Transcript Slide 1

Chapter 9
CORPORATE-LEVEL STRATEGY:
HORIZONTAL INTEGRATION, VERTICAL
INTEGRATION, AND STRATEGIC
OUTSOURCING
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9-1
Corporate-Level Strategy
How do we sustain competitive advantages in our
current business? What new businesses or industries
do we wish to enter?
Corporate strategy is used to identify:
1. Businesses/industries firm should be in
2. Value creation activities firm should perform
3. Methods to enter/exit businesses/industries
to maximize long-run profitability
Companies must adopt a long-term perspective
in formulating a corporate-level strategy.
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-2
Corporate-Level Strategy
and Multi-Business Model
Multi-Business
Company Must Construct:
1) Business model & strategies for
each business unit/division in every
industry it competes
2) Higher-level model- justifies
entry into different
businesses & industries
Division
Business
Unit
Dept.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Dept.
Business
Unit
Dept.
9-3
Repositioning &
Redefining A Business Model
Corporate-level strategies primarily directed toward
improving company’s competitive advantage and
profitability in present business or product line.
o Horizontal Integration- acquiring/merging with
industry competitors
o Vertical Integration- expanding operations
backward into industry that produces inputs
for company or forward into industry that
distributes company’s products
o Strategic Outsourcing- letting some value
creation activities within business be
performed by independent entity
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-4
Horizontal Integration:
Single-Industry Strategy
Process of acquiring/merging with industry competitors
in effort to achieve competitive advantages that come
with large scale & scope.
Staying in single industry allows firm to:
o Focus resources- resources
devoted to competing successfully
in one area
o ‘Stick to the knitting’- company
stays focused on what it does best
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-5
Benefits of Horizontal Integration
Profits/profitability increase if horizontal integration:
1. Lowers cost structure
2. Increases product differentiation
• Product bundling
• Cross-selling
3. Replicates business model
4. Reduces industry rivalry
5. Increases bargaining power
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-6
Problems with
Horizontal Integration
Data suggests the majority of mergers/acquisitions DO
NOT create value and many may DESTROY value.
o Implementing horizontal integration not easy task
• Problems with merging different company cultures
• High management turnover in acquired when
acquisition is hostile
• Managers tend to overestimate benefits of merger
• Managers tend to underestimate problems in merging
o Merger may be blocked if perceived to:
• Create dominant competitor
• Create too much industry consolidation
• Have potential for future abuse of market power
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-7
Vertical Integration:
Entering New Industries
o Backward Vertical- expands into
industry that produces inputs to
company
o Forward Vertical- company
expands into industry
that uses, distributes,
sells company’s
products
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9-8
Stages in Raw-Materials-toCustomer Value-Added Chain
Figure 9.1
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9-9
Raw-Materials-to-Customer
Value-Added Chain in PC Industry
Figure 9.2
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-10
Increasing Profitability
Through Vertical Integration
“...strengthens the business model of the core business
or... improves its competitive position.
1. Facilitates investments in specialized assetslowers cost structure or better differentiation.
2. Enhances product quality- strengthens its
differentiation advantage through either forward
or backward integration
3. Improved scheduling
• Easier & more cost-effective to plan, transfer of
product in value-added chain
• Enables company to respond better to changes
in demand
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-11
Problems with Vertical Integration
o Increased Cost Structure
• Company-owned suppliers develop higher
cost structure than independent suppliers
• Bureaucratic costs of solving transaction
difficulties
o Technological Change
• May lock into old/inefficient technology
• Prevent company from changing to new
technology that could strengthen business
model
o Unpredictable Demand
o Creates risk in vertical
integration investments
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9-12
Vertical Integration Limits
 Company-owned suppliers
lack incentive to reduce costs
 Changing demand/technology
reduces ability to be competitive
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-13
Alternatives to Vertical Integration:
Cooperative Relationships
o Short-term contracts/competitive bidding- lack of
commitment to supplier
o Strategic alliances/long-term contracting
• Enables creation of stable long-term relationship
• Becomes substitute for vertical integration
• Avoids problems of managing additional company
o Building long-term cooperative relationships
• Hostage taking – creating mutual dependency
• Credible commitments – believable promise/pledge
• Maintaining market discipline
• Periodic contract renegotiation
• Parallel sourcing policy
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Strategic Outsourcing
Allows one or more of company’s value-chain
activities/functions to be performed by independent
specialized companies to focus all skills/knowledge on
one activity.
o Focus on fewer value-creation activities
o Goal to outsource noncore/nonstrategic
activities
o Virtual Corporation- companies that
pursue extensive strategic outsourcing
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9-15
Strategic Outsourcing of
Primary Value Creation Functions
Figure 9.3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-16
Benefits of Outsourcing
1. Lower cost structure- specialist cost is less
than performing activity internally
2. Enhanced differentiation- quality of activity
performed by specialist is greater than if
activity were performed by the company
3. Focus on the core business
• Distractions are removed
• Company can focus attention/resources
on activities important for value
creation/competitive advantage
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-17
Risks of Outsourcing
 Holdup – company becomes
too dependent on specialist
provider
 Loss of information –
company loses important
customer contact or competitive
information
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9-18
Chapter 10
CORPORATE-LEVEL
STRATEGY: RELATED AND
UNRELATED DIVERSIFICATION
Diversified Company
“...makes and sells
products in two or more
different or distinct
industries…”
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Why Diversify?
When company is generating
free cash flow with resources
in excess of those needed to
maintain competitive
advantage.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Corporate-Level Strategy
Allow company to perform value creation functions at
lower cost or in way allowing differentiation & premium
price.
Used to identify:
1. Businesses/industries in which company
should compete
2. Value creation activities company should
perform in those businesses
3. Method to enter or leave businesses or
industries in order to maximize its long-run
profitability
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Strategy of Diversification
Types of diversification:
• Related diversification
• Unrelated diversification
Methods to implement
diversification
strategy:
• Internal new ventures
• Acquisitions
• Joint ventures
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Ways to Diversify
= Increase Profitability
Product bundling
Transfer
competencies General organizational
competencies
Leverage
competencies
Share Resources
& Capabilities
Transferring Competencies
Taking a distinctive competency developed
in one industry and implanting it in
EXISTING business unit in another
industry
Competencies transferred must
involve activities important to
establish competitive advantage
Transfer of
Competencies at Philip Morris
Figure 10.1
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10-26
Sharing Resources
at Procter & Gamble
Figure 10.2
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Product Bundling
Differentiate products/expand product lines to
satisfy customers’ needs for package of related
products.
• Allows customers to reduce
suppliers for convenience &
cost savings
• Examples


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Telecommunications
Medical equipment
Types of Diversification
 Related - entry into new business in different

industry:
• Related to company’s existing business/activities
• Has commonalities between one or more
components of each activity’s value chain
Based on transferring/leveraging competencies,
sharing resources, & bundling products
Unrelated - entry into industries with no connection
to any of company’s activities in present industry or
industries
Based on only general organizational competencies
to increase profitability of all business units
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Commonalities Between Value
Chains of 3 Business Units
Figure 10.3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10-30
Disadvantages/Limits
of Diversification
Conditions = diversification disadvantageous:
1. Changes in Industry/Company
•
•
Unpredictable future
Willing to divest business units
2. Diversification for the Wrong Reasons
•
•
Clear vision of how value will be created.
Extensive diversification can reduce profitability.
3. Bureaucratic Costs of Diversification
•
•
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Costs are function of number of business units
portfolio
Extent coordination is required to gain benefits.
Factors Ignored in
Pooling Diversification Risk
Stockholders can diversify own
portfolio
Business cycles of different industries
are difficult to predict – economic
downturn affects all
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Choosing Strategy
Depends on comparison of benefits of each strategy
versus cost of pursuing it:
o Related
• Competencies can be applied across greater
number of industries
• Superior capabilities to control bureaucratic costs
o Unrelated
• Functional competencies have few uses across
industries
• Organizational design skills to build competencies
May pursue both strategies simultaneously
Sony’s Web of
Corporate-Level Strategy
Figure 10.5
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Internal New Ventures
Process of transferring/creating new
business unit/division in new industry.
Pitfalls:
Scale of Entry
Commercialization
Poor Implementation
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Successful Internal New Venturing
 Place funding for research in hand of
business unit managers
 Effective use of R & D competency
 Foster close links between R & D and
marketing
 Large-scale entry leads to greater longterm profits
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Attractions of Acquisitions
Principle strategy to
start horizontal integration:
o Lack of distinctive competencies
o Need to move quickly
o Perceived as less risky than
internal new ventures
o Attractive way to enter new
industry protected by high barriers
to entry
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Acquisition Pitfalls
oIntegrating the acquired
company
oOverestimating
economic benefits
oExpense of
acquisitions
oInadequate
preacquisition screening
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Guidelines for
Successful Acquisition
Identification and screening
Bidding strategy
Integration
Learning from
experience
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Joint Ventures
Attractions:
o
o
Avoid risks/costs of building new operation
Sharing complementary skills/assets
increase probability of success
Pitfalls:
o
o
o
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Sharing profits if new business succeeds
Venture partners must share control –
conflicts can cause failure
Risk of giving know-how away to joint
venture partner
Restructuring
Process of divesting businesses and
exiting industries to focus on core distinctive
competencies to increase company profitability.
Why Restructure?
• Diversification discount- investors see
highly diversified companies as less
attractive
• Response to failed acquisitions
• Innovations in strategic management
have diminished advantages of vertical
integration or diversification
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