1. McDonald’s and P&G selling in different nations

1. 1. McDonald’s and P&G selling in different nations • Selling different products • Lose production economies of scale • Spreading fixed costs • Purchasing economies • Transportation economies • Inventories

2. Brand names • McDonald’s -- same brand name, take advantage of umbrella branding • Consumers infer product quality from brand name • Procter and Gamble -- different brand names, unable to take advantage of umbrella branding

3. 2. Poletown case • Background to case • New site needed, Poletown only site in Detroit, heavily populated • City, UAW in favor of Poletown, residents opposed • $200 million for Poletown site vs $65-80 million for alternative site • Stockholders -- fiduciary responsibility • Midwestern alternative

4. Stakeholders -- non-fiduciary, moral responsibility • Includes stockholders, community, employees, suppliers, alternative community, customers • Likely locate in Poletown • Same conclusion • If survival of company at risk • If satisfying stakeholders in best interests of stockholders (increases value)

5. Your choice -- depends on strength of argument

6. 3. Dixieland Bottlers/Big Dog • Transfer pricing -- Big Dog better off if it acquires Dixieland and can increase price that Dixieland pays? • Opportunity cost -- best use of Big Dog’s Resources? • Vertical integration vs. market transaction

7. Vertical integration • Reduce transactions costs (but already lifetime contract) • Increase coordination • Reduce leakage of private information • Market transaction • Reduce agency costs • Reduce influence costs • Although Dixieland pays less for Big Dog products, market share same as nationwide

8. 4. Developing Countries’ Demand for Specific Assets • Increase demand for specific assets, more vertical integration • Underdeveloped court system and contract law • Economies of scale

9. 5. Patterns in many industries • A) Small firms outsource production • Less able to achieve economies of scale and learning economies • B) Standardized inputs outsourced, tailor-made not outsourced • Standardized inputs -- less asset specificity • Little risk of opportunism -- lower transactions costs • More opportunity for economies of scale • Tailor-made -- just the reverse

10. 6. Diversification to diversify managerial risk (Ch 3-5) • Agency considerations -- difficult to measure divisional performance • Product diversification increases agent’s opportunity for hidden information and hidden action (asymmetric information) • Risk attached to investment in relationship-specific assets

11. Shareholders spread risk • If shareholder owns large block of stock, can’t sell without affecting stock price • Diversification resulting from internal development reduces risk by reducing asymmetric information • Diversified firms less likely to go bankrupt (all or nothing) • Economies of scope reduce risk

12. 7. Holdup problem related to relationship-specific assets • Fundamental transformation with relationship-specific assets • Opportunity cost -- redeploying a specific asset reduces its value • Quasi-rents can be transferred to trading partner