T his chapter defined corporate strategy and then looked at two fundamental corporate strategy topics— vertical integration and diversification—as summa-rized by the following learning objectives and related take-away concepts.
LO 8-1 / Define corporate strategy and describe the three dimensions along which it is assessed.
■Corporate strategy addresses “where to compete.” Business strategy addresses “how to compete.”
■ Corporate strategy concerns the boundaries of the firm along three dimensions: (1) industry value chain, (2) products and services, and (3) geogra-phy (regional, national, or global markets).
■ To gain and sustain competitive advantage, any corporate strategy must support and strengthen a firm’s strategic position, regardless of whether it is a differentiation, cost-leadership, or integration strategy.
LO 8-2 / Describe and evaluate different options firms have to organize economic activity.
■ Transaction cost economics help managers decide what activities to do in-house (“make”) versus what services and products to obtain from the external market (“buy”).
■When the costs to pursue an activity in-house are less than the costs of transacting in the market ( C in-house < C market ), then the firm should vertically integrate.
■ Principal–agent problems and information asym-metries can lead to market failures, and thus situa-tions where internalizing the activity is preferred.
■ A principal–agent problem arises when an agent performing activities on behalf of a principal pur-sues his or her own interests.
■ Information asymmetries arise when one party is more informed than another because of the pos-session of private information.
TAKE-AWAY CONCEPTS
CHAPTER 8 Corporate Strategy: Vertical Integration and Diversification 269
■ Moving from less integrated to more fully integrated forms of transacting, alternatives include short-term contracts, strategic alliances (including long-term contracts, equity alli-ances, and joint ventures), and parent–subsidiary relationships.