A mechanic doing brake jobs could also do oil changes but he might be more

A mechanic doing brake jobs could also do oil changes

This preview shows page 26 - 33 out of 43 pages.

A mechanic doing brake jobs could also do oil changes, but he might be more productive if he could specialize. Again, the requirement is: the c ost of sharing an asset across two markets is less than the cost of developing the asset individually for each.
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27 Value creation: advertising / brand equity Special case of fixed cost that can be spread over multiple markets Examples: FedEx marketing in next-day air extends to ground Starbucks reputation in one city carries over to another Caveat: easy argument to make but often hard to quantify Lots of examples where it doesn’t work. Coke didn’t even try to use its brand with Dasani. Should FedEx and AirBorne merge under same brand? Probably would help AirBorne, but could harm FedEx
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28 Value creation: managerial talent This is another special case of fixed cost. Managers / owners may develop special skills in organization, finance, etc. that allow them to outperform competitors in many different industries: – GE? Caveat: this is an even MORE dangerous argument than the marketing one. Lots of people think they have special talents, but few do. Managerial skills must be scarce and apply specifically to industries in question Warner Bros. finding TV talent and finding movie talent?
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29 Value creation: internal capital markets Combining a cash-rich and a cash-constrained business can allow cross-subsidization. This only makes sense if it allows profitable investments that would not otherwise have been made . Rare with sophisticated capital markets. Why is it better to borrow from a firm than from a bank? (or a VC) Conditions that could make it work: Solves information problems (outside investors are uncertain about value of projects) Monitoring by banks and outside investors is costly Overall, though, empirical and theoretical evidence argues against combining completely unrelated businesses.
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30 Value creation: bargaining power If firms in two industries buy from the same supplier or sell to the same customers, they can enhance their bargaining power by merging. Or, suppose you have a really powerful supplier. Should you just buy them?
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31 One cost of integration: straddling Spreading resources too thin Brain surgeons doing physicals Gleacher center as a nightclub Bigger firms have higher labor costs More likely to have unions Workers prefer smaller firms in general Internal rent seeking Costs of integrating companies’ culture and organization Dilution of brand equity
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Some other costs of integration Incentive provision Mom and pop hardware store owners have strong incentives to work hard because they own the store. Suppose Home Depot buys them out – could they offer similarly high-powered incentive contract?
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