C6 Flashcards
Corporate Strategy
The decisions that leaders make on where to compete
Corporate Strategy: Dimensions along which boundaries of the firm are determined:
- Vertical integration along the value chain.
- Diversification of products and services.
- Geographic scope.
Underlying concepts that guide discussion:
Core Competencies (Chapter 4).
Economies of Scale (Chapter 6).
Economies of Scope (Chapter 6).
Transaction Costs: cost effectiveness of vertical integration vs.
diversification.
Why firms need to grow (9)
To increase profits and shareholder returns.
Reinvest into the business
Higher wagers and benefits (motivation)
*If not, there may be a hostile takeover (remember our Peloton
discussion!)
To lower costs and achieve economies of scale.
To increase market power.
To reduce risk through diversification (especially if one SBU isn’t
performing)
To motivate management.
To avoid the principal-agent problem
External Transition Cost
Searching for contractors.
Negotiating, monitoring, and enforcing contracts.
Internal transaction costs
Recruiting and retaining employees.
Setting up a shop floor; Internal costs typically go up with size (firm dependent) whereas external costs are
largely a product of where the firm is operating (environment dependent)
Ronald Coase
given the efficiencies of the market, why do
firms even exist?
Douglas North
New Institutional Economics; What are institutions?
Make or Buy?
The decision around transaction costs forces firms to decide if they should
make or buy
If Costs in-house < Costs market
Vertically integrate.
Own production of the inputs.
Or own output distribution channels.
If Costs market < Costs in-house
The firm should consider purchasing instead
Disadvantage
of Operating
within Firms:
The Principal-
Agent
Problem
Agents pursue their own interests (corporate jets, golf outings)
Disadvantage
of operating
within the
Market:
Information
Asymmetry
One party is more informed than another (usually the
seller) due to the possession of private information, which can result in the crowding out of desirable goods and services by
inferior ones
Vertical
Integration
The ownership of inputs or distribution channels
Backward Vertical Integration
Owning inputs of the value chain
Forward Vertical Integration
Owning activities closer to the customer
Vertical Int, along value chain
- Raw Mats 2. Intermediate goods 3. Final Assembly 4. Sales&Marketing 5. After sale service&support
Benefits of
Vertical
Integration (6)
Lowering costs.
Improving quality.
Facilitating scheduling and planning.
Facilitating investments in specialized assets:
Co-located assets, unique equipment, human capital.
Securing critical supplies and distribution channels.
Risks of
Vertical
Integration (4)
Increasing costs.
Reducing quality.
Reducing flexibility.
Increasing the potential for legal repercussions.
When Does
Vertical
Integration
Make Sense?
- When there are issues with raw materials 2. To enhance the customer experience 3. Eliminate annoyances and poor interfaces
Vertical Market Failure
- Small number of buyers and sellers 2. High asset specificity, durability and intensity 3. Frequent transactions
Alternatives to
Vertical
Integration
- Taper Integration (mix of integration and market exchange) 2. Strategic Outsourcing
Taper Integration
Backward or forward integrated.
+ reliance on outside firms such as suppliers or
distributors
Strategic Outsourcing
Moving internal value chain activities to other firms, Outsourcing and offshoring
