Choosing Corporate Scope - Ghemawat and Rivkin

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  1. Ways in which corporate strategy changed over time
    1. Using financial measures to determine the performance of SBUs
    2. SBUs should focus on core competencies because this - the SBUs should reorganize around ways in which they are related. However
      1. Berkshire Hathaway never did this and still was successful
      2. Sears did this and failed
    3. Two part test to see if adding a company to a SBU would be good
      1. "Better-Off" test: Does combining the two units create and capture more value than two individual units
      2. "Best-Alternative" test: Is there another way to get this value (joint venture, licensing, arms length deal, etc.
    4. Other considerations
      1. will total profits increase (likely to be yes if the two part test works)
      2. best parent test: will we do as well as the best parent would (this is probably too harsh because we shouldn't pass something up just because someone would do better with it
      3. there are various forces that make us trend towards expansion (overconfidence, goals of an empire, etc.)
  2. How can a company be better off by acquiring another company?
    1. industry attractiveness
      1. mitigate porter's five forces
      2. firm can leave to a poor industry to a more burgeoning one
    2. competitive advantage
      1. Cost effects
        1. One must go activity by activity of a company, see how costs can be saved by sharing costs, and then see how these costs effect the bottom line.
        2. this can be happened via buying power, reducing effect of fixed costs, and other supply chain costs
        3. size may cause trouble with certain things such as hiring, and with conflicts of goals across companies
      2. Willingness to pay
        1. convenience of one stop shopping
        2. cross promotion
        3. umbrella branding
        4. coordinate pricing in different horizontals
        5. conflict issues - think when Pepsi bought Taco Bell and Pizza Hut and turned them to Pepsi, Coke convinced Wendies to change to Coke
          1. cognitive conflicts - think Disney and Mirmax
          2. rep issues - think Anderson consulting
      3. Dual Effects - both willingness to pay and cost effects
        1. example is sales staff that only one unit can justify in cost
        2. cross business learning (negative is that this can lead to internal bias)
  3. What are the costs of not acquiring a company and rather just negotiating with them to get the competitive advantage?
    1. transaction costs - every negotiation has costs
    2. opportunistic behavior - people would use the license to advantage themselves over the licensee
    3. why can't contracts solve these two issues?
      1. contracts that cover all contingencies are hard to write
      2. contracts hard to enforce
      3. it is hard to determine who has a property right
      4. the licenses being exchanged are extremely hard to value --> negotiations are harder
  4. Three different types of SMUs and how they create value?
    1. One dominant business and other peripheral businesses --> large corporate staff to coordinate use of the peripherals
    2. related industry SMUs that create value by broad sharing of resources and skill
    3. SMUs with unrelated businesses - try to do cash management and create liquidity better than capital markets can
  5. Flaws in analyzing synergies in a merger
    1. assuming benefits are benefits when they can be achieved through contract without the merger
    2. heavily utilized units cannot be tapped by the other company
    3. loss of ability to deal and create synergies with competitors of the company you will merge with
    4. double counting of certain benefits
    5. the cost of cross-unit coordination is often very costly.