Create and answer a case study similar to Memo 9 from Time Warner (Most Relevant Chapters 3, 5, 7, and 13) that look at the implications of spinning off a division. Andrew Royalty
Create and answer a case study similar to Memo 9 from Time Warner (Most Relevant Chapters 3, 5, 7, and 13) that look at the implications of spinning off a division.
Spinning off a division
Steve’s electronics company is currently having a dilemma. The company produces several product lines in the electronics industry. These products range include computers, laptops, and printers. Recently the company has seen drastic reductions in the profits that it has been receiving from its line of printers. In fact in recent months the line has become slightly unprofitable after all expenses are determined.
Printers, much like many of these products, have become progressively more and more like commodity products. This means that the margin for each printer sold is slowly approaching zero. Steve has been thinking about the possibility of spinning this division off into its own separate entity for this reason. He wants the core business to only focus on product lines with higher margins. There are some worries about doing this though.
Several companies have recently tried to move towards this concept and back off of it though. Recently HP computers debated about spinning off its personal systems group. The CEO of HP decided to forgo this opportunity however because of potential synergies the company has because of this segment.( Kolakowski) The cost of spinning off the division would have been immense as well. The division was estimated to be worth approximately 8 billion dollars and the one time charge HP would take was valued at 1.5 billion dollars. (Computerworld)
Another company, Netflix, thought of doing a similar concept by spinning off the companies DVD by mail business into a separate entity. (USA Today) This separate entity, Qwickster, would be able to exist as a separate entity and would be less affected by the content licenses that Netflix would have to make. Instead of seeing a profit motive to keep the entity Netflix was pressured by consumers and stockholders to not make the move and eventually decided against it.
There however have been some successful spin offs in the past. PepsiCo for example used to own the company now known as Yum Brands.(Economist) These fast food chains were unable to utilize the synergies they achieved once they spun off because under Pepsi they often were run as rivals. By operating individually they were able to manage their costs significantly better and have turned into the second largest food conglomerate out there.
Economies of Scope:
One dilemma that the company may experience is that the printer line of products might be resulting in a cost savings in some of the other more profitable segments. This is called economies of scope.(economist) This concept could mean that discontinuing the printers line could result in a cost savings that may be negligible.
This can be especially seen when goods are in related industries such as the electronics industry above. Products likely use many of the same materials to produce or at the very least the same suppliers. For example the company may receive the plastic casing it uses to produce it’s printers from the same company that provides the plastic for the outside of the computers it sells.
Half of the example above is an example of economy of scope and the other half economy of scope. The fact that they are able to buy large amounts of the plastic needed gives the company the economy of scale, and the fact that it is caused by two product lines leads to the economy of scope. Between these two factors keeping the division may actually lead to a total cost savings even though the printer’s line is unprofitable.
Recommendations:
Steve’s electronics needs to look at a few things before it makes its final decision on whether or not to spin off this new division. The first thing it needs to look at is how it will affect the stakeholders in the organization. It could discover that the very customers and shareholders that are valuable to the company would react negatively to the change such as what happened with Netflix. Then the company needs to take a look at what impact the spinoff will have on its other divisions. If the line of printers has a significant economy of scope with the other lines removing this product line could end up making the other lines costs rise to the point where they too could be unprofitable.
Questions:
1. The fact that the company can save money by producing both computers and printers is part of?
A. Economies of scale
B. Economies of scope
C. Cost savings
D. None of the above
2. The move towards a standardize price with no margin is indicating the market for printers is becoming?
A. Monopoly
B. Perfect Competition
C. Monopolistic Competition
D. Oligopoly
3. By having economies of scope if one product line left the company it would result in?
A. Large reductions in cost
B. Small reductions in cost
C. No Reduction in cost
D. None of the above
4. Which of these companies managed to successfully do a spin off?
A. Pepsi
B. Netflix
C. HP
D. All of the Above
5. Which of these factors should the company not consider in its final decision?
A. The cost to spin off the division
B. The economies of scope
C. The money already spent on the printers division
Mike, Snider, and TODAY USA. "Netflix ditches Qwikster plan." USA Today n.d.: Academic Search Premier. Web. 6 Dec. 2011
"Idea: Economies of Scale and Scope | The Economist." The Economist - World News, Politics, Economics, Business & Finance. Web. 06 Dec. 2011. <http://www.economist.com/node/12446567>.
"Yum! Brands: Fast Food's Yummy Secret | The Economist." The Economist - World News, Politics, Economics, Business & Finance. Web. 06 Dec. 2011. <http://www.economist.com/node/4316138>.
Andrew Royalty
Create and answer a case study similar to Memo 9 from Time Warner (Most Relevant Chapters 3, 5, 7, and 13) that look at the implications of spinning off a division.
Spinning off a division
Steve’s electronics company is currently having a dilemma. The company produces several product lines in the electronics industry. These products range include computers, laptops, and printers. Recently the company has seen drastic reductions in the profits that it has been receiving from its line of printers. In fact in recent months the line has become slightly unprofitable after all expenses are determined.
Printers, much like many of these products, have become progressively more and more like commodity products. This means that the margin for each printer sold is slowly approaching zero. Steve has been thinking about the possibility of spinning this division off into its own separate entity for this reason. He wants the core business to only focus on product lines with higher margins. There are some worries about doing this though.
Several companies have recently tried to move towards this concept and back off of it though. Recently HP computers debated about spinning off its personal systems group. The CEO of HP decided to forgo this opportunity however because of potential synergies the company has because of this segment.( Kolakowski) The cost of spinning off the division would have been immense as well. The division was estimated to be worth approximately 8 billion dollars and the one time charge HP would take was valued at 1.5 billion dollars. (Computerworld)
Another company, Netflix, thought of doing a similar concept by spinning off the companies DVD by mail business into a separate entity. (USA Today) This separate entity, Qwickster, would be able to exist as a separate entity and would be less affected by the content licenses that Netflix would have to make. Instead of seeing a profit motive to keep the entity Netflix was pressured by consumers and stockholders to not make the move and eventually decided against it.
There however have been some successful spin offs in the past. PepsiCo for example used to own the company now known as Yum Brands.(Economist) These fast food chains were unable to utilize the synergies they achieved once they spun off because under Pepsi they often were run as rivals. By operating individually they were able to manage their costs significantly better and have turned into the second largest food conglomerate out there.
Economies of Scope:
One dilemma that the company may experience is that the printer line of products might be resulting in a cost savings in some of the other more profitable segments. This is called economies of scope.(economist) This concept could mean that discontinuing the printers line could result in a cost savings that may be negligible.
This can be especially seen when goods are in related industries such as the electronics industry above. Products likely use many of the same materials to produce or at the very least the same suppliers. For example the company may receive the plastic casing it uses to produce it’s printers from the same company that provides the plastic for the outside of the computers it sells.
Half of the example above is an example of economy of scope and the other half economy of scope. The fact that they are able to buy large amounts of the plastic needed gives the company the economy of scale, and the fact that it is caused by two product lines leads to the economy of scope. Between these two factors keeping the division may actually lead to a total cost savings even though the printer’s line is unprofitable.
Recommendations:
Steve’s electronics needs to look at a few things before it makes its final decision on whether or not to spin off this new division. The first thing it needs to look at is how it will affect the stakeholders in the organization. It could discover that the very customers and shareholders that are valuable to the company would react negatively to the change such as what happened with Netflix. Then the company needs to take a look at what impact the spinoff will have on its other divisions. If the line of printers has a significant economy of scope with the other lines removing this product line could end up making the other lines costs rise to the point where they too could be unprofitable.
Questions:
Answers:
References
Kolakowski, Nicholas. "HP Wants Strong, Balanced PC Division." Eweek 28.18 (2011): 12. Academic Search Premier. Web. 6 Dec. 2011.
Shah, Agam. "HP: Spinning PC Unit off Would Have Cost Billions - Computerworld." Computerworld - IT News, Features, Blogs, Tech Reviews, Career Advice. Web. 06 Dec. 2011. <http://www.computerworld.com/s/article/9221303/HP_Spinning_PC_unit_off_would_have_cost_billions>.
Mike, Snider, and TODAY USA. "Netflix ditches Qwikster plan." USA Today n.d.: Academic Search Premier. Web. 6 Dec. 2011
"Idea: Economies of Scale and Scope | The Economist." The Economist - World News, Politics, Economics, Business & Finance. Web. 06 Dec. 2011. <http://www.economist.com/node/12446567>.
"Yum! Brands: Fast Food's Yummy Secret | The Economist." The Economist - World News, Politics, Economics, Business & Finance. Web. 06 Dec. 2011. <http://www.economist.com/node/4316138>.