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

2. 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: …

3. 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)

4. 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.

5. 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

6. 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.

7. 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

8. 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.

9. 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.

10. 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

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

12. 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

13. 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

14. 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

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

16. 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

17. Will diversification truly create shareholder value?

18. 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

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

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

21. 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

22. “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)

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

30. Ashridge Portfolio Display: Potential for Patenting Advantage

31. 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