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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

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Chapter 7 Corporate Strategy

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

  2. CorporateStrategy • Corporate strategy is concerned with wherethe firm competes whereas business strategy is concerned with howa 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. 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 The Scope of the Firm

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

  12. 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 Economics of scope 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 Market Mechanism (visible) Administrative Mechanism (invisible) Transaction costs • 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. 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. 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 • 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

  29. Ashridge Portfolio Display:Potential for Patenting Advantage

  30. 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

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