So let's turn now to the question of horizontal scope or diversification. As with vertical scope, there are two questions here; which businesses a company should operate in, and whether the same company should be integrated across a set of businesses. Now the first question again is primarily a business strategy question, it is possible to exit current businesses and enter into other more profitable ones, or to start new businesses and diverse them if it doesn't make sense to own all the businesses together. So the second question here, which is a question about whether a firm should be horizontally diversified is really the key one. To get you thinking about this question, let me highlight that an example of diversification is the modern multi-specialty university such as the University of Illinois at Urbana–Champaign. As you probably know, there are some business schools that are independent stand-alone entities, not closely connected or located with the larger university. What do you think are some advantages of having a business school as part of a larger diversified university such as the University of Illinois? What are some disadvantages? Please reflect and write down your answers. One morning I walked into the wonderful atrium of our business school and asked the same question to some of our students faculty and even one former associate dean, what are the advantages of having the Gies College of Business be part of a larger university, be part of the University of Illinois at Urbana–Champaign? What are the disadvantages? Here's what they had to say. So I'm here with Jim Dahl, who was formerly the dean of our undergraduate program and is also a very valued colleague of mine in business administration. One of my colleagues Ermal Kwan and a friend of his from another department, and I thought I'd pose this question to both of them. So I'm here with Arjin, one of our undergraduate students. I have with me, two of our undergraduate students, Caleb and Rong. So I'm here with Ellie and Monica, and I'm going to pose a question to him. What is the value of having the business school be part of the larger university, couldn't we perhaps do better on our own for example? There are several business schools are a stand-alone business schools. If you could just list one pro and one con of being part of this larger university, I'd be interested to hear. I think the stand-alone model is a clarity of focus, it's really easy to get everyone working in the same direction, and I think that's really important for any organization or any unit of an organization. The downside of that becomes more challenging when you're part of a larger enterprise like a university, as you know faculty will often be asked to engage in other activities for the good of the campus. One of the great synergies you find in the university is definitely the opportunity to connect with faculty and college across the campus. Actually learn from them, and then take those ideas and bring them into your teaching or your research. It's interdisciplinary learning, and diverse perspectives that come with all the classes and projects. I really sought to improve my business acumen, because that's something the engineering curriculum just doesn't provide me. By having the Gies College of Business at the University of Illinois, I'm able to minor in business which is something I'm going to pursue in the following years. I think that I benefit a lot from having other departments within the university under the same roof as the business school. For instance, our friend Ruan Yuan, he's from the math department not from business school, but I invited him over because I wanted to talk about possible research and I wanted to ask him a bunch of math questions that I would need in my research. The comprehensive university is a very natural ground for interdisciplinary research. So you can talk to people in other fields with different expertise, you can generate new ideas. Having the resources of the other universities such as the College of Engineering, being able to help you with like technology or coding problems now just with how engineering and business are coming together with the world, I'd say that one of the biggest pro. Also, it's obviously that we have a bigger population, that we have friends and students from different backgrounds, different cultures, and also different majors. So we make friends and we have conversation with other people, we are more exposed to other fields and other grounds. Yeah, definitely one of the advantages would be we have such strong programs outside of the College of Business. So if people want to double major in something outside of business, you have that possibility and they're all very strong programs with great research opportunities. The resources that we have need to be diverted to various other activities to meet the university's needs, such as service courses is one thing. One of the downsides is sometimes you can get lost in a large pool of students. University of Illinois is very big and if a College of Business is also affiliated with such a large university, sometimes the students can feel as though they maybe are not as special as other people or they get lost in the large pool. If we were by ourselves, then we wouldn't have resources be more specific for only the business students, but because we're in a larger university, we share our resources with engineering students, science, music, and all the above. I'd like to begin by clarifying some terms in anticipation of potential confusion. I'd like to alert you that in mergers particularly in public policy discussions, the term horizontal mergers is sometimes used. It refers to merging with another company in the exact same industry, so it's really about increasing the size of the company in the same business. So one automobile insurance company merging with another automobile insurance company, would be a horizontal merger. But more generally when we think of horizontal scope, we're thinking of the firm's footprint across a set of different, not the same business, that is the firm's diversification. Within diversification, a common terminology that's often used is that of related and unrelated diversification, which we'll also come to in just a little bit. I think one nice way to understand diversification is to view it through historical lens. In particular, there was a period in the 1960s and 1970s when conglomerates were quite common in the United States, they are still quite popular in many other parts of the world. The heyday of conglomerates came to an end in the 1980s, which is illustrated in the movie Wall Street, starring Michael Douglas as a hard charging corporate raider called Gordon Gekko, who buys up conglomerate and bakes them up. I might add that he does this in the movie with little regard from the social harm he's causing. But Gekko also makes the case that the companies are being mismanaged and destroying value, so that he needs to come in and fix them. In one famous scene, Gekko comes in to this meeting of shareholders, and boast how much value he's created by breaking up other companies. He then goes on to complain about how the company that he's particularly focused on, has so many vice-presidents that do nothing in the corporate office and seemed to simply push paper between each other. He talks about how the company has lost a lot of value and has made losses for many years. He then goes on to propose a solution where he buys up the company and breaks it up, and what follows is perhaps the most famous line in the movie about greed being good. So how exactly does Gekko propose to create value from this company? Indeed, from any conglomerate, let's try to understand this a little bit more deeply.
