Corporate Strategy (Foundations of Strategy CH.7) Aaron Phillips James Blanton Lauren Defrancisco

Scope of the Firm “What business are we in” Three dimensions of a firm (Product, Vertical, and Geographical Scope) Often changes over time (Phillips) Under Armour Product Scope: Tangible aspect of the firm dealing with actual products Vertical Scope: Presence along the industry value chain Geographical Scope: what geographical markets will it compete in Refoucsing on core business is a common trend Phillips getting rid of product lines other than healthcare, lighting, and consumer well-being

Tesco: From food to finance History British grocery store that started in 1919 by Jack Cohen Grew in the 1960’s by acquisitions and a strategy of “piling it high and selling it cheap” Cohen steps down in 1973 after sales start slipping Repositioning of the company Opened up Tesco Personal Finance (TSP) in 1997 What went wrong Trust Issues Internal Complexity

Key Concepts for Analysing Scope Economies of Scope Transaction Costs Costs of Corporate Complexity Economies of scope: When using a resource across multiple activities actually uses less than it would if each action was performed individually Transaction Costs: How much do they spend on transactions How to minimize this is through overtaking the buyer or seller on the other side of the transaction Costs of Corporate Complexity: The more transactions costs you get rid of the more you will start to grow your corporate complexity.

Scope of Tesco’s activities 2014 Company Scope Telecommunication Services, Entertainment, Financial services, CRM, Family Restaurants, as well as different store formats International diversification

Diversification Expansion of an existing firm into another product line or field of operation Concentric/Conglomerate Related Vs. Unrelated diversification Not always as easy as it seems at first glance Diversification: expansions of an existing firm into another product line or field of operation Types of diversification: Related diversification (concentric diversification): this occurs when a company expands into a similar field of operation. Example used: Honda: they expanded their field of operations by expanding their product line from motorcycles to cars Under armor: athletic clothing/ apparel to footwear Unrelated diversification (conglomerate diversification): this occurs when a company adds an additional product line that is VERY different from the firms core business It is often difficult to distinguish which type of diversification is present within these companies Example: Honda: diversification is difficult to distinguish due to what someone would mean by relatedness One could argue that Honda isrelated or concentric diversification due to the fact that motorcycles and cars are similar on an operational level Therefore: classifying diversification as related or unrelated requires an understanding of the overall strategic approach of the company and recognition of its corporate-level management capabilities

Benefits and Costs of Diversification Growth Risk Reduction Value Creation (Porter’s Essential Tests) Attractiveness Test The Cost-of-entry The Better-off test Diversification is beneficial ONLY if it helps the firm to achieve its objective Diversification can be used to help firms improve profitability and shareholder value. However, sometimes corporate diversification appear to have been motivated by the desire for growth or risk reduction,which might not always be in the shareholders interest

Growth Without diversification Exxon Mobil Stagnant Declining industry Expanding their operations Conglomerate diversification Without diversification, firms may become stagnant or their industry may began to decline. Ex:Exxon Mobil: in the 1980's their business was declining but they diversified their operations by expanding into copper and coal mining, electric motors, computers and office equipment. This diversification allowed them to grow their company by utilizing conglomerate diversification

Risk Reduction “Don’t put all your eggs in one basket.” Allows for: Expansion into various operations Common ownership Stable profit earnings Who benefits the most? Managers " don’t put all your eggs in one basket" If one operation fails, it wont affect the business as much as it would if you had various operations that helped your cash-flow Therefore, bringing different businesses together under common ownership results in stable profit earnings. Who benefits from risk reduction the most? Managers: they tend to benefit the most because stable profits allow them to keep their jobs due to job security.

Value Creation: Porters Essential Tests Creates value for shareholders Used to increase long-run profitability 3 Essential Tests: The Attractiveness Test Must be structurally attractive of have the capability to being made attractive The Cost-of-Entry Test Cost of entry must not outweigh all future profits The Better-off Test New unit must gain a competitive advantage from its link with the corporation of vice versa In order to ensure that diversification creates value for shareholders through increasing the long-run profitability of the firm, Michael Porter proposed three essential tests Attractiveness test: although diversification allows a firm access to more attractive opportunities than are available in its own industry, it faces many challenges when entering a new industry. Therefore, industry attractiveness is insufficient on its own Cost-of-Entry Test: for a firm seeking to enter a new industry, the cost of entry may eat upthe BENEFITS of being in the industry. So cost of entry recognizes that an industry offers above-average profitability to its participants because it is PROTECTED BY BARRIES TO ENTRY Better-off Test: If it doesnt allow for competitive advantage, then maybe it’s not worth investing in the expansion into that industry/market

Exploiting Economies of Scope Tangible Resources Distribution Networks, Information Technology Systems, Sales Forces, and Research Labs Shared Service Organizations Intangible Resources Brand, Corporate Reputation, Technology Brand Extension

Economies of Scope at Tesco Became Diversified which has allowed shared use of tangible and intangible resources Tesco’s Brand Name and Reputation Tesco’s Market Analytics and Information Processing Tesco’s Land and Property Management

A firm’s ownership of vertically related activities Vertical Integration A firm’s ownership of vertically related activities Can be Backwards, Forwards, Full, or Partial Grown unpopular over the past 25 years Companies putting emphasis on outsourcing to focus on their core competencies