1. Chapter 9
CORPORATE-LEVEL STRATEGY: HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, AND STRATEGIC OUTSOURCING
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2. 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:
Businesses/industries firm should be in
Value creation activities firm should perform
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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3. Corporate-Level Strategy and Multi-Business Model
Company Must Construct:
Business model & strategies for each business unit/division in every industry it competes
Higher-level model- justifies entry into different businesses & industries
Division
Business Unit
Dept.
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4. Repositioning & Redefining A Business Model
Corporate-level strategies primarily directed toward improving company’s competitive advantage and profitability in present business or product line.
Horizontal Integration- acquiring/merging with industry competitors
Vertical Integration- expanding operations backward into industry that produces inputs for company or forward into industry that distributes company’s products
Strategic Outsourcing- letting some value creation activities within business be performed by independent entity
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5. 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:
Focus resources- resources devoted to competing successfully in one area
‘Stick to the knitting’- company stays focused on what it does best
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6. Benefits of Horizontal Integration
Profits/profitability increase if horizontal integration:
Lowers cost structure
Increases product differentiation
Product bundling
Cross-selling
Replicates business model
Reduces industry rivalry
Increases bargaining power
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7. Problems with Horizontal Integration
Data suggests the majority of mergers/acquisitions DO NOT create value and many may DESTROY value.
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
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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8. Vertical Integration: Entering New Industries
Backward Vertical- expands into industry that produces inputs to company
Forward Vertical- company expands into industry that uses, distributes, sells company’s products
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9. Stages in Raw-Materials-to-Customer Value-Added Chain
Figure 9.1
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10. Raw-Materials-to-Customer Value-Added Chain in PC Industry
Figure 9.2
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11. Increasing Profitability Through Vertical Integration
“...strengthens the business model of the core business or... improves its competitive position.
Facilitates investments in specialized assets- lowers cost structure or better differentiation.
Enhances product quality- strengthens its differentiation advantage through either forward or backward integration
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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12. Problems with Vertical Integration
Increased Cost Structure
Company-owned suppliers develop higher cost structure than independent suppliers
Bureaucratic costs of solving transaction difficulties
Technological Change
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
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13. Vertical Integration Limits
Company-owned suppliers lack incentive to reduce costs
Changing demand/technology reduces ability to be competitive
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14. Alternatives to Vertical Integration: Cooperative Relationships
Short-term contracts/competitive bidding- lack of commitment to supplier
Strategic alliances/long-term contracting
Enables creation of stable long-term relationship
Becomes substitute for vertical integration
Avoids problems of managing additional company
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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15. 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.
Focus on fewer value-creation activities
Goal to outsource noncore/nonstrategic activities
Virtual Corporation- companies that pursue extensive strategic outsourcing
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16. Strategic Outsourcing of Primary Value Creation Functions
Figure 9.3
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17. Benefits of Outsourcing
Lower cost structure- specialist cost is less than performing activity internally
Enhanced differentiation- quality of activity performed by specialist is greater than if activity were performed by the company
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.

18. 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.

19. CORPORATE-LEVEL STRATEGY: RELATED AND UNRELATED DIVERSIFICATION
Chapter 10
CORPORATE-LEVEL STRATEGY: RELATED AND UNRELATED DIVERSIFICATION

20. Diversified Company
“...makes and sells products in two or more different or distinct industries…”

21. Why Diversify?
When company is generating free cash flow with resources in excess of those needed to maintain competitive advantage.

22. Corporate-Level Strategy
Allow company to perform value creation functions at lower cost or in way allowing differentiation & premium price.
Used to identify:
Businesses/industries in which company should compete
Value creation activities company should perform in those businesses
Method to enter or leave businesses or industries in order to maximize its long-run profitability

23. Strategy of Diversification
Types of diversification:
Related diversification
Unrelated diversification
Methods to implement diversification strategy:
Internal new ventures
Acquisitions
Joint ventures

24. Ways to Diversify = Increase Profitability
Transfer competencies
Leverage competencies
Share Resources & Capabilities
Product bundling
General organizational competencies

25. 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

26. Transfer of Competencies at Philip Morris
Figure 10.1

27. Sharing Resources at Procter & Gamble
Figure 10.2

28. 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
Telecommunications
Medical equipment

29. 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

30. Commonalities Between Value Chains of 3 Business Units
Figure 10.3

31. Disadvantages/Limits of Diversification
Conditions = diversification disadvantageous:
Changes in Industry/Company
Unpredictable future
Willing to divest business units
Diversification for the Wrong Reasons
Clear vision of how value will be created.
Extensive diversification can reduce profitability.
Bureaucratic Costs of Diversification
Costs are function of number of business units portfolio
Extent coordination is required to gain benefits.

32. Factors Ignored in Pooling Diversification Risk
Stockholders can diversify own portfolio
Business cycles of different industries are difficult to predict – economic downturn affects all

33. May pursue both strategies simultaneously
Choosing Strategy
Depends on comparison of benefits of each strategy versus cost of pursuing it:
Related
Competencies can be applied across greater number of industries
Superior capabilities to control bureaucratic costs
Unrelated
Functional competencies have few uses across industries
Organizational design skills to build competencies
May pursue both strategies simultaneously

34. Sony’s Web of Corporate-Level Strategy
Figure 10.5

35. Internal New Ventures Pitfalls: Scale of Entry Commercialization
Process of transferring/creating new business unit/division in new industry.
Pitfalls:
Scale of Entry
Commercialization
Poor Implementation

36. 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 long-term profits

37. Attractions of Acquisitions
Principle strategy to
start horizontal integration:
Lack of distinctive competencies
Need to move quickly
Perceived as less risky than internal new ventures
Attractive way to enter new industry protected by high barriers to entry

38. Acquisition Pitfalls Integrating the acquired company
Overestimating economic benefits
Expense of acquisitions
Inadequate preacquisition screening

39. Guidelines for Successful Acquisition
Identification and screening
Bidding strategy
Integration
Learning from experience

40. Joint Ventures Attractions: Pitfalls:
Avoid risks/costs of building new operation
Sharing complementary skills/assets increase probability of success
Pitfalls:
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

41. Restructuring Why Restructure?
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