Transcript Slide 1

Chapter 9
CORPORATE-LEVEL STRATEGY:
HORIZONTAL INTEGRATION, VERTICAL
INTEGRATION, AND STRATEGIC
OUTSOURCING
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Learning Objectives
• Discuss how corporate-level strategy
can be used
• Define horizontal integrationadvantages & disadvantages
• Explain difference between company
and industry value chain
• Discuss why and under what
conditions cooperative relationships
may become a substitute for vertical
integration
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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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“The great commander knows
when to attack and when to
stand down. Never fight a battle
when nothing is
gained by winning.”
- General George S. Patton
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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
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.
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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
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.
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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.
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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.
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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.
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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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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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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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Stages in Raw-Materials-toCustomer Value-Added Chain
Figure 9.1
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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.
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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.
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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.
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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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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.
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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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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.
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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
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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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Risks of Outsourcing
 Holdup – company becomes
too dependent on specialist
provider
 Loss of information –
company loses important
customer contact or competitive
information
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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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“Coke can grow
faster by forming
alliances that give it
access to research
and other expertise.”
- Douglas Daft,
Chairman, Coca-Cola
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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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