8/22/2020 OneNote

Week 8
March 10, 2020 12:05 PM

Corporate Strategy
• What businesses should the company be in (Company's Scope)
• AND how should the corporate office manage its portfolio of strategic business units
(SBUs)?

The Company's Scope

Range of Products and Markets
1. Product scope - range of products the firm supplies...different industries it is
present
E.g., netflix makes movies inside the firm vs. Just taking movies from elsewhere
2. Vertical scope - range of vertically linked activities the firm engages in
E.g., range of activities you want inside the firm (like vertical integration)
Backward integration is movie making
Forward is buying the firm which makes the movies
3. Geographic scope - geographical spread of the firm's activities. Does it compete
locally or globally?

Product & Vertical Scope

Diversification decisions are crucial decisions in Corporate Strategy
• Related versus Unrelated
○ Extension of what we do vs. Something new
(concentric or conglomerate)
Related: closely related to your knowledge
• Horizontal diversification
○ At the same stage of production, same industry
• Vertical diversification
○ Makes sense when administration costs aren't high: the benefits I get when
bringing new capital into my company must outweigh the costs.
○ Get regular supply --> with quality

Key concepts for analyzing firm scope

• Economies of scope: cost economies from spreading costs over multiple products
○ Cash is the most important tangible resource they're able to use
○ Brand/Goodwill
○ Suppliers
○ Distribution capability / sales course
• Transaction costs: costs of market transactions (market) and administrative costs
(inside firm). If transaction costs inside firm are lower than market transaction costs,
the firm grows in scope.
○ Market Costs
• Constant negotiations/Bargaining
• Search Costs
• Logistical Costs
○ Administration Costs
• Capital --> Technology (Knowledge)

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• Hire More employees --> (different requirements, local laws have to be

managed, environment issues)
• Coordination Costs
• Managing
• New Industry...
• Complexity Increases
• Corporate complexity costs: impose limits to the firm's growth in size and scope.

Vertical integration or Market? When benefits > costs

Source of benefits
• Superior coordination from integrating processes
• Where markets are inefficient especially where there are:
○ Small number of firms
○ Asset specificity or transaction-specific investments (implies if a particular firm
only supplies to me then their whole production is geared to supply to me, so
they can supply to me directly so it makes sense to bring it inside the firm)
○ Limited information (expensive to find out more information)
• Sources of costs
○ Can demand absorb the supply internally? How much extra? Expectations of
future use
○ Incentive problems
○ Limits flexibility
○ Compounding risk (legal risk --> liability)

The vertical chain for steel cans

Question: Why do market contracts predominate between some stages and

vertical integration between others?

Designing Vertical Relationships

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Why Diversification as a Strategy?

• Growth
○ Seeking more profitable products/services or industries/markets
• Reduce risk
○ "don't put all your eggs in one basket"
• Value Creation
○ Exploitation economies of Scope
○ Internal Capital Markets
○ Internal Labour Markets
• Movement of quality personnel inter-organizationally

Diversification via Strategic Maneuvering

• Mergers and Acquisitions
○ Mergers are arrangements as a combination of assets
○ Acquisitions are purchases of another firm's assets
• Strategic Alliances
○ A non-permanent arrangement that combines certain resources and
capabilities of parties to arrive at a mutually agreed to outcome.

Managing the corporate portfolio: the BCC growth-share matrix

Managing The Corporate Portfolio

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Managing The Corporate Portfolio: The Ashridge Portfolio Display

Does Diversification create shareholder wealth?

• Follow Porter's tool for evaluating a diversification strategy
1. Attractiveness test (5F model to see if it's an attractive industry)
2. Cost-of-entry test (If Company A finds another company B attractive, they want to
bring it in, if there is a bidding war which may result in it being too expensive)
3. Better-off-test

Netflix Team Challenge 7

In observing what you believe Netflix’s corporate strategy is, provide a two page
memo that identifies what their product, vertical and geographical scopes are. Has
their choices provided economies of scope,
reduced transactional costs and avoided corporate complexity? Is diversification
an option for Netflix and how should they pursue it

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