CHAPTER 7: CORPORATE STRATEGY Team 4: Peter Hogue, Breann Flores, Cameron Lloyd, Matthew Hord,...
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Transcript of CHAPTER 7: CORPORATE STRATEGY Team 4: Peter Hogue, Breann Flores, Cameron Lloyd, Matthew Hord,...
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
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
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 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
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
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?