Samenvatting
Summary CLS articles
- Instelling
- Tilburg University (UVT)
Summary of all CLS articles + important slides for the exam, including exam questions such as main contribution and proposed relationships of each paper.
[Meer zien]Voorbeeld 3 van de 17 pagina's
Voorbeeld 3 van de 17 pagina's
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Voorbeeld van de inhoud
CLS summaryWeek 1
Logics for corporate growth
Business development (same Horizontal expansion (different Vertical expansion (upstream or
business) business) downstream activity)
Decreased - Increased bargaining power - Increased bargaining power - Access to cheaper inputs (over
input cost on input suppliers on suppliers of shared inputs market transactions)
- 1999: acquisition of Nissan - 1930 Unilever: merger Lever - Raw materials
by Renault (same suppliers) Brothers (soap) + margarine - Components
Unie (margarine) (same - Financial resources
supplier) - Total’s expansion from oil
distribution into oil
exploration (cheaper internal
inputs)
Decreased - Scale economies (fixed cost - Scope economies (fixed cost - Technical integration-based
production offsetting on productive offsetting on shared economies
cost resources) productive resources) - Also, information-based scale
- Acquisition of Skoda by VW - Tangibles: machines economies
(same engines, chassis) - Intangibles: skills - Samsung: from chip to phone
- KraftHeinz (combination of (integration tech. economies)
logistics – same tangibles) - Zara’s vertical expansion
(information scale economies)
Increased - Increased market power on - Higher prices: increased - Reputational effects in
revenues output buyers market power downstream areas
- 1996 Merger Boeing + - Higher prices: WTP - Microsofts’ expansion into
McDonnell Douglas (same integration & reputation game console, tablets, cell
buyers = airlines) - Higher unit sales: X-selling phone (reputation)
- P&G (beauty) + Gillette
(razors) (increased power)
- IBM entry into IT services
(integration WTP), Disney
entry into toys (reputation
WTP)
- GM into insurance (X-selling)
BBB: Pros & Cons
+ -
Build • Maintain control • Slow & risky
• Keep all profits • Large resource requirements
• Easy integration/ cultural fit • Entry barriers/ liability of newness
• Increase competition & capacity
• Exploitation (vs exploration)
Blend • Share investments & costs • Minimum resources required
• Complementary strengths • Share the profits
• Learn & acquire new capabilities • Problems/ clashes with partner
• Gradual/ reversible move • Lose control & create dependence
• Knowledge leakage & creating competitors
Buy • Fast • Price premium
• Full control • Information asymmetry/ real value
• No initial resource required • Integration problems
• Acquire additional strengths • Time compression diseconomies
• No market capacity created • Acquisitions may hamper innovation
Week 2
Zhou (2011) – Synergy, Coordination Costs and Diversification Costs
Abstract: Sharing common inputs across business lines can potentially generate synergy that justifies related diversification. The
pursuit of such synergy through diversification is, however, fundamentally driven by the indivisibility of inputs between firms.
Following Penrose’s insight, I argue that to realize this synergy, a firm needs to actively manage the interdependencies between
different business lines, which, in turn, increases its coordination costs. The coordination costs may increase faster than synergy
and set a limit to related diversification. This is particularly salient when the firm’s existing business lines already have complex
interdependencies among them. I test these arguments on a dataset of U.S. equipment manufacturers for the period 1993 to
,2003. The results show that a firm is more likely to diversify into a new business when its existing business lines can potentially
share more inputs with the new business; however, the firm is less likely to diversify into any new business when its existing
business lines are complex. Importantly, the firm’s likelihood of diversifying into a new business decreases more with the
complexity in the firm’s existing business lines if they share more inputs with the new business. These results suggest that
increasing coordination costs counterbalance the potential synergistic benefits associated with related diversification.
Main contribution of the paper: This paper examines whether the pursuit of synergy itself explains limits to related diversification
and therefore the choice for unrelated diversification. It argues that to realize the potential synergy, a firm must actively manage
the interdependencies between new and existing businesses, which results in coordination costs. Net synergy may decline not
because of exogenous opportunity constraints but because of the rising costs of coordinating interdependencies across an
increasing array of related business lines. Therefore, while diminishing synergistic benefits limit diversification in general,
increasing coordination costs moderate the impact of synergy on the choice of industries and set a limit to related diversification.
Theories: Theory of the firm (the boundaries of the firm) Transaction cost economics (TCE)
Proposed relationships:
• H1: A firm is less likely to diversify into a new business when its existing business lines are more complex supported
o Instead of sharing inputs with others, a firm can leverage scope economy by diversifying into business lines that
share similar inputs with its existing businesses. However, diversification merely shifts transaction costs into the
boundary of the firm, albeit in a slightly different form – coordination costs. Sharing common inputs creates
interdependencies between business lines, which challenge three elements of coordination: communication,
information processing and joint decision making. Even though at the transaction level the costs of managing
interdependent activities within an integrated firm may be less than between two separate firms, at the firm
level such costs rise dramatically as the firm’s total coordination demand approaches its coordination capacity.
To reduce transaction costs between firms, firm boundaries should be located such that interdependencies
between integrated activities and outsourced activities are weak. But what determines whether an
interdependent relationship is too weak to be integrated or too strong to be left out? The answer lies in a firm’s
prevailing coordination demand: the greater it is, the less coordination capacity will be spared for a new activity,
and the greater will be the marginal coordination cost if the new activity is integrated. In other words, there is
the exogenous potential for interdependencies between activities, but a firm can affect interdependencies
within its boundary by choice of activities.
• H2: A firm’s likelihood of diversifying into a new business decreases more with the complexity in the firm’s existing
business lines if they share more inputs with the new business supported
o While coordination costs pose a challenge to diversification in general, they are greater for firms pursuing more
related diversification. More input sharing between a firm’s existing business lines and a new business adds
more interdependencies. Coordination costs go up more than linearly with the number of business lines; they
increase with the amount of interdependencies among them. Depending on how quickly coordination costs and
synergy increase relative to each other, the difference in marginal coordination costs between more and less
related diversification may become greater than the difference in marginal synergistic benefits between the
two. In that case, diversification into a less related business becomes more attractive than a more related
business. To save coordination costs, a firm can diversify into a highly related business but not integrate it with
existing business lines. Unfortunately, to realize the potential synergy that justifies diversification in the first
place, the firm needs to actively manage and align the interdependent activities. In sum, related diversification
is more costly to coordinate than unrelated diversification. It also exacerbates the problem of coordinating a
complex portfolio more than unrelated diversification. The more inputs that are shared between the new and
old business lines, the more existing relationships need to be adjusted (i.e., the greater the ‘ripple’ effect).
Conclusion: This paper investigates the joint effect of synergy and coordination costs on a firm’s diversification choices.
Diversification patterns of U.S. equipment manufacturers show that the similarity of inputs (a source of synergy) between a firm’s
business lines and a target business increases the probability that the firm diversifies into the target business, but the firm is less
likely to diversify into any new business when it has greater complexity (a source of coordination costs) in its existing business
lines. Importantly, the potential for input sharing magnifies the negative impact of complexity on entry. These results confirm that
coordination costs are an important explanation for limits to related diversification (relative to unrelated diversification) that is
independent of existing explanations such as risk pooling, agency, and imitation. The paper has three managerial implications.
First, it suggests that, in making diversification choices, a firm needs to balance the potential synergy with the associated
coordination costs and evaluate in particular the impact of complexity. Second, the paper suggests that because a firm’s overall
coordination capacity is limited, its scope choices may be substitutive: a firm may not expand into all markets where it can apply
excess resources, since doing so will impose coordination burden on the company. Likewise, standardizing components and
outsourcing existing activities along the vertical value chain may free up coordination capacity for horizontal diversification. Third,
the observed heterogeneity across firms in their scope of integration and diversification suggests that firm-specific organizational
capabilities may offset some limitations of coordination costs
, Hashai (2015) – Within industry diversification and firm performance – an S-shaped hypothesis
Abstract: This study shows that the interplay between “adjustment costs”, “coordination costs” and within industry diversification
benefits, results in an S-shaped relationship between within-industry diversification and firm performance. At low levels of within-
industry diversification, coordination costs are negligible but “adjustment costs” are higher than the synergy benefits of a limited
product scope, hence leading to negative performance outcomes. At moderate levels of within-industry diversification synergies
between related product categories substantially increase and outweigh the rise in adjustment and coordination costs, resulting
in positive performance outcomes. Yet, extensive within-industry diversification gives rise to considerable coordination costs,
which, coupled with adjustment costs, outweigh synergy effects and hamper performance. The study further shows that a greater
change rate of within-industry diversification results in negative performance outcomes.
Main contribution of the paper: This study shows that the interplay between “adjustment costs”, “coordination costs” and within
industry diversification benefits, results in an S-shaped relationship between within-industry diversification and firm performance.
Definitions:
• Adjustment costs – are stimulated by the need to transfer and adapt resources to different product categories
• Coordination costs – result from the need to share and create effective linkages between the resources used for different
product categories.
• To a large extent, the two types of costs are shaped by an important attribute of resources, that is whether resources are
“scale free” or “non-scale free”.
o Scale free resources are resources whose use for a given task is independent of their use for other tasks
(technological knowledge).
o Non-scale free resources are those whose use for a specific task comes at the expense of another opportunity
costs (managerial times and attention).
Theories:
• Population ecology – liability of newness and aging (also smallness), organizational inertia
• Industry life cycle
• Time compression diseconomies
Proposed relationships:
• H1: At low levels of within-industry diversification the relationship between within-industry diversification and
performance is negative supported
o The benefits from within-industry diversification are expected to be quite modest for firms engaging in very few
product categories because of the limited potential to exploit economics of scope and their related synergies.
While at low levels of within-industry diversification, coordination costs are expected to be negligible (as firms
need to share resources and coordinate operations only between a few product categories), significant
adjustment costs are likely to already occur. Such costs will likely center around the diversion of non-scale free
resources from their current use and the imperfect adaptation of resources to new product categories. At low
levels of within-industry diversification firms have virtually no supporting routines and knowledge base to
efficiently transfer resources to new product categories and are further likely to bear the costs of imperfect
replication of their existing operations in similar yet sufficiently different product categories within their core
industry. Taken together, at low levels of within-industry diversification, adjustment costs are likely to increase
more rapidly than the modest increase in the benefits of within-industry diversification.
• H2: At moderate levels of within-industry diversification, the relationship between within-industry diversification and
performance is positive supported
o The benefits of within-industry diversification are expected to increase the more diversified firms are across a
greater spread of product categories within their core industry. This results from the greater potential to exploit
scope economies and synergies as the number and variety of product categories increases. While at moderate
levels of within-industry diversification, coordination costs are still not expected to become acute, adjustment
costs are expected to continue and increase the more diversified firms become within their core industry. This
is due to the need to adapt resources to multiple new product categories as well as a greater diversion of
resources from existing product categories to new ones. Yet, the increase in adjustment costs is likely to be
moderated by the fact that some adaptation costs, such as those resulting from the imperfect adaptation of
resources when replicating existing activities in similar yet different product categories, may in fact reduce. As
firms become engaged in a greater number and variety of product categories, managers are more likely to realize
the distinct resources required for different product categories and apply a more nuanced management of
operations in different product categories. Likewise, at such levels firms are likely to possess supporting routines
and knowledge base to transfer resources to new product categories which may somewhat mitigate the rise in
adjustment costs. Hence, relative to low levels of within-industry diversification, at moderate levels of within-
industry diversification, I expect the increase in the benefits of within-industry diversification to be larger than
the increase in adjustment costs. At moderate levels of within-industry diversification, the benefits of product
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