EcoCorporate Strategy
- Quest for competitive advantage when competing in multiple industries
- Where to compete?
Corporate strategy concerns the scope of the firm
industry value chain
products and services
geography
Three Dimensions of Corporate Strategy
1. What stages of industry value chain and degrees of vertical integration (supply chain)
2. What range of products and services and degrees of horizontal integration (buying competitors)and diversification (successful diversification must be aligned with
Economies of Scale
Average per-unit cost decreases as its output increases
Economies of Scope
Savings that come from producing two or more outputs together rather than separately through using the same resources and technology
Transactional Cost
The cost associated with economic exchange (the costs associated with the "make or buy" decision)
If C in-house < C market, then the firm should...
vertically integrate
Disadvantage of "make" in-house
- Principal - agent problem- owners are the principals of the company and the managers are the agents
- Agent pursues his/her own interests- managers will make the best decisions for the owners, but the problem is when they do not do what's best for the c
Disadvantage of "buy" from markets
- Search cost
- Pay a premium
- Incomplete contracting
- Enforce legal constraints
Short-term contacts
Competitive bidding process
Less than one-year term
Lower prices --> cost advantages
Strategic alliances
Facilitate investment without administrative costs
Ex. long-term contacts, equality alliances, joint ventures
Ex. Hulu
Parent-subsidiary relationship
- Most integrated alternative
- Parent companies have command and control
Vertical integration
Ownership of its inputs, production, & outputs in the value chain
Vertical value chain
Industry-level integration from upstream to downstream
SLIDE 10 - IMPORTANT
If you control the whole process, you are fully vertically integrated
Types of Vertical Integration
� Full vertical integration
- Ex: Weyerhaeuser (owns forests, mills, and distribution to retailers)
� Backward vertical integration
- Ex: HTC's backward integration into design of phones
� Forward vertical integration
- Ex: HTC's forward integration into
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 (Internal suppliers lose incentives to compete)
� Reducing quality (Single captured customer can slow experience effects)
� Reducing flexibility (Slow to respond to changes in technology or demand)
� Increasing the potential for legal r
Degrees of diversification
Range of products and services a firm should offer
(Ex: PepsiCo also owns Lay's & Quaker Oats.)
Diversification strategies:
-product diversification
-geographic diversification
-product market diversification
Product diversification
Active in several different product categories
Geographic Diversification
Active in several different countries
Product - market diversification
Active in a range of both product and countries
Types of Corporate Diversification
-single business
-dominant business
-related diversification
-unrelated diversification
Single Business
Gibson guitars
Dominant business
Harley-Davidson
Related diversification
Draws on synergy (1+1=3; the whole is more valuable than the individual parts of the company)
Related Constrained - Shared manufacturing processes (Ex. Exxon Mobile)
Related Linked - Connected by types of businesses (Disney)
Unrelated diversification
- Very few or no connection between the different divisions.
- There is no synergy
Ex. General Electric
Diversification discount
Stock price of diversified firms is less
Diversification premium
Stock price of diversified firms is greater
Core Competence
- Unique skills and strengths
- Allows firms to increase the value of product/service
- Lowers the cost
Examples: Walmart (global supply chain), Infosys (low-cost global delivery system)
The core competence - market matrix
Provides guidance to executives on how to diversify in order to achieve continued growth
How does diversification enhance performance?
Economies of scale --> lower the cost
Economies of scope --> increase the value
Reduce cost and increase value simultaneously
Restructuring
Process of reorganizing and divesting business units
To refocus a company to leverage its core competencies
Boston Consulting Group growth-share matrix
- Dogs
- Cash cows
- Stars
- Question marks
Google?
SLIDE 23 VERY IMPORTANT
Look in slides