MGMT 4210 - Class 9.pdf - MGMT 4210 Corporate Strategy...

MGMT 4210
Corporate Strategy
Prof. Pavel Zhelyazkov
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Corporate Strategy

Next three lectures will be focused on
corporate strategy…
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Corporate
headquarters
Business unit 1 Business unit 2 Business unit 3
Function 1
(e.g., marketing)
Function 2
(e.g., R&D)
Function 3
(e.g.,
production)
Typical M-form (multidivisional) corporate structure… … and the corresponding levels of strategy
Corporate strategy
• Where to compete?
Business strategy
• How to compete?
Functional strategy
• How to implement the business strategy?

… And specifically on three related questions:
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How do we set the boundaries of the firm through
vertical integration and diversification ?
How do we interact with other actors outside the value
chain through M&A and strategic alliances ?
How do we compete in different countries through our
international strategy ?
Focus of today

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Vertical Integration

Transaction cost economics and the
boundaries of the firm
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Ronald Coase (1910-2013)
Nobel Laureate in
Economics (1991)
Oliver Williamson (1932-)
Nobel Laureate in
Economics (2009)
• Short answer: every transaction (whether
internal within the firm or external with the
market) carries different levels of
transaction costs (costs of exchange).
• Key question: why do firms exist at all given
that markets are so efficient at allocating
scarce resources to their best uses?

Internal and external transaction costs
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Internal
transaction
costs
External
transaction
costs
Definition
Costs pertaining to
organizing exchange
within the firm
Costs pertaining to
conducting an
exchange through
the open market
Includes
• The cost of searching employees
• The cost of negotiating and drafting employment agreements
• The cost of training the employees
• The cost of managing and monitoring the employees
• The cost of malfeasance and opportunism
• The costs of searching for an exchange partner
• The cost of negotiating, drafting and monitoring the contract
• The cost of enforcing the contract
• The cost of dealing with contractual partner malfeasance and
opportunism

Internal and external transaction costs
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Firm A
Internal
transaction
costs
External
transaction
costs
When the external
transaction costs exceed the
internal transaction costs of
a particular exchange, this
exchange can be more
efficiently executed within a
the firm
Firm B
Internal
transaction
costs

Benefits and disadvantages of markets vs.