Corporate Level Strategy Notes

Corporate Strategy Overview

• Definition: Corporate strategy is a comprehensive plan that dictates the scope and direction of a business, outlining the industries, products/services, and geographic markets for competition.
• Key Focus:
  • "Where to compete" (corporate strategy)
  • "How to compete" (business strategy)
• Competitive Edge: Must reinforce the strategic position via:
  • Differentiation
  • Cost leadership
  • Combination of both
• Three Critical Questions:
  1. Which industries should we compete in?
  2. How can we add value to our Strategic Business Units (SBUs)?
  3. Will diversification or entering new industries strengthen our competitiveness in existing markets?

Make vs. Buy Decision

• Transaction Cost Economics: Decides between performing activities in-house ("make") or procuring from the market ("buy").
  • Rule of Thumb:
  • If in-house costs < market costs ⇒ consider vertical integration (e.g., producing own inputs or managing distribution channels).
  • If market costs < in-house costs ⇒ purchasing is more economical.

Strategic Alternatives

• Strategic Alliances: Other options aside from make vs. buy:
  • Short Term Contracts: Request for Proposal (RFP) process.
  • Long Term Contracts: Licensing and franchising arrangements.
  • Equity Alliances: Partial financial ownership between partners.
  • Joint Ventures: Creation of a new organization jointly owned by multiple partners.
  • Parent-Subsidiary Relationships: Corporate parent controls subsidiary, but risks include political friction and competition for resources.

Vertical Integration

• Concept: Engagement in different stages of the value chain.
  • Advantages: Reduces supplier/buyer power, increases profit potential.
  • Types of Vertical Integration:
  • Backward Integration: Moves back along the value chain into supplier territory (e.g., auto manufacturers producing parts).
  • Forward Integration: Moves towards the buyer’s business (e.g., Disney opening retail stores).
• Risks: Includes operational inefficiencies, skill mismatches in different domains, and potential complacency.

Corporate Diversification Types

1. Single Business: > 95% revenues from one business (e.g., Coca-Cola).
2. Dominant Business: 70-95% from one business; some revenue from other activities (e.g., UPS).
3. Related Diversification: Moves into industries with similarities to current ones, leveraging core competencies (e.g., Disney's purchase of ABC).
   • Core Competency: Unique combination of resources and capabilities that confer competitive advantages.
4. Unrelated Diversification: < 70% revenues from a single business with minimal connections (e.g., Berkshire Hathaway).

Boston Consulting Group Matrix (BCG Matrix)

• Purpose: A tool to analyze a firm's SBUs, manage long-term strategic planning, and identify growth opportunities.
• Categories:
  • Dogs: Low market share, low growth; strategic options include divestment or harvesting.
  • Cash Cows: High market share in low-growth markets; recommendation to invest sufficiently to maintain position.
  • Stars: High market share in fast-growing markets; suggestion to invest resources for growth retention.
  • Question Marks: High growth, low market share; may require investment or divestment based on growth potential.

Limitations of the BCG Matrix

• Oversimplification: Focuses on only two dimensions, ignoring other critical factors in competitive strategy.
• Employee Motivation Issues: Knowledge of SBU classification may demotivate workers in lower-performing units.
• Lack of New Opportunities Identification: Primarily addresses existing business performance, unable to indicate new market entry opportunities.