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The Conglomerate Paradox: As GE splinters, Facebook becomes Meta

Are diseconomies of scope becoming more prevalent in the old American conglomerates while economies of scope are emerging in the technology spaces? (Planet Money, Nov. 2021)

Why Conglomerates Split Up

Sounds like diseconomies of scope is at work (WSJ Nov 2021).

FYI: A driver for conglomerates has disappeared. One reason that conglomerates were the rage in the 1960s is that the firm's stock served as a diversified portfolio of income streams from different sectors in the economy. A key lesson in finance is not to put all of you eggs in one basket. By buying shares in a conglomerate, an investor automatically had many baskets. Now, with lower transactions costs and ETFs and index funds, investors can easily and cheaply purchase a diversified portfolio AND can tailor to their individual preferences.   

Ford Steps Into the Chips Business

Ford is (sort of) integrating backward (WSJ Nov. 2021).

1. Are specialized investments large?
2. Are contracting costs high?

GE and the Belief in Management Magic

This report describes the history that led to GE's decision to split into three companies (WSJ Nov. 2021). To me the attitude at GE contrasts with Porter's definition of strategy. Here are some money quotes:

1. GE’s corporate culture prided itself on elevating management to a kind of science. The dissolution of the company, however, points to a reality many executives don’t like to admit:
   
   Management matters a lot, but it doesn’t matter as much as you think (especially if you are management).
2. Business historian Leslie Hannah, analyzing the 100 companies that had the largest stock-market value in 1912, found that only 21% remained among the top 100 in 1995. Almost half had disappeared ...
3. The struggle to integrate some of those lumbering acquisitions, and sluggish growth elsewhere at the company, forced GE Capital to become ultra-aggressive. Management had no choice; smooth earnings growth had to come from somewhere when other parts of the company were faltering. GE Capital “could get higher returns only by shouldering more risk,”
4. Decades of success had bred complacency. Rita McGrath is a management professor at Columbia Business School who studies corporate change and has consulted for GE. In the early 2000s, she says, a common attitude among the company’s managers was: “It doesn’t matter what we make; it’s how we manage.”
   
   GE was betting that “management technology would always save them,” she says.
5. But a management system optimized for wringing out incremental efficiencies couldn’t make the leap from the Industrial Age to the Information Age.
6. So industrial conglomerates are on the wane, at least for now. The myth that great management can always work miracles should be, too.

Rivian Prices Shares at $78 in Highly Anticipated IPO

This report from the WSJ states that Rivian is "backed by Amazon.com Inc." and that "Rivian has said it will launch three models by the end of the year. Among those is an electric delivery truck designed and built for Amazon. The e-retailer has an order for 100,000 of the trucks". 

The article raises several questions.

1. Is Amazon integrating backwards? 
2. If so, does the move make sense? 
1. Do transactions between EV truck manufacturers and Amazon require specialized investments? 
2. Are contracting costs high? 
3. If not, what other cost efficiencies might accrue? 

Another report. "The upstart auto manufacturer is backed by some big names, including Amazon.com Inc. and Ford Motor Co."

Update: "Ford Motor Co. F -0.87% and Rivian Automotive Inc. RIVN 4.23% have decided to go their separate ways rather than collaborate on future electric vehicles, backing away from an earlier strategic pact that led to a multibillion-dollar windfall for Ford."

Ford remains an investor. Its $500KK investment + "subsequent infusions" is now valued at $12.8KKK.

Rivian's market value > Ford's. Rivian delivered 42 cars in the last 5 weeks or so and its revenue = $0 in the third quarter of this year.

General Electric to Split Into Three Public Companies

The stock price of GM rose when it announced the split (WSJ, Nov. 2021). Does the increase in market capitalization indicate that producing all three divisions under one roof creates economics of scope or diseconomies of scope?

What I've learnt talking to 2,500+ companies about remote work

This thread outlines the reasons Chris Herd expects the demand for office space to plummet. Two posts really caught my eye.

Would Ticket Holders Pay $25 if They Got Unlimited Food? One Movie Theater Decided to Find Out

This article describes one movie theater's experiment with bundling unlimited food with a movie (WSJ Oct 2021). The scheme also charged a higher price on weekends.

Cake Liberation Day

This opinion states that requiring a home bakery to have a "commercial grade kitchen separate from a home kitchen" "intended to reduce competition for commercial bakers" WSJ, Oct 2021). One of Porter's three common approaches to create a competitive advantage is to reduce the intensity of competition. 

RAP and infrastructure spending

“There is some incentive for forecasts to be high if they make [a project] more likely to get built” (WSJ, Sep 2021)

Why firms need strategies

 

Life at the top is often fleeting (WSJ, Sep 2021)

Facebook Tried to Make Its Platform a Healthier Place. It Got Angrier Instead.

I argue that the decision to maintain an algorithm that encourages divisive content is bad (WSJ Sep 2021). The bad decision raises three questions :

1. Who made the decision not to revise the algorithm?
2. What information did the decider have?
3. What incentives did the decider face?

Walmart to End Quarterly Bonuses for Store Workers

This report (WSJ, Sep 2021) raises an important question: "Which compensation scheme better aligns interests or employees and owners, quarterly bonuses based on store performance or higher wages?"

How do you think the employees view the change?

Funds Go Green, but Sometimes in Name Only

A rose by any other name would smell as sweet but saying something is a rose does not make it one (WSJ, Sep 2021). I tell students to be wary when someone can change a number with the stroke of a pen. The same caution applies to claims: not all claims are true.

For Chobani, Allbirds, Other Coming IPOs, Greed Is Out. Do-Gooding Is In.

"A new generation of companies, including startups such as Rent the Runway Inc., Chobani LLC, Warby Parker Inc. and Allbirds Inc., are on tap to go public this fall, people familiar with the matter say. They’ll be doing it with this message: It isn’t just about the money. It is also about the mission" (WSJ Sep 2021).

I doubt that Milton Friedman  would have objected when a company's founding owners include doing good as part of their mission, even if doing good reduces value. The company is theirs.

I also doubt he would have objected when the company maintains its mission after an IPO. The shareholders know in advance what they are buying. 

Peloton Slashes Price on Exercise Bike, Predicts Slowing Growth

This article illustrates complex pricing. (WSJ, Sep, 2021) It also illustrates that firms may sacrifice profits today for greater profits tomorrow. Peloton bikes and sbscription services are complements. The Bike is a substitute for the Bike+.

Do these pricing decisions conform with the guidelines developed in ECON 610?

"The lowest-cost Peloton Bike will sell for $1,495, down from $1,895. The higher priced Bike+ still goes for $2,495. "

"In a letter to investors, executives said they were trying to add as many customers to its subscription workout classes as possible, even though the price cut, coupled with higher shipping costs, would depress near-term profits."

"The company reduced the Bike to $1,895 from $2,145 in September, when it launched the more-expensive Bike+."

The Importance of Stakeholders to Profitability

In a Wall Street Journal opinion piece denoting [the anniversary of the Business Roundtable's revised statement on the Purpose of a Corporation], the director and associate director of Harvard Law School’s Program on Corporate Governance offered evidence that the 181 CEOs who signed the statement “didn’t intend to make any significant changes to how they do business.” Rather, companies were, for example, still aligning director compensation with the company’s stock price, sending “a clear signal that shareholder value is the objective directors are expected to pursue.”

Well, of course it is. The Business Roundtable’s statement did nothing to change that. But that doesn’t mean that a business’s sole responsibility is to its shareholders. Business have always owed responsibilities to other stakeholders including customers, employees, suppliers, and communities as an integral part of their primary responsibility — to make a profit. In fact, the statement confirms that corporate management will continue to do the things that lead to profitability and — God forbid — shareholder value. 

...

I’ll even go a step beyond that and bet that none of these CEOs, at least none that still have their jobs, reported that profits declined because they were focused on the needs of stakeholders other than their investors. Something like, “Profits are down and your stock price will decline but, hey, we’re really good guys.”

(Puzder, National Review, Aug. 2021)

NIKE reoganizes

Under the leadership of new CEO John Donahoe, Nike is moving away from its classic discrete sports categories (Nike Basketball, Nike Soccer, etc.) in favor of a system where all products are shoveled into one of three divisions: men’s, women’s and kids’. Obviously Nike made clothing tailored to the specificities of all these groups before, but now, Nike is emphasizing gender over sport. Gone is the model of the product appealing to basketball fans because they are basketball fans. It’s now replaced by a model of, say, the product appealing to women because they are women. (https://houseofstrauss.substack.com/p/nikes-end-of-men)

The Uneven Odds for Promotions With Hybrid Work

WFH may reduce your chances for promotion. (WSJ, July 2021)

The World Relies on One Chip Maker in Taiwan, Leaving Everyone Vulnerable

TCSM is almost a monopoly in some sectors fo the semiconductor industry. (WSJ,June 2021) What does the 5-forces model say about its prospects for earning a high rate of return? What do you see as its strategy?

Here are some money quotes.

1. "Its technology is so advanced, Capital Economics said, that it now makes around 92% of the world’s most sophisticated chips, which have transistors that are less than one-thousandth the width of a human hair. Samsung Electronics Co. makes the rest. Most of the roughly 1.4 billion smartphone processors world-wide are made by TSMC.
   
   It makes as much as 60% of the less-sophisticated microcontrollers that car makers need as their vehicles become more automated, according to IHS Markit, a consulting firm."
2. "Semiconductors have become so complex and capital-intensive that once a producer falls behind, it’s hard to catch up. Companies can spend billions of dollars and years trying, only to see the technological horizon recede further.
   
   A single semiconductor factory can cost as much as $20 billion. One key manufacturing tool for advanced chip-making that imprints intricate circuit patterns on silicon costs upward of $100 million, requiring multiple planes to deliver."
   
   TSMC’s own expansion plans call for spending $100 billion over the next three years. That’s nearly a quarter of the entire industry’s capital spending, according to semiconductor research firm VLSI Research."

How ESG Stocks Perform Depends on Who Ranks Them

Determining how ESG stocks perform depends on weights used for the various inputs. (WSJ, June 2021) The market cap of a firm is easy to measure; how well it is meetings its ESG goals is not. As a result, determining whether or not the stocks of companies with high ESG scores outperform the stocks of companies with low ESG scores is difficult.

Palantir and DoorDash CEOs Top List of Biggest Pay Packages in 2020

 

Do the compensation packages align the interests of the two CEOs with owners'? (WSJ, June 2021) 

Questions from WSJ Weekly Review:

• From the article: “Alexander Karp, the chief executive officer and a co-founder of Palantir…received compensation valued at $1.1 billion last year, including $798 million in options and $296 million in restricted stock…” The board of directors of Palantir agreed to compensate Alexander Karp with options to buy Planatir stock. Why would the board pay Karp with options to buy Palantir stock rather than pay him a salary?
• From the article: “Shortly before DoorDash went public…the meal-delivery company awarded co-founder and CEO Tony Xu restricted shares…valued at more than $400 million...” Explain what “going public” means. Why would the founders of DoorDash choose to become publicly owned?
• Prior to becoming a publicly owned firm, could DoorDash experience a principal-agent problem? After become a publicly owned firm, could DoorDash experience a principal-agent problem? Briefly explain your answers.
• From the article: “Mr. Xu…started DoorDash with Stanford University classmates in 2013. The company…had $2.9 billion in revenue last year and reported a loss of $461 million.” Why would the board of directors award CEO Tony Xu a large compensation package when DoorDash suffered a loss of $461 million?
• From the article: “Ambitious, all-or-nothing equity packages are intended to keep and motivate leaders …according to Terry Adamson, a managing director at Technical Compensation Advisors. ‘They’re so levered and so high-risk…They either create massive awards or they create nothing.’” Briefly explain what is meant by an “all-or-nothing” equity package. Briefly explain why an equity package would “create massive awards” or “create nothing.”

Does a walled garden = a castle surrounded by a moat?

This analysis of Apple mentions "Steve Jobs’ (sic?) 2010 vision to 'tie all our products together so we further lock customers into our ecosystem.'” (WSJ, June 2021)

"It is a fallacy to think that if you are seeking profits, you are not serving people"

Pat Toomey defends capitalism here. A money quote follows.

"It is a fallacy to think that if you are seeking profits, you are not serving people. In fact it’s the exact opposite. Business can only profit when they satisfy customers and that can only be achieved with a satisfied workforce and good relationships with the community."

What is a market?

This article illustrates the difficulty of deciding where one market ends and another one begin one begins. (WSJ, 2020).

Why 20% of working days will be from home

"COVID-19 drove a mass social experiment in working from home (WFH). We survey more than 30,000 Americans over multiple waves to investigate whether WFH will stick, and why. Our data say that 20 percent of full workdays will be supplied from home after the pandemic ends, compared with just 5 percent before. We develop evidence on five reasons for this large shift: better-than-expected WFH experiences, new investments in physical and human capital that enable WFH, greatly diminished stigma associated with WFH, lingering concerns about crowds and contagion risks, and a pandemic-driven surge in technological innovations that support WFH. We also use our survey data to project three consequences: First, employees will enjoy large benefits from greater remote work, especially those with higher earnings. Second, the shift to WFH will directly reduce spending in major city centers by at least 5-10 percent relative to the pre-pandemic situation. Third, our data on employer plans and the relative productivity of WFH imply a 5 percent productivity boost in the post-pandemic economy due to re-optimized working arrangements. Only one-fifth of this productivity gain will show up in conventional productivity measures, because they do not capture the time savings from less commuting." https://www.nber.org/papers/w28731#fromrss

Don't reward A and expect B

"You get a guy or a woman in charge of it—they’re personable, the directors like ’em—they don’t know what they’re doing. But they know how to put on an appearance. That’s the biggest single danger". (Warren Buffett, May 2021)

Does diversity in the boardroom increase profit?

Gray and Barry say the claim that diversity in the boardroom increases profit is not based on the evidenc. (WSJ, April 2021).

What are the limits of economies of scope?

 

HT: MURevolution, April 2021

"The social purpose of a company is to find profitable solutions to the challenges of people and planet"

Have Satya Nadella, CEO of Microsoft, and Oxford economist Colin Mayer rebranded Milton Friedman's statement that “the social responsibility of business is to increase profits”? (WSJ, April 2021)

Is this the end of Barbie doll pricing for printers?

New printers are NOT charging a high price for refills of ink. (WSJ, March 2021) My question is, "What took so long?" Were consumers unable to look ahead and then reason back?

Look ahead and reason back

Tractor manufacturers are trying to lock farmers into getting repairs from their dealers. (WSJ, March 2021) One question is, "Were the manufacturers hoping to use Barbie doll pricing?"

This article finds that right to repair legislation can result in a lose-lose-lose outcome.

1. Consumers may lose because manufacturers increase the price of the tractor when the link between tractor sales and revenues from repairs decreases. 
2. Producers may lose because the increase in the price of tractors fails to offset the lose of revenue from repairs. 
3. The environment may also lose.

Barbie doll pricing for printers

Planet Money (Feb. 2021) describes how companies charge low prices for printers to sell high-price ink and make substituting third-party ink difficult.

Is this an example of 1st degree price discrimination?

"When a woman gets a caesarean section at the gleaming new Van Ness location of Sutter Health’s California Pacific Medical Center, the price might be $6,241. Or $29,257. Or $38,264. It could even go as high as $60,584.

"The rate the hospital charges depends on the insurance plan covering the birth. At the bottom end of the scale is a local health plan that serves largely Medicaid recipients. At the top are prices for women whose plans don’t have the San Francisco hospital in their insurers’ network" (WSJ, Feb. 2021).

Should NASDEQ require diversity on boards of directors?

Arthur Levitt, former chairman of the SEC, says the SEC should investigate to determine what benefit, if any exists (WSJ, Jan. 2020). Here is a money quote.

"The most powerful argument for board diversity is that diversity is a social good. The most powerful argument against a board diversity requirement is that if it were manifestly good for companies, there would be no need for it in the first place. Successful companies can’t keep secrets quiet for long; if one could reliably increase its market capitalization by, say, 5% through the appointment of a diverse board, every company on Nasdaq would already meet that standard.

"The problem of board diversity is compounded by the nomination process. Searches for directors are formally structured, but in the end they depend on informal social networks where friends recommend each other. In my experience, many such searches are closer to a social-club recruitment process than a serious contemplation of someone’s task-specific skills. And as has been shown by the National Football League’s Rooney Rule, which since 2003 has required that teams interview at least one ethnic-minority candidate for all head-coaching positions, formal requirements for effort don’t necessarily lead to results.

"Since neither Nasdaq nor the SEC can reliably say that more diverse boards produce better results than homogeneous ones, the SEC should lead."

Trends in which activities beauty firms perform internally

"Historically, big beauty companies have been in charge of their own manufacturing, formulations and distribution, while relying on advertising agencies to market their products and retailers to sell them. But a generation of beauty startups, including Kylie Cosmetics, is upending that formula, selling directly to consumers and relying on social media for marketing, while farming out production and distribution to third parties."

Kylie Cosmetics generates  "$200 million in annual revenue with fewer than a dozen employees and virtually no ad spending."

WSJ, Jan. 2021.

HBR on Strategy

 Casadesus-Masanell, Ramon. 2014. Introduction to Strategy. HBR

Casadesus-Masanell, Ramon. 2014. Industry Analysis. HBR

ebiz

Marchand, Donald A., and Joe Peppard. 2013. Why IT Fumbles Analytics. HBR
Focus on information rather than technology.

Carr, Nicholas G. 2003. IT Doesn't Matter. HBR
IT is a commodity -> spend less, follow rather than lead, and focus on risks rather than opportunities.

Davenport, Thomas H. 2006. Competing on Analystics. HBR
Become an analytics competitor to differentiate yourself.

McAfee, Andrew, and Erik Brynjolfsson. 2008. Investing in the IT that Makes a Competitive Difference. HBR
IT -> more concentration and more turbulent. To thrive firms need to deploy, innovate, and propagate.