Chapter 7 Corporate Strategy Daniel Crawford Mark Engelhardt Chase Barlow Alex Bregger Chapter 7 Corporate Strategy

Corporate Strategy Corporate strategy is concerned with where the firm competes whereas business strategy is concerned with how a firm competes In this chapter we turn our attention to corporate strategy and the scope of the firms activities. These include: …

Corporate Strategy Product Scope – how specialized the firm is in terms of the range of products it supplies. (Coca Cola- soft drinks) (Gap – Fashion retail) Vertical Scope – the range of vertically linked activities the firm encompasses. (Exxon – active supply chain) Geographical Scope – the geographic spread of activities for the firm. (Global Vs. Local)

Amazon Strategy Product Scope: Amazon Prime, Amazon Fresh, Amazon Supply, Amazon Web Services, One Click Purchasing, Vertical Scope: Amazons goal is to own every step of the internet experience. (Cloud Computing) Geographical Scope: Amazon is a global company.

Tesco Case Tesco is a global grocery and general merchandise retailer headquartered in London. The company was founded in 1919 by Jack Cohen Tesco made a name for itself by developing a strategy of “piling it high and selling it cheap” in the 50s and 60s

Tesco Case In 1973 Jack Cohen stepped down and passed the torch to new management They decided to take on a new strategy and abandon the low price approach. Expanded the company through new formats; Tesco Extra, Tesco Express, new technology, and acquisition.

Tesco Case Another change in management and the need to expand further ushered in more new ideas. Tesco became first UK market to introduce loyalty cards. Tesco Direct mail ordering company. Tesco Personal Finance in 1997

Tesco Personal Finance Products initially offered: Credit cards, savings, and insurance. By 2008 Tesco decided to develop into a full scale bank, offering mortgages, current accounts, and loans. By 2011 Tesco became third largest retailer In the world by turnover, behind Walmart and Carrefour.

Tesco Strategy When the company would near its limits of growth. Executives would broaden its scope: Through the use of diversification they extending its product offerings Adapting and changing to consumer tastes Building its capabilities in house instead of outsourcing.

The Scope of the Firm Deciding ‘what business are we in?’ Corporate strategic decisions encompasses both firm’s product range and extent of involvement in the value chain Can be defined broadly or narrowly Some exclusively focus on one narrow part of the supply chain, other will extend reach across many supply chain activities

Key concepts for analyzing firm scope Economics of Scope Transaction Costs Costs of Corporate Complexity

Capabilities vs. Resources Economics of scope The cost economies from increasing the output of multiple products Economies of scope exists when using a resource across multiple activities uses less of that resource than when the activities are carried out independently This creates the potential for multi-business firms to gain cost advantage over more specialized businesses Capabilities vs. Resources Tangible resources Shared service organizations Intangible resources Brand extension Organizational capabilities Can be exploited by simply selling or licensing the use of the resource or capability

Forms of Economic Organization Transaction costs Forms of Economic Organization Market Mechanism (visible) Administrative Mechanism (invisible) Firms and markets may be viewed as alternative forms for organizing production Firms are not essential for organizing production Mainframes vs. PC’s If transaction costs of organizing across markets is higher than administrative costs then, we can expect coordination of productive activity to be internalized within firms Technology: major source of falling administrative costs Vertical integration doesn’t reduce/ eliminate all transaction costs

Costs of Corporate Complexity Extending firm’s scope of operations by engaging in additional business activities, can reduce transaction costs This incurs additional management costs Can outweigh cost savings Usually requires more organizational capabilities Costs of Corporate Complexity

Diversification The expansion of an existing firm into another product line or field of operation Unrelated (conglomerate) diversification Related (concentric) diversification

Costs and Benefits Growth Risk Reduction Value Creation Economies of Scope Internal Labor Markets Sometimes against the shareholders interests Transaction Costs Politicized investment allocation Benefits Costs

Will diversification truly create shareholder value?

Attractiveness and cost-of-entry tests The firm faces the challenge of entering the new industry The cost of entry may counteract the attractiveness of the industry

Better-off test Will the firm be any more profitable? Economies of scope and transaction costs Will diversification be more profitable than licensing?

Diversification and performance How will the diversified firm perform compared to the specialized firm? Organizational complexity Turbulence of the business environment

Recent Trends in Diversification Firms in mature industrialized nations have shied away from unrelated diversification Invested more in their core business While diversification in industrialized nations is shrinking, more conglomerates are being formed in developing nations Technology may make diversification more attractive in the future

“A firms ownership of vertically related activities” Vertical Integration “A firms ownership of vertically related activities” Indicated by: ratio of a firms value added to its sales revenue (how much it makes rather than buys)

Benefits & Costs Benefits Costs Cost savings from physical integration of processes Ex: linking the two stages of steel sheet production (production & rolling into sheet) at a single location saves energy & transportation costs Costs Single supplier/Single Buyer No market price; all depends on relative bargaining power Transaction- specific investments result in high transaction costs between both parties

Optimal Scale Example: FedEx would not produce their delivery trucks in-house to avoid transaction-specific investments but rather to avoid mass inefficiency Amazon does not produce their own products because they simply do not possess the optimal scale needed for proper efficiency

Designing Vertical Relationships Classified in relation to TWO characteristics: Extent to which buyer/seller commit resources to relationship Arm’s length/spot contracts: involve no resource commitment beyond single deal Vertical Integration: involves substantial investment Formality of Relationship Long-term/Franchise: complex written agreements Spot contracts: bound by formalities of common law Collaborative Agreements: informal Vertical Integration: at the discretion of the firm’s management

Types of Vertical Relationships Spot Contracts: one time transaction, requiring no subsequent transactions Long-term Contracts: Involve series of transactions over time with specifications to each party Relational Contracts: No written contract; high flexibility to adapt to changing circumstances Franchising: Contractual agreement between business owner and a permitted investor

Recent Trends in Vertical Integration Past 25 years: Massive shift from spot contracts to long-term collaborations with fewer suppliers Outsourcing Involves outsourcings entire chunks of the value chain rather than individual components or services Virtual corporation: coordination of activities through a network or suppliers & downstream partners

Portfolio Planning GE/Mckinsey Matrix Strategic variables based on industry attractiveness & competitive advantage Analysis guides: Allocation of resources between the business Formulating business unit strategy: strategic positioning & opportunities Analyzing portfolio balance: cash flow generation & growth prospects Setting performance targets

Ashridge Portfolio Display: Potential for Patenting Advantage

Summary Corp. Strategy: about deciding which business segment to engage in Clear, long term adaptation to market conditions through diversification Careful selection deciding which parts of value chain to engage in Outsource/vertically integrate/specific contracts