College of Business

MODULE 3
BA 569 – ADVANCED STRATEGIC
MANAGEMENT
CORPORATE STRATEGY
What is Corporate Strategy
• Determining the firm’s boundaries along three dimensions:
• Industry value chain
• Range of products and services
• Where to compete geographically
• Key Concepts
• Core competencies
• Economies of Scale
• Economies of Scope
• Transaction Costs

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Internal and External Transaction Costs
• Exhibit 8.2

• Access the text alternate for slide image.

Organizing Economic Activity: Firms vs. Markets
• Exhibit 8.3

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Problems Leading to Market Failures
• Principal-Agent Problems
• Arise when an agent such as a manager performing activities on behalf
of the principal (owner of the firm), pursues his or her own interests at
the expense of the principal (we’ll discuss this more next week).

• Information Asymmetries
• Arise when one party in a transaction is more informed than another
because of the possession of private information.

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Alternatives on the Make vs. Buy Decision
• Exhibit 8.4

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Backward and Forward Vertical Integration along an Industry Value
Chain
• Exhibit 8.5

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Taper Integration along the Industry Value Chain
• Exhibit 8.7

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Diversification
• Product Diversification:
• Increase in variety of products / services.
• Active in several product markets.

• Geographic Diversification:
• Increase in variety of markets / geographic regions.
• Regional, national, or international markets.

• Product-Market Diversification:
• Product and geographic diversification.

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Types of Corporate Diversification
• Single business – very low level of diversification (< 95% of revenues
from single business).

• Dominant business – low level of diversification (70-95% of revenues

from the dominant business).

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Types of Corporate Diversification
• Related Diversification - medium level of diversification (<70% of
revenues from a single business).
• Related Constrained – All businesses under the corporate umbrella share
competencies in products, services, technology, or distribution.

• Related Linked – Only some businesses share competencies in products,

services, technology, or distribution.

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Types of Corporate Diversification
• Unrelated Diversification – high level of diversification (<70% of
revenues from a single business).
• No competency linkages in products, services, technology or distribution
between businesses.

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The Core Competence–Market Matrix
• Exhibit
8.9
• Source:. Adapted
from G. Hamel
and C.K. Prahalad
(1994),
Competing for the
Future (Boston:
Harvard Business
School Press).

• Access the text alternate for slide image.

The Diversification-Performance Relationship

• Exhibit 8.11
• Source:. Adapted from L.E. Palich, L.B. Cardinal, and C.C. Miller (2001), “Curvilinearity in the diversification-performance linkage: An examination of over
three decades of research,” Strategic Management Journal 21: 155–174..
• Access the text alternate for slide image.
Sources of Value Creation and Costs in
Vertical Integration and Diversification
• Vertical Integration
• Value creation: Securing critical supplies and distribution channels, lower costs,
improving quality, facilitating scheduling and production.
• Costs: Increasing costs, reducing quality, reducing flexibility, increasing potential for
legal (antitrust) repercussions.
• Related Diversification
• Value creation: Economies of scope, economies of scale, financial economies
• Costs: Coordination costs, influence costs (i.e., managers influencing actions)
• Unrelated Diversification
• Financial economies (internal capital markets, restructuring)
• Costs: Influence costs
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Horizontal Integration
• Merger – combining two independent firms to form a single entity.
• Acquisition – purchase or takeover of one firm by another; can be
friendly or unfriendly.
• Hostile takeover – acquisition in which the target firm does not wish to
be acquired.
• Horizontal integration – process of merging with competitors leading
to industry consolidation.
• Potential challenges – principal-agent problems, information
asymmetries, managerial hubris
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Strategic Alliances
• Strategic alliances are voluntary arrangements between two or
more firms.
• Involves the sharing of knowledge, resources, and capabilities to
develop products, processes, and services.
• 3 types:
• Non-equity - supply, licensing, and distribution agreements.
• Equity - purchase of equity stake or corporate venture capital (CVC)
investment.
• Joint ventures – creation of a new entity by two parent firms.
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How to Make Alliances Work

• Exhibit 9.4
• Source:. Adapted from J.H.
Dyer and H. Singh (1998),
“The relational view:
Cooperative strategy and the
sources of intraorganizational
advantage,” Academy of
Management Review 23: • Access the text alternate for slide image.
660–679.
Guiding Corporate Strategy: The Build-Borrow-or-Buy Framework

• Exhibit 9.1
• Source:. Adapted from L. Capron and W. Mitchell (2012), Build, Borrow, or Buy: Solving the Growth Dilemma • Access the text alternate for slide image.
(Boston: Harvard Business Review Press).
THANK YOU.
Jonathan Arthurs
Professor of Strategy & Entrepreneurship

For further information or if you have questions, please contact me at

arthursj@oregonstate.edu