Chapter 9 CORPORATELEVEL STRATEGY HORIZONTAL INTEGRATION VERTICAL INTEGRATION

Chapter 9 CORPORATE-LEVEL STRATEGY: HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, AND STRATEGIC OUTSOURCING 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 -

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 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. 19 -

“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 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 -

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 -

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. 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. Dept. Business Unit Dept. 9 -

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 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 -

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 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 -

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 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 -

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 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 -

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 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 -

Stages in Raw-Materials-to. Customer Value-Added Chain Figure 9. 1 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 -

Raw-Materials-to-Customer Value-Added Chain in PC Industry Figure 9. 2 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 -

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 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 -

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 o o • May lock into old/inefficient technology • Prevent company from changing to new technology that could strengthen business model Unpredictable Demand Creates risk in vertical integration investments 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 -

Vertical Integration Limits Ø Company-owned suppliers lack incentive to reduce costs Ø Changing demand/technology reduces ability to be competitive 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 -

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 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 -

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 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 -

Strategic Outsourcing of Primary Value Creation Functions Figure 9. 3 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 -

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 -

Risks of Outsourcing v Holdup – company becomes too dependent on specialist provider v 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 -

“Coke can grow faster by forming alliances that give it access to research and other expertise. ” - Douglas Daft, Chairman, Coca-Cola 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 -