CHAPTER 7 CORPORATE

STRATEGY

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 offeringsAdapting and changing to consumer tastesBuilding 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

Key concepts

1. 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 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

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 operationUnrelated

(conglomerate) diversification

Related (concentric) diversification

Costs and Benefits

Benefits Costs

Growth Risk Reduction Value Creation Economies of Scope Internal Labor Markets

Sometimes against the shareholders interests

Transaction Costs Politicized investment

allocation

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

costsWill 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

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

Classified in relation to TWO characteristics:

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 businessFormulating business unit strategy: strategic

positioning & opportunitiesAnalyzing 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 inOutsource/vertically integrate/specific

contracts