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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)