Corporate Strategy
the decisions that senior management makes and the goal-directed actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously
core competencies
unique strengths, embedded deep within a firm, that are critical to gaining and sustaining competitive advantage
economics of scale
factors that cause a producer's average cost per unit to fall as output rises
economics of scope
savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology
transaction costs (internal & external)
all costs associated with an economic exchange. Internal: training & coordination. External: search, contracting, monitoring
transaction cost economics
a theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to competitive advantage
Diversity if they pass 3 tests
1. industry attractive test 2. cost of entry test 3. better-off test (the company's different businesses should perform better together "synergy")
Vertical expansion (look at graph in notes)
growth in new activities for an existing product line
Strategies for entering new businesses
1. acquire existing company 2. form joint venture/strategic alliance 3. start a greenfield venture
Equity alliance
partnership in which at least one partner takes partial ownership in the other
joint venture
A stand-alone organization created and jointly owned by two or more parent companies.
Diversification: sources of advantages
1. economics of scope 2. market power (economics of scale, vertical integration) 3. financial economics 4. restructuring
Vertical Integration (backward "upstream": inputs) (forward:outputs) partial: 50/50 full: 100%. More integrated (make) less integrated (buy)
the firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs
Understanding Vertical Integration
How many firms? Is there transaction specific investment? Need for continual improvement? Opportunity for cheating? Tax Regulations? Similarity of optimal scale? Impact on risk due to linkages?
?, star, dog, cash cow (y-axis: market growth, x-axis: relative market share)
?: increase market share or harvest/divest. Star: hold or invest for growth. Dog: harvest/divest. Cash cow: hold
Benefits of Vertical Integration
-lowering costs-improving quality-facilitating scheduling and planning-facilitating investments in specialized assets-securing critical supplies and distribution channels
Risks of Vertical Integration
increasing costs, reducing quality, reducing flexibility, increasing the potential for legal repercussions
taper integration
a way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside market firms for some of its supplies, and/or is forwardly integrated but also relies on outside market firms for some of its distribution
strategic outsourcing
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain
geographic diversification strategy
corporate strategy in which a firm is active in several different countries
product-market diversification strategy
corporate strategy in which a firm is active in several different product markets and several different countries
Single Business
95% or more of revenue comes from a single business
Dominant Business
between 70% and 95% of revenue comes from a single business
related diversification strategy (linked & constrained) (best for performance and level of diversification)
Corporate strategy in which a firm derives less than 70 percent of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity.
unrelated diversification strategy
Corporate strategy in which a firm derives less than 70 percent of its revenues from a single business and there are few, if any, linkages among its businesses.