MANAJEMEN STRATEGIK

8.1. Corporate Strategy

Corporate Strategy is the decisions that senior management makes and the goal directed actions
to gain and sustain competitive advantage in several industries and markets simultaneously. It
must align with business strategy and help in determining where the firm should compete.

Decisions on where to compete:

1. Vertical integration in what stages of the industry’s value chain it competes
2. Diversification what range of products the firm should offer
3. Geographic scope where the firm should compete geographically

There are several reasons why firms need to grow

1. Increase profits: provide higher return for shareholders/owners. Market evaluation of a
firm is partly determined by expected future revenue stock price falls if company fails to
achieve growth target.
2. Lower costs: profit from economies of scale
3. Increase market power: increased market share means fewer competitors which
generally generates higher industry profitability
4. Reduce risk: competing in different industries makes a firm able to compensate for low
performance in one industry with higher performance profit from economies of scope
5. Managerial motives: problem that managers sometimes are more interested in pursuing
their own interest than in firm’s goals. CEO pay package often correlates more strongly
with firm size.

There are concepts of the three dimensions of vertical integration, diversification and geographic
competition:
1. Core competencies: unique strengths deeply embedded within a firm that allows them to
differentiate its products. A firm’s boundaries are delineated by its core competencies
resource-based framework.
 2. Economies of scale: occur when a firm’s average cost per unit decreases as its output
increases
3. Economies of scope: saving that come from producing two or more outputs at less cost
than producing each individually, using the same resources and technology
4. Transaction costs: all costs associated with an economic exchange. The concept enables
managers to answer the question of whether it is cost-effective to expand its boundaries
through vertical integration or diversification.

8.2 Boundaries of Firm

Transaction cost economics is a framework to predict boundaries of firm. Helps to decide
whether a firm should expand in house or through external market
Transaction cost is all internal & external costs associated with an economic exchange, within
firm or in market

Total cost of transacting:

1. External transaction cost: in open market → searching for a firm, with
whom to contract, negotiating, monitoring, enforcing contract
2. Internal transaction cost: within firm → recruit & retain employee, pay
salary, set up shop floor, provide office space, organizing, monitoring,
supervising work, administrative cost between business unit (transfer
pricing for input factors, business unit & corporate headquarter
(resource allocation)

Firms vs Market: Make or Buy (Boundaries of Firm)

When the Cost for in house is less than cost for external market, it is advised to pursue vertical
integration (own production of needed input/channel distribution of output)
Principal agent problem is a situation in which an agent performing activities on behalf of a
principal pursues his own interests
Information asymmetry is when one party is more informed than another because of the
possession of private information

Alternatives on Make-or-Buy Continuum

Short Term Contract - short duration, less than 1 year
Strategic Alliances - voluntary arrangements between firms that involve sharing knowledge,
resources, capabilities with the intent of developing process & product
1. Long Term Contracts: more than 1 year
a. Licensing: commercialize intellectual property
b. Franchising: a franchisor grants a franchisee the right to use the franchisor's
trademark & business process to offer goods that carry franchisor’s brand name
2. Equity Alliances: at least 1 partner takes partial ownership in other partner
3. Joint Ventures: stand-alone organization created & jointly owned by two/more parent
companies
Parent Subsidiary Relationship: corporate parents own the subsidiary and can direct it via
command & control
8.3 Vertical Integration
The firm’s own activities around production of its inputs or own channels around distribution of
its outputs.

Measured by what percentage of a firm’s activities are generated internally within the firm.

Industry Value Chain

Each stage represents a distinct industry in which multiple different firms are competing.
Industry Value Chain depict the transformation of raw materials into finished goods and services.

Upstream is pointing towards Raw Materials

Downstream is pointing towards Finished Goods and After-Sales Service
Types of Vertical Integration
Fully Vertically Integrated
All activities are conducted within the firm from producing Raw Materials to producing Finished
Goods and providing After-Sales Services.
Example: Google Search. Google owns the entire technology stacks from Server, Service,
Operating System, and Hardware.

Vertically disintegrated with a low degree of vertical integration

Focus on only one or two stages of the Industry Value Chain.
Example: Apple does Design, Marketing, and Retail within its firm’s boundaries but outsource
the rest of the value chain.

Backward Vertical Integration

Moving ownership of activities Upstream. Companies move ownership of activities to the origin
of input in the value chain.
Example: Amazon from being an online book store now also owns a book publishing division.

Forward Vertical Integration

Move ownership of activities Downstream. Companies move ownership of activities nearer to
the end of the customer.
Example: Disney from distributing their content now create their own streaming service.

Alternative to Vertical Integration

1. Taper Integration
a. Firm is backwardly integrated but relies on external providers for some of its
supplies
b. Firm is forwardly integrated but relies on external providers for some of its
distribution
2. Strategic Outsourcing
a. Move internal value chain that is not within the firm’s core competencies to
external providers

Benefits of Vertical Integration

1. Lowering costs
2. Improving quality
3. Facilitating scheduling and planning
4. Securing critical supplies and distribution channels
5. Facilitating investments in specialized assets

Risk of Vertical Integration

1. Increasing costs
2. Reducing quality
3. Reducing flexibility
4. Increasing the potential for legal repercussions

Facilitating investments in specialized assets

Specialized Assets are assets characterized to have high opportunity cost and have more value
for its specific intended use.
Types of Specialized Assets includes
1. Site specificity
a. Assets required to be co-located.
b. Example: equipment for mining.
2. Physical-asset specificity
a. Physical and engineering properties are designed for specific consumer.
b. Example: Bottling machinery for Coca Cola and Pepsi.
3. Human-asset specificity
a. Investments made in human capital to acquire knowledge and skills.
b. Example: Mastering routines and procedures of a specific organization.

When to use Vertical Integration?

When securing raw materials is crucial to the operation of the business

When NOT to use Vertical Integration?

Vertical Market Failure: When owning a part of the supply chain is riskier than relying on
external providers. It is better to rely on external providers.

8.4 Corporate Diversification: Expanding Beyond a Single Market

8.4.1 Types of Corporate Diversification

Richard Rumelt developed a helpful classification scheme that identifies four main types of
diversification by looking at two variables :

1. The percentage of revenue from the dominant or primary business.

2. The relationship of the core competencies across the business units.

The four main types of business diversification are :

1. Single business
a. A single-business firm derives more than 95 percent of its revenues from one
business.
 2. Dominant business
a. A dominant-business firm derives between 70 and 95 percent of its revenues from
a single business, but it pursues at
3. Related diversification
a. Related-constrained diversification strategy
b. A kind of related diversification strategy in which executives pursue only
businesses where they can apply the resources and core competencies already
available in the primary business.
c. Related-linked diversification strategy
d. A kind of related diversification strategy in which executives pursue various
businesses opportunities that share only a limited number of linkages.
4. Unrelated diversification: the conglomerate
a. 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.

8.4.2 Leveraging Core Competencies for Corporate Diversification

Core competence market matrix is a framework to guide corporate diversification strategy by

analyzing possible combinations of existing/new core competencies and existing/new markets.
There are Four Options to Formulate Corporate Strategy via Core Competencies :

1. Leverage existing core competencies to improve current market position.

2. Build new core competencies to protect and extend current market position.
3. Redeploy and recombine existing core competencies to compete in markets of the future.
4. Build new core competencies to create and compete in markets of the future.
8.4.3 Corporate Diversification and Firm Performance

Corporate managers pursue diversification to gain and sustain competitive advantage. But
does corporate diversification indeed lead to superior performance?

The diversification-performance relationship is a function of the underlying type of

diversification. A cumulative body of research indicates an inverted U-shaped relationship
between the type of diversification and overall firm performance, as depicted in Exhibit 8.10
High and low levels of diversification are generally associated with lower overall performance,
while moderate levels of diversification are associated with higher firm performance. This
implies that companies that focus on a single business, as well as companies that pursue
unrelated diversification, often fail to achieve additional value creation. Firms that compete in
single markets could potentially benefit from economies of scope by leveraging their core
competencies into adjacent markets.

Firms that pursue unrelated diversification are often unable to create additional value.
They experience a diversification discount in the stock market: The stock price of such highly
diversified firms is valued at less than the sum of their individual business units.

At the most basic level, a corporate diversification strategy enhances firm performance
when its value creation is greater than the costs it incurs. Exhibit 8.11 lists the sources of value
creation and costs for different corporate strategies, for vertical integration as well as related and
unrelated diversification. For diversification to enhance firm performance, it must do at least one
of the following:

● Provide economies of scale, which reduces costs.

● Exploit economies of scope, which increases value.
● Reduce costs and increase value.
 Other potential benefits to firm performance when following a diversification strategy
include financial economies, resulting from restructuring and using internal capital markets.
Restructuring describes the process of reorganizing and divesting business units and activities to
refocus a company in order to leverage its core competencies more fully.

Corporate executives can restructure the portfolio of their firm’s businesses, much like an
investor can change a portfolio of stocks. One helpful tool to guide corporate portfolio planning
is the Boston Consulting Group (BCG) growth-share matrix, shown in Exhibit 8.12. Boston
Consulting

Group (BCG) is growth share matrix A corporate planning tool in which the corporation
is viewed as a portfolio of business units, which are represented graphically along relative
market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into
four categories (dog, cash cow, star, and question mark), each of which warrants a different
investment strategy.
 Each category warrants a different investment strategy. All four categories shape the
firm’s corporate strategy.

- Dogs. They are underperforming businesses. The strategic recommendations are either to
divest the business or to harvest it.
- Cash cows. in contrast, are SBUs that compete in a low-growth market but hold
considerable market share. Their earnings and cash flows are high and stable. The
strategic recommendation is to invest enough into cash cows to hold their current position
and to avoid having them turn into dogs (as indicated by the arrow).
- Star. SBUs hold a high market share in a fast-growing market. Their earnings are high
and either stable or growing. The recommendation for the corporate strategist is to invest
sufficient resources to hold the star’s position or even increase investments for future
growth.
- Question marks. It is not clear whether they will turn into dogs or stars (as indicated by
the arrows in Exhibit 8.12). Their earnings are low and unstable, but they might be
growing. Ideally, corporate executives want to invest in question marks to increase their
relative market share so they turn into stars. If market conditions change, however, or the
overall market growth slows, then a question-mark SBU is likely to turn into a dog. In
this case, executives would want to harvest the cash flow or divest the SBU.

8.5 Implication for Strategic Leaders

Important choices along three dimensions that determine the boundaries of the firm:

1. The Degree of Vertical Integrations: In what stages of the industry value chain to
participate
2. Type of Diversification: What range of products and services to offer
3. Geographic Scopes: where to compete

Since a firm’s external environment never remains constant overtime, corporate strategy needs to
be dynamic over time. As firms grow they tend to diversify and globalize to capture additional
growth opportunities.Example of the implication are adidas and nike. Both implicated not only
disintegrated but also diversified.

Relationship between diversification strategy and competitive advantage depends on the

type of diversification. Related diversification is most likely to lead superior performance
because it taps into multiple source of value creation