Corporate scope

Corporate scope is the overall footprint of an organisation, What activities or business is the organisation engaged in and where. Corporate scope is made up of three dimensions: 

Vertical integration: refers to how much of the production or distribution process a company controls for a particular product or service. This means that the company owns or controls the entire supply chain, from raw materials to finished products, or from production to distribution channels, or some other subset of the process. There are two main types of vertical integration:

• Backward (Closer to the raw material): This occurs when a company controls the inputs or raw materials needed to produce its products. For example, a car manufacturer may acquire a tire manufacturer to ensure a stable supply of tires.
• Forward (Closer to the customer): This occurs when a company controls the distribution channels or sales outlets for its products. For example, a clothing manufacturer may acquire its own retail stores to sell its products directly to consumers.

Vertical integration can provide several benefits to companies, including cost savings, increased efficiency, improved quality control, and greater control over the supply chain. However, it can also be risky and expensive, and may not always be the best strategy for every business.

Horizontal integration: refers to the breadth of business an organisation controls, a horizontal integration strategy can be highly cohesive in the sense that an organisation can acquire or merge with a competitor with the goal of increasing market share, reduce competition, and gain access to new customers or markets.

However horizontal integration does not have to be limited to the organisations particular industry, it is perfectly reasonable for an organisation to acquire a company in a completely different line of business, with the intention on synergising, or quite possibly just diversifying with no intention of finding synergies between their existing portfolio and their new acquisition

Geographic scope: refers to the geographical area or region where a company operates. This can include local, regional, national, or international markets, and can have a significant impact on a company's growth, profitability, and overall success.

Vertical integration

Economies of scale is an important factor when deciding where to strategically position a business in the supply chain, for example a furniture retailer would never be able to reach the economies of scale needed to justify owning their own forestry rights, not to mention the expertise required to run such a business. However it may very well make sense for a furniture retailer to acquire a logistics service to provide delivery services for customers.

By leveraging partners both upstream (closer to the raw material) and downstream (closer to the customer) an organisation can focus on it's own capabilities as well as the expertise of their partners, who in all likelihood know their phase of the supply chain better than you do.

A major strategic benefit of integrating up or downstream could be controlling an important resource or capability that could provide you with a competitive advantage, by either bolstering your own capabilities or hindering your competitions. Another benefit of backward integration is quality control, by acquiring suppliers an organisation can have full control of the quality of goods they receive.

There are positives and negatives to both vertical integration or strategic partnerships. Partnerships provide better adaption, however have higher transaction costs, whereas integration provides better coordination, however comes with higher administrative costs. It's up to each individual organisation to assesses which is better for them and under what circumstances.

Potential risks of engaging in a strategic partnership

• Adverse Selection: the supplier knows more information that the buyer know they need 'Something' and how much they are willing to pay for it, whereas the supplier has much more information about the 'something' and will be more motivated to rid themselves of lower quality 'somethings' quicker, it's a classic case of buyer beware.
• Moral Hazard: a supplier or partner will put their needs ahead of the organisation who is dealing with them, they will priorities themselves.
• Hold up Problem: after the contracts are signed there is an imbalance of power and one party can become opportunistic in their nature, taking advantage of their partner.
• Trade secrete: sharing information about how to do something with a supplier can lead to intellectual property theft.

Potential risks of engaging in a vertical integration

• Weak incentives: an internal capability may not be as focused on delivering the very best quality as an external supplier who can more easily be replaced.
• Principle agent problem: an internal manager may prioritise their own interests over the organisations.
• Lack of dynamism: it is very difficult to have a unified culture throughout a large organisation that benefits and works well with every department
• Bureaucracy: Often times the same policies and procedures which initially made operations run smoothly become cumbersome and impede rapid progress.
  
  

Horizontal Integration

Horizontal integration can provide several benefits for companies. It can lead to economies of scale by spreading fixed costs over a larger number of products. It can also help companies to leverage their existing resources and capabilities, reduce competition, and increase market share.

However, expanding horizontal scope also comes with some risks. Companies may face challenges in integrating acquired businesses, managing multiple product lines, and maintaining consistency in brand image and customer experience.

Overall, horizontal scope is an important consideration for companies when developing their corporate strategy. It can enable companies to grow and diversify their revenue streams, but it requires careful planning and execution to realize its potential benefits.

Types of horizontal integration

• Horizontal merger: is a type of corporate merger where two companies that operate in the same industry or market merge together to form a new entity. In a horizontal merger, the two companies are often direct competitors or operate in similar markets or product lines, thus increasing their combined market share by merging.
  
  
• Related merger: also known as a strategic merger, is a type of corporate merger where two companies that operate in the same or similar industries merge together to form a new entity. In a related merger, there is often a significant amount of synergy between the two companies, as they share similar customers, markets, and technologies.
  
  
• Unrelated merger: also known as a conglomerate merger, is a type of corporate merger where two companies that operate in completely different industries or markets merge together to form a new entity. In an unrelated merger, there is little to no synergy between the two companies, and they often have different business models, customers, and strategies.
  
  
• Indirect merger: also known as a triangular merger, is a type of corporate restructuring where an acquiring organisation creates a subsidiary that merges with the target company. The subsidiary becomes the surviving entity and the target company is merged into it, resulting in the target company becoming a wholly-owned subsidiary of the acquiring organisation.

Motivation for horizontal integration or diversification

• Market Power: Reduce competition, by acquiring companies that provide substitute products or services.
• Synergies: Essentially economies of scope, allow an organisation share idle or common resources/capabilities across companies, or, Procurement, logistics, information technology,  Human resources, etc. 
• Cross selling: Organisations can use their brand to cross sell products in different markets 
• Negotiating power: by broadening the scope of related businesses, an organisation can increase it's bargaining power with suppliers.
• Reduce risk: by spreading the risk across multiple companies and markets, an organisation can reduce the risk of any one or two particular businesses performing poorly, by bolstering them with more successful counterparts.

BCG Growth-Share Matrix

The BCGGE Matrix, also known as the Boston Consulting Group Growth-Share Matrix, is a strategic tool used to analyze an organisations company portfolio based on two dimensions: market growth rate and relative market share. It is used to help companies allocate resources and prioritize investments by classifying their products into four categories:

The Y-Axis can be interpreted as Market or industry attractiveness whereas the X-axis can be interpreted as company strength.,

• Stars: These are companies that have a high market share in a fast-growing market. They require a lot of resources to maintain their position and continue growing.
  
  
• Cash Cows: These are companies that have a high market share in a slow-growing market. They generate a lot of cash flow and profits but require minimal investment to maintain their position.
  
  
• Question Marks: These are companies that have a low market share in a fast-growing market. They require a lot of investment to gain market share and become stars, but they have the potential to become very profitable.
  
  
• Dogs: These are companies that have a low market share in a slow-growing market. They do not generate much cash flow and should be divested or discontinued if they cannot be improved. The capital gained by divesting can then be redeployed to stars and question marks.

The BCGGE Matrix helps companies to make informed decisions about which products to invest in, which products to divest, and how to allocate resources effectively.

Geographic Scope

Globalisation is the third dimension of corporate scope, in essence it is the process of closer integration and exchange between countries and people worldwide. From the corporate scope perspective, our focus is on the Economical aspects of globalisation: Trade, investment flows, movement of labor, and Multinational Enterprises (MNEs). An MNE is any organisation which conducts its operations in at least two countries, but often times more. 

Foreign direct investment is the primary function of MNEs, basically it is the act of investing capital abroad, if a Swiss company builds a chocolate factory in Romania, this would be considered foreign direct investment.

Reasons for internationalisation

• Access to larger markets: Expand into other countries to broaden your market, the more people you sell to, the more sales you make.
• Access to better or lower cost manufacturing: Higher skilled workforce or lower cost workforce
• Diversifying risk: by operating in multiple countries, spreading risk across various economies.
• Capabilities: leverage core capabilities in various markets, or gain capabilities from new markets
• Resources: access to natural resources, such as oil or forestry
• Logistics: access to waterways or central geographic location for distribution hub.

Those maybe some good reasons to enter a new market, but the question is, how? There are Five main approaches for organisations to enter new markets:

• Exporting: Sale into foreign markets, direct exports or indirect export via an agent. An organisation produces their product domestically and ships it to a foreign market. Direct exports, the organisation sells the product themselves, whereas indirect exports there is an agent who imports the products and sells them on their local market, this may involve rebranding.
• Licensing (Franchising): Contract with a local partner who produces your product on the local market resells it in the foreign market. This comes with risk since generally the partner gains access to intangibles such as technology, knowhow or intellectual property. This also comes with the overhead of oversight of the partner to ensure the licensors interests 
• Strategic Alliance: Similar to licensing, but much more coordinated, broader scope may share capabilities such as R&D, Marketing, Logistics etc.
• Joint Venture: A local partner contributes resources to create a jointly owned subsidiary for the purpose of operating in a foreign market. Both organisations mange the new company and share in the risk as well as rewards.
• Wholly-Owned Subsidiary: An organisation establishes a 100% owned unit in a foreign market. this can come in three different flavours:
• Greenfield: everything is built from scratch
• Brownfield: infrastructure is acquired in the foreign market and then repurposed for use
• Acquisition: A local company is purchased and then integrated into the parent organisation.

The major risk in joint ventures, strategic alliances, and licensing models is Intellectual property theft, in all three you are trusting your partner with trade secrets, technical knowhow and intellectual property, there is very little preventing your partner from learning from you, and using that knowledge to break off relations and directly compete with you, perhaps even in your own domestic market.

The major benefit is that you can gain a lot of local cultural understanding through a partner, that you may never gain otherwise. Also by using a partner, your investment capital risk is much lower, since your partner should bare the brunt of the operational expenditures.