CHAPTER 7: CORPORATE
STRATEGY
Team 4: Peter Hogue, Breann Flores, Cameron
Lloyd, Matthew Hord, Jonathon Jordan
Corporate Strategy
vs.
Business Strategy


Business Strategy is concerned with how a firm
competes
Corporate Strategy is concerned with where a firm
Competes
Range of product/market activities the
firm undertakes
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Product Scope– How specialized the firm is in terms
of the range of products it supplies. E.g. Coca-Cola,
Gap, SAP
Vertical Scope– The range of vertically linked
activities the firm encompasses. E.g. Exxon, Nike
Geographical Scope– The geographical spread of
activities for the firm.
Tesco Bank: from Food to Finance
A New Image

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New store formats: Tesco Extra, Tesco Express
The Tesco “Clubcard”
Online shopping
Tesco Financial Services
Economies of scope


Economies of scale- reduction of the average costs
that result from increase in the output of a single
product
Economies of scope- is when a resource across
multiple activities uses less of that resource than
when the activities are performed independently
 Tangible
vs. non tangible resources
Economies of Scope cont.


Brand extension- exploiting a strong brand across
additional products
Economies of scope can be exploited by selling or
licensing the use of the resource or capability to
another company
 Ex:
Pepsi selling and distributing Starbucks
Frappuccino's
Transaction costs


•
Market mechanism- where individuals and firms,
guided by market prices, make independent
decisions to buy and sell goods and services
Administrative mechanism- where decisions
concerning production and resource allocation are
made by higher authorities' figures
Examples: search costs, cost of negotiating and drawing
up a contract, the cost of monitoring the other party’s side
of the contract
The scope of the firm: specialization vs.
integration


Single integrated- Vertical scope, product scope
and geographical scope
Several specialized firms-it has an administrative
interface between each vertical level
Diversification


Refers to the expansion of an existing firm into
another product line or field of oporation
Two types
 Horizontal
 Vertical
Benefits and Costs

Growth

Risk reduction

Value creation
 Internal
creation
 External creation
When Does Diversification Create
Value?

Attractiveness test

Cost-of-entry test

Better-off test
Vertical Integration



Vertical integration refers to a firm’s ownership of
vertically related activities
Indicated by the ratio of a firm’s value added to its
sales revenue.
Vertical integration can be:
 Backward:
the firm acquires control over production of
its inputs
 Forward: the firm acquires control of activities
previously undertaken by its customers
 Full or partial
Benefits and Costs


In the 20th century, vertical integration was viewed
as beneficial.
That opinion has changed over the past 25 years
 Outsourcing
enhances flexibility and allows firms to
concentrate on their ‘core competencies’


One benefit is vertical integration results in cost
savings from the physical integration of processes
One cost is that it can restrict a firm’s ability to
benefit from scale economies and can reduce
flexibility and increase risk.
Technical Economies from the Physical
Integration of Processes

Analysis of the benefits of vertical integration has
emphasized the technical economies of vertical
integration
 Cost
savings that arise from the physical integration of
processes
Transaction Costs in Vertical Exchanges

When a single supplier negotiates with a single
buyer, there is no market price
 It

depends on relative bargaining power
Moving from a competitive market to one with
individual buyers and sellers in bilateral relationship
causes efficiencies of the market system to be lost.
The Incentive Problem

High-Powered incentives:
A
market interface exists between buyer and seller,
profit incentives ensure the buyer is motivated to secure
the best deal & the seller is motivated to be efficient to
retain the buyer.


Internal supplier-customer relationships are subject
to low-powered incentives
To create stronger incentives, companies can open
internal divisions to external competition
Flexibility


May be disadvantageous in responding to new
product development that require new combinations
of technical capabilities.
When system-wide flexibility is needed, it may
allow for speed and coordination in adjusting
through the vertical chain.
Compounding Risk


Vertical integration represents a compounding risk
because problems at one stage of production
threaten all other stages.
GM strike in 1998
 24
US assembly plants halted
Designing Vertical Relationships

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Arms-length and spot contracts involve no resource
commitment beyond the deal
Vertical integration involves a substantial investment
Franchises and long term contracts are formalized
by complex written agreements
Spot contracts may require little documentation but
are bound by common law
Collaborative agreements between buyers and
sellers are informal
Different types of Vertical
Relationships

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Long term contracts
Vendor partnerships
Franchising
Joint Ventures
Agency Agreements
Long-term Contracts

A series of transactions over a period of time and a
specify the terms of sales and responsibilities of
each party
Franchising

A contractual agreement between the owner of a
business system and trademark that permits the
franchisee to produce and market the franchisers
product or service in a specified area.
Managing Corporate Portfolio

When opportunities are presented that create value
through vertical integration or diversification
managers have to decide whether or not to pursue
the option and if so how to manage this. Portfolio
planning helps answer all those question.
GE/McKinsey Matrix


The attractiveness axis combines market size,
market growth, market profitability, cyclicality,
inflation recovery, and international potential
Business unit competitive advantage axis combines
market share, technology, manufacturing,
distribution, marketing, and cost
BCG’s Groxth-Share Matrix



Uses industry attractiveness and competitive position
to compare the strategic positions of different
business
The simplest of the portfolio planner
Four quadrants- Question Marks, Dogs, Cash Cows,
and Stars
Ashridge Portfolio Display

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

Based upon Goold, Campbell and Alexanders
parenting framework
Looks not just at the characteristics of a business but
the characteristics of its parent company
Looks at styles of management
More difficult to use then the other two types of
portfolio planning but is more realistic
Questions?