firm? economies of scope (aka, synergies) diversify if (cost of having units A & B in same firm) < (cost of unit A in firm A) + (cost of unit B in firm B) boost in WTP (aka, cross-selling) diversify if (WTP of activities A & B if done in same firm) > (WTP of activity A in firm A) + (WTP activity B in firm B) Ownership Test in context of Horizontal Scope should firm own both business units (or is another arrangement more profitable)? the prescription here cannot be characterized as easily by an algorithm, but the principle remains important note that many intangible assets satisfy this test, some do not
Boston University Questrom School of Business Another summary: BO & O test in context of Vertical Scope Better Off Test & Ownership Tests BO Test: Does vertical integration lead to lower average cost or higher average WTP? Ownership Test: Is it best to 100% own vertically integrated entity or do alternative arrangements (long-term contracts, long-term relationship, etc.) achieve same benefits at lower cost? Factors that drive each quality control cost control relationship-specific investments result of relationship-specific investments that may change bargaining power with suppliers or rivals joint ownership provides incentives to offer service
Boston University Questrom School of Business Good reasons sometimes drives firm diversification, but so do bad ones (sometimes) Good” reasons : (i.e., reasons that increase rate of return & maximize shareholder value) efficient operations

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