Top 3 Boundary Implications

20 February 2009 at 5:50 am 10 comments

| Lasse Lien |

Top 3 lists are popular, the financial crisis is a hot topic, and this is Organizations and Markets. Combine all three and you get my top 3 list of implications of the financial crisis/recession for firm boundaries:

1. Increased horizontal specialization (de-diversification)

2. Increased vertical specialization

3. Increased concentration (increased size)

Is this roughly right? If not, provide us with your own list.

Entry filed under: - Lien -, Bailout / Financial Crisis, Strategic Management, Theory of the Firm.

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10 Comments Add your own

  • 1. David Chen  |  20 February 2009 at 9:09 am

    I don’t mean this as an argument, but why?

  • 2. Lasse  |  20 February 2009 at 9:32 am

    David, here are two reasons. One is that capital shortage and margin erosion means that firms will give priority to funding their core business, assuming that this is what ‘s most valuable to protect and where the most attractive options lie. The other is that as other firms refocus and marginal players struggle, there will be a lot of potential M&A targets. A firm who wants to be active in the restructuring of their core industry will need capital to play the M&A game.

  • 3. pj  |  20 February 2009 at 11:59 am

    It would seem to be hard to get increased size along with increased specialization in both vertical and horizontal dimensions. If firms start specializing to micromarkets, then you’d expect concentration to decrease in any industry definition that encompasses a number of micromarkets.

    I would predict increasing market share to the least leveraged firms.

  • 4. anonymous  |  20 February 2009 at 9:35 pm

    If a whole industry is contracting though, I could see firms being smaller (even if their market share is higher) after M&A

  • 5. Peter Klein  |  21 February 2009 at 12:30 am

    We might also predict, based on the Mitchell and Mulherin work on the clustering of M&A by industry, and the idea that not only consolidation, but also experimentation, tends to follow industry shocks, that a greater-than-average share of boundary changes in financial services, automobiles, home construction, etc. will later be reversed.

  • 6. Lasse  |  23 February 2009 at 4:11 am

    pj & and anonymous, I stand corrected. I should have clarified that I meant size as market share, not absolute size. My point is that strong firms in an industry are likely to gain more share as others fail, and as the strong take over the weak.

    Peter, I agree with the qualification that experiments that require a lot of capital or time will probably not be popular for a while

  • 7. Bruce Rayton  |  25 February 2009 at 6:24 am

    I suspect the current illiquidity in financial markets will (at least in the short run) favor companies with access to internal sources of funds. This probably means ‘bigger’ firms (to increase the size of the internal capital market), and this may also imply more diversification rather than less if the areas of highest expected future returns are not currently generating profits for reinvestment.

  • 8. Lasse  |  25 February 2009 at 6:44 am

    Interesting point Bruce. But don’t you think the motive of increasing the size of the internal capital market will be dominated by the tendency of firms to become more risk averse (and impatient)? Diversification is after all a highly risky undertaking.

  • 9. Pacific gets pretty specific « International BS Blog  |  26 February 2009 at 2:10 am

    […] It has been asked what the impact of the current financial crisis will have on firm boundaries (i.e. how far they stretch themselves in terms of range of products and activities). Pacific Brands look to be reducing their extent of horizontal reach (or perhaps their extent of duplication within existing product markets). Carrying slow-moving product is a lot harder to justify when your financiers are looking over your shoulder and are nervous about debt levels. […]

  • 10. International BS Blog  |  2 March 2009 at 2:17 am

    Please enjoy the firesale…

    Further to the question about the implications of the Global Economic Crisis on firm boundaries, it would seem that we may be seeing an increase in concentration. As more firms become distressed, the bigger (or more financially sound) players are star…

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