Lecture 7 - The Scope of the Firm

Question 1

What is corporate strategy and how does it differ from business strategy?

Answer 1

Corporate Strategy focuses on how to manage resources, risk and return across a firm, as opposed to looking at competitive advantages in business strategy.

Question 2

What are the 4 pillars of corporate strategy?

Answer 2

• Allocation of resources
• Organizational design
• Portfolio management
• Strategic tradeoffs

Question 3

Business strategy is ???? to compete, corporate strategy is ???? to compete.

Answer 3

Business strategy is how to compete, corporate strategy is where to compete.

Question 4

Corporate strategy must aim to do 1 or more of what 3 things?

Answer 4

• Increase customer willingness to pay OR
• Decrease costs OR
• Increase bargaining power

Question 5

What are the 3 ‘scopes’ of corporate strategy? How do these apply to making a strategy?

Answer 5

• Vertical scope (stages of the value chain)
• Product (horizontal) scope (products and services to be supplied)
• Geographical scope (where they are providing the products and services)

Question 6

What is upstream integration?

Answer 6

Backward integration - closer to the raw materials

Question 7

What is downstream integration?

Answer 7

Forward integration, closer to the end consumer

Question 8

Name 4 types of vertical relationships.

Answer 8

• Long-term contracts
• Vertical integration
• Agency agreements
• Franchises
• Joint venutres
• Informal customer-supplier relationships
• Spot sales/purchases
• Formal customer-supplier relationships

Question 9

Why would you not just always interact with the market (i.e. outsource) as opposed to internalising all operations?

Answer 9

Transaction cost - at some point it is more expensive to monitor and handle relationships with externals than it would be to do their job in-house.

Question 10

Briefly explain the idea of transaction cost.

Answer 10

The ability to settle conflicts is an important reason why internalising elements is sometimes a good idea.
At some point it is more expensive to monitor and handle relationships with externals than it would be to do their job in-house.

Question 11

What is outsourcing?

Answer 11

Moving previously internally performed activities to be subcontracted out to external suppliers.

Question 12

What is consolidating?

Answer 12

A defensive strategy where focus is shifted to current products and markets (as opposed to expansion).

Question 13

What is retrenching?

Answer 13

Withdrawing from marginal activities to focus on the most valuable segments.

Question 14

What is diversification?

Answer 14

Expanding to new products and services.

Question 15

What are the 4 reasons to vertically integrate?

Answer 15

• Get more control over the value chain
• Technical economies (savings from being supplier and buyer)
• If there would be additional complexity and risk if the supply remained external
• Transaction costs:
  Small number of viable partners
  Uncertainty
  Transaction specific investments

Question 16

When should a company not vertically integrate? (6 reasons)

Answer 16

• The companies have distinctive capabilities
• There is a need for constant capability upgrades
• Differences in optimal scale
• Unattractive business
• High powered incentives (contracts, bonuses)
• Managing strategically different businesses

Question 17

What are the 3 tests for diversification through merger?

Answer 17

1. Is the industry you want to enter attractive?
2. Is the cost of entry less than the value of future profits? (DCF)
3. Is the combined firm more valuable? “Better off test”

Question 18

What factors could contribute to a firm being better off after diversification?

Answer 18

• Parenting advantage
• Internal markets are widened beneficially (labour and capital)
• Revenue synergies
• Cost synergies

Question 19

What are the (4) risks of diversification through mergers?

Answer 19

• Diseconomies of scope (trying to do too many things)
• Cultural differences and integration costs
• Empire building vs long-term practicality
• Acquisition premiums (goodwill)

Question 20

What is operational versus strategic relatedness?

Answer 20

Operational relatedness is the idea that firms do things the same way.
Strategic relatedness is the idea that the firms think the same way.