CORPORATE LEVEL STRATEGY: HORIZONTAL & VERTICAL INTEGRATION; OUTSOURCING BUS 189 SPRING 2010 DR. MARK FRUIN

SCHEDULE APRIL 13, CHAPTER 9 APRIL 15, RETURN 2ND MIDS, RETURN PROJECT DRAFTS; DISTRIBUTE CASES 26 & 27 APRIL 20, CHAPTER 10 APRIL 22, DISTRIBUTE & DISCUSS CASES –Case 26: Michael Eisner’s Walt Disney Company –Case 27: The Walt Disney Company APRIL 27, CHAPTER 11 APRIL 29, PREPARE THIRD MID-TERM; MORE DISCUSSION OF CASES 26 & 27 MAY 4, THIRD MID-TERM; MAY 6, NO CLASS MAY 11 & 13, GROUP PRESENTATIONS MAY 20, LAST DAY FOR TURNING IN PROJECTS

CORPORATE-LEVEL STRATEGY C-L STRATEGIES CREATE VALUE THROUGH MAXIMIZING FUNCTIONAL & BUSINESS LEVEL OPPORTUNITIES FOR THE FIRM AS-A-WHOLE –CHAPTER 9: HORIZONTAL & VERTICAL INTERGRATION, STRATEGIC OUTSOURCING –CHAPTER 10: RELATED & UNRELATED DIVERSIFICATION –CHAPTER 11: CORPORATE PERFORMANCE, GOVERNANCE & BUSINESS ETHICS

SINGLE INDUSTRY STRATEGIES HORIZONTAL INTEGRATION: PREMIER SINGLE INDUSTRY STRATEGY WHY? 1) FOCUS IN ONE AREA; 2) STICK TO WHAT ONE KNOWS BEST BUT 1 INDUSTRY MAY HAVE MANY AREAS OF ACTIVITY –BANKING: RETAIL, WHOLESALE, INVESTMENT, REAL ESTATE PRIMARY TOOLS OF H. I. ARE MERGERS & ACQUISITIONS –MERGER: AGREEMENT BETWEEN EQUALS TO POOL ASSETS, OPERATIONS & SHARE –ACQUISITION: USE OF CAPITAL RESOURCES - DEBT, STOCK & CASH - TO ACQUIRE ANOTHER COMPANY RESULTS OF HORIZONTAL INTEGRATION –INCREASE CONCENTRATION; INCREASED MARKET POWER –TAKE OUT COMPETITION; REDUCE INDUSTRY RIVALRY –GAIN LOWER COST STRUCTURES –INCREASE (DECREASE) PRODUCT DIFFERENTIATION –MORE RESOURCES ALLOWS FIRM TO REPLICATE BUSINESS MODEL IN NEW LOCATIONS & SEGMENTS

PROBS W/ HORIZ. INEGRATION DATA SUGGEST THAT IMPLEMENTING H. I. STRATEGIES IS PRETTY HARD TO DO WELL –KPMG STUDY OF 700 LARGE ACQUISITIONS 31% REDUCE PROFITABILITY; DO NOT CREATE VALUE 30% INCREASE PROFITABILITY OF ACQUIRING COMPANY 29% HAVE LITTLE IMPACT NO BETTER THAN A 1-IN-3 CHANCE OF MAKING MONEY TYPICAL PROBLEMS –CULTURES CLASH –HIGH MANAGEMENT TURNOVER –OVERESTIMATION OF BENEFITS –ANTITRUST CONCERNS: DEPT OF JUSTICE (THE FEDS) TOO MUCH CONCENTRATION & MARKET POWER HOW MUCH IS TOO MUCH MAY BE HARD TO DETERMINE IN GLOBAL ECONOMY

VERTICAL INTEGRATION VERTICAL INTEGRATION - A STRATEGY OF MOVING INTO NEW INDUSTRIES THAT ARE DIRECTLY RELATED TO CORE BUS –BACKWARD OR UPSTREAM VERTICAL INTEGRATION BACKWARD TOWARDS SOURCES OF SUPPLY OF RAW MATERIALS OR INTERMEDIATE GOODS WHY DO THIS? –FORWARD OR DOWNSTREAM VERTICAL INTEGRATION FORWARD TOWARDS CUSTOMERS & THE MARKET WHY DO THIS?

PROFITABILITY & V.I. HOW TO CREATE VALUE & ADD PROFITS THROUGH VERTICAL INTEGRATION? –FACILITATE INVESTMENTS IN SPECIALIZED ASSETS A “SPECIALIZED ASSET” IS DESIGNED TO PERFORM A SPECIFIC TASK; ITS VALUE IS GREATLY REDUCED IN ITS NEXT BEST USE SAME MAKE OR BUY DECISION AS FIRM FACES IN ITS OWN INDUSTRY RISK OF HOLDUP: IF CORE FIRM FEARS HOLDUP, ONLY TWO CHOICES: 1) STRENGTHEN PARTNERSHIP & DEVELOP TRUST, OR 2) TAKEOVER SPECIALIZED ASSET –ENHANCE PRODUCT QUALITY: IF YOU CAN’T GET THE QUALITY YOU WANT OR YOU’RE NOT WILLING TO ACCEPT THAT RISK, TAKEOVER SPEC. ASSETS –IMPROVE SCHEDULING & THROUGHPUT: STREAMLINE & GUARANTEE FLOWS & TIMING

PROBS W/ VERTICAL INTEGRATION INCREASED COSTS/COST STRUCTURE –ACQUISITION COSTS –TRANSACTION COSTS TRANSACTION COSTS ASSOCIATION W/ACQUISITION TRANSACTION COSTS ASSOC. WITH BUREAUCRACY –HIGHER TRANSFER PRICES W/I COMPANY AFTER ACQUISITION; “CAPTURED CLIENT” SYNDROME CHANGES IN TECHNOLOGY –MAY NOT UNDERSTAND DYNAMICS OF NEW INDUSTRY –MAY NOT BE WILLING TO MAKE NEEDED INVESTMENTS DEMAND UNPREDICTABILITY –LOCKED INTO TRYING TO MAKE MONEY VIA ACQUISITION ACQUIRED COMPANY MAY HAVE VARIOUS UNKNOWN PROBLEMS –EVEN DUE DILIGENCE MAY NOT BE ENOUGH

ALTERNATIVES TO V. I. SHORT TERM CONTRACTS & COMPETITIVE BIDDING –THE PROBLEMS WITH MARKETS ARE VARIABLE COSTS & PROBLEMATIC SUPPLY, ESP SUPPLY THAT HINGES ON SPECIALIZED ASSETS –OF COURSE, THE ADVANTAGES OF MARKETS ARE LOW & COMPETITIVE PRICES LONG TERM CONTRACTS & STRATEGIC ALLIANCES –STRATEGIC ALLIANCES ARE AGREEMENTS TO CO-SPECIALIZE ASSETS, BUT SEPARATE ENTITIES ARE NOT FORMED IN MOST INSTANCES, AS IN JOINT VENTURES –STRENGTHS OF S.A.: COSTS SHARED, CONTRACTUAL COMPLEXITIES MINIMIZED, MUTUAL RISK & REWARD –WEAKNESSES OF S.A.: NO CONTROL, BLEEDTHROUGH, LOSE MORE THAN GAIN LONG TERM PARTNERSHIPS –HOSTAGE TAKING: SUBSTANTIAL, MUTUALLY DEPENDENT INVESTMENTS –CREDIBLE COMMITMENTS: WALKING THE TALK; TAKING ACTION –MAINTAIN “MARKET” DISCIPLINE: “DUAL” SOURCING; PARTNER EVALUATION AND REWARD

STRATEGIC OUTSOURCING V. I. STRATEGIES CREATE VALUE ACROSS INDUSTRIES TO STRENGTHEN FIRMS’ CORE BUSINESSES STRATEGIC OUTSOURCING IS A WAY OF REMOVING MANAGERIAL RESPONSIBILITIES FOR V. I. STRATEGIES ENTIRE VALUE-CREATING ACTIVITIES THAT WERE PART OF A FIRM’S VALUE CHAIN ARE OUTSOURCED (REMOVED) TO OTHER COMPANIES –FULL VERSUS TAPERED INTEGRATION OF VALUE CHAIN ACTIVITIES: FULL INTEGRATION = IN-HOUSE; TAPERED INTEGRATION = IN-HOUSE + OUTSIDE SUPPLIERS BENEFITS OF STRATEGIC OUTSOURCING –LOWER COSTS CHEAPER, BETTER & FASTER –ENHANCED DIFFERENTATION; SUPPLIERS DO IT BETTER THAN WE DO –GREATER FOCUS ON CORE BUSINESS/CORE COMPETENCIES RISKS OF OUTSOURCING –HOLDUP –LOSS OF CONTROL OVER STRATEGIC ACTIVITIES –LOSS OF INFORMATION

WHEN TO H.I., V.I. & S.O.? THE QUESTION, AS ALWAYS, IS WHEN TO EXERCISE OR IMPLEMENT STRATEGIES WHEN TO H.I.? WHEN TO V.I.? WHEN TO S.O.? HOW LONG WILL IT TAKE TO SELECT & IMPLEMENT ANY OF THESE STRATEGIES HOW LONG SHOULD A COMPANY WAIT BEFORE IT ASSESSES THE RESULTS OF ITS H.I., V.I. & S.O. STRATEGIES?

REMEMBER BASIC DEFINITION STRATEGY IS WINNING: SUSTAINING SUPERIOR PERFORMANCE (PRESUMABLY BASED ON SUPERIOR COMPETITIVE ADVANTAGES) RELATIVE TO RIVALS IN THE SAME INDUSTRY