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    John Rick Dayondon
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    This document summarizes a chapter on corporate strategy, including vertical integration, diversification, and their evaluation. It discusses: 1. Corporate strategy comprises senior management decisions and actions to achieve competitive advantage across industries and markets. It is assessed based on vertical integration, diversification, and geographic scope. 2. Firms pursue growth to increase profits, lower costs, gain market power, reduce risk, and motivate management. Growth options include vertical integration and diversification. 3. Vertical integration and diversification are evaluated based on factors like transaction costs, core competencies, economies of scale, and whether the strategy increases competitive advantage.

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    This document summarizes a chapter on corporate strategy, including vertical integration, diversification, and their evaluation. It discusses: 1. Corporate strategy comprises senior management decisions and actions to achieve competitive advantage across industries and markets. It is assessed based on vertical integration, diversification, and geographic scope. 2. Firms pursue growth to increase profits, lower costs, gain market power, reduce risk, and motivate management. Growth options include vertical integration and diversification. 3. Vertical integration and diversification are evaluated based on factors like transaction costs, core competencies, economies of scale, and whether the strategy increases competitive advantage.

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    70 views35 pages

    Corporate Strategy Vertical Intergration Diversification

    Uploaded by

    John Rick Dayondon
    This document summarizes a chapter on corporate strategy, including vertical integration, diversification, and their evaluation. It discusses: 1. Corporate strategy comprises senior management decisions and actions to achieve competitive advantage across industries and markets. It is assessed based on vertical integration, diversification, and geographic scope. 2. Firms pursue growth to increase profits, lower costs, gain market power, reduce risk, and motivate management. Growth options include vertical integration and diversification. 3. Vertical integration and diversification are evaluated based on factors like transaction costs, core competencies, economies of scale, and whether the strategy increases competitive advantage.

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    of 35

    GROUP 6: ME

    TOO MAMA!
    Chapter 8 – Corporate strategy:
    Vertical Integration and
    Diversification
    Members:

    Rikki Genvell Philip

    Agnes Edison
    Learning Objectives:
    LO 8-1 Define corporate strategy and describe the three dimension along which it is assessed.

    LO 8-2 Explain why firms need to grow, and evaluate different growth motives.

    LO 8-3 Describe and evaluate different options firms have to organize economic activity.

    LO 8-4 Describe the two types of vertical integration along the industry value chain: backward and forward vertical
    integration.

    LO 8-5 Identify and evaluate benefits and risks of vertical integration.

    LO 8-6 Describe and examine alternatives to vertical integration.

    LO 8-7 Describe and evaluate different types of corporate diversification.

    LO 8-8 Apply the core competence-market matrix to derive different diversification strategies

    LO 8-9 Explain when a diversification strategy creates a competitive advantage and when it does not.
    WHAT IS CORPORATE
    STRATEGY?
    ● Comprises the decisions that senior management makes
    and the goal-directed actions it takes in the quest for
    competitive advantage in several industries and markets
    simultaneously.
    Executives must determine their corporate strategy by answering three
    questions:
    1. In what stages of the industry value chain should the company
    participate?
    2. What range of products and services should the company offer
    3. Where should the company compete geographically in terms of
    regional, national, or international markets?
    WHY FIRMS NEED TO GROW?
    1. Increase profits
    2. Lower costs
    3. Increase market power
    4. Reduce risk
    5. Motivate management
    THREE DIMENSIONS OF CORPORATE
    STRATEGY
    1. Vertical integration
    2. Diversification
    3. Geographic Scope
    These underlying strategic management concepts will guide you the
    discussions of the three dimensions of corporate strategies:
    4. Core competence
    5. Economies of scale
    6. Economies of scope
    7. Transaction costs
    LEARNING OBJECTIVES
    After studying this chapter, you should be able to:

    LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed.

    LO 8-2 Explain why firms need to grow, and evaluate different growth motives.

    LO 8-3 Describe and evaluate different options firms have to organize economic activity.

    LO 8-4 Describe two types of vertical integration along the industry value chain: backward and forward vertical
    integration.

    LO 8-5 Identify and evaluate benefits and risks of vertical integration.

    LO 8-6 Describe and examine alternatives to vertical integration.

    LO 8-7 Describe and evaluate different types of corporate diversification.

    LO 8-8 Apply the core competence – market matrix to derive different diversification strategies.

    LO 8-9 Explain when a diversification strategy creates a competitive advantage, and when it does not.
    The boundaries of the firm

    ● Transaction cost economics


     Explains and predicts the scope of the firm
     "Market vs. firms" have differential costs

    ● Transaction costs
     Costs associated with economic exchanges
     External Transaction Costs
     Internal Transaction Costs
    Internal and External Transaction Costs
    Firms vs. Markets: Make or Buy

    • Should a firm do things in-house (to make)? Or obtain externally (to


    buy)?

    • If Cin-house < Cmarket, then the firm should vertically integrate


    • If Costs(market) < Costs (in house) Firm should considering
    purchasing

     Firms and markets have distinct advantages and disadvantages (see


    Exhibit)
    Organizing Economic Activity: Firm vs. Markets
    Alternatives along the Make or Buy
    Continuum
    LEARNING OBJECTIVES
    After studying this chapter, you should be able to:

    LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed.

    LO 8-2 Explain why firms need to grow, and evaluate different growth motives.

    LO 8-3 Describe and evaluate different options firms have to organize economic activity.

    LO 8-4 Describe two types of vertical integration along the industry value chain: backward and forward vertical
    integration.

    LO 8-5 Identify and evaluate benefits and risks of vertical integration.

    LO 8-6 Describe and examine alternatives to vertical integration.

    LO 8-7 Describe and evaluate different types of corporate diversification.

    LO 8-8 Apply the core competence – market matrix to derive different diversification strategies.

    LO 8-9 Explain when a diversification strategy creates a competitive advantage, and when it does not.
    ckward and Forward Vertical Integration
    along an Industry Value Chain
    Continuum
    VERTICAL INTEGRATION
    Forward Vertical Integration & Backward Vertical Integration

    COMPANY X Backward Vertical


    Integration

    MANUFACTURING
    COMPANY

    Forward Vertical
    COMPANY Y Integration
    VERTICAL INTEGRATION
    BENEFITS AND RISKS OF VERTICAL
    INTEGRATION
    BENEFITS RISKS
    Lowering of Costs Increasing costs

    Improving Quality Reducing quality

    Facilitating schedule and planning Reducing flexibility

    Facilitating investments in specialized Increasing the potential for legal


    assets repercussions
    Securing critical supplies and
    distribution channels
    WHEN DOES VERTICAL
    INTEGRATION MAKE SENSE?
    ALTERNATIVES TO VERTICAL INTEGRATION

    01 02
    TAPER STRATEGIC
    INTEGRATION OUTSOURCING
    -An alternative to vertical integration - moving one or more internal
    value chain activities outside
    Involves either: the firm’s boundaries to
    - Backward integration and relying on other firms in the industry
    others for supplies value chain.
    - Forward integration and relying on
    others for distribution
    Types of Corporate
    Diversification
    1. Single Business
    2. Dominant Business
    3. Related Diversification
    4. Unrelated diversification: the conglomerate.
    01 Single Business
    - Single business leverages its competencies.

    02 Dominant Business
    - Dominant & minor businesses share competencies.
    Related Diversification
    A. Related Constrained: all business share competencies
    B. Related linked: some businesses share competencies.

    04 Unrelated Diversification: the


    conglomerate
    - No businesses share competencies.
    Leveraging Core Competencies for
    Corporate Diversification
     Core competence-market matrix
    - A framework to guide corporate diversification strategy by analyzing
    possible combinations of existing/new core competencies and
    existing/new markets.
    Four Options to Formulate Corporate via Core
    Competencies
    1. Leverage existing core competencies to improve current market position.
    2. Build new core competencies to protect and extend current market
    position.
    3. Redeploy and recombine existing core competencies to compete in
    markets of the future.
    4. Build new core competencies to create and compete in markets of the
    future.
    Corporate Diversification and Firm
    Performance
    ● Diversification discount –the stock price of highly
    diversified firms is valued at less than the sum of their
    individual business units.

    ● Diversification premium- the stock price of related-


    diversification firms is valued at greater than the sum of
    their individual business units.
    For diversification to enhance firm performance, it must do
    at least one of the following:

    ● Economies of scale
    ● Economies of scope
    ● Reduce costs and increase value
    Restructuring
    ● The process of reorganizing and divesting
    business units and activities to refocus a
    company in order to leverage its core
    competencies more fully
    .
    ● Boston Consulting Group (BCG) growth-share
    matrix
    Implications for the Strategist
    • Effective corporate strategy helps to gain and sustain a
    competitive advantage.

    3 Dimensions:
    • The degree of vertical integration
    • The type of diversification
    • The geographic scope
    THANK
    YOU!

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