Daniel Crawford
Mark Engelhardt
Chase Barlow
Alex Bregger
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
1.
Key concepts
Economics of Scope
2.
Transaction Costs
3.
Costs of Corporate Complexity
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 multibusiness 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
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
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
Benefits



Sometimes against the
shareholders interests
Transaction Costs
Politicized investment
allocation
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

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

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:
1.
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
2.
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