1. Chapter 9
CORPORATE-LEVEL STRATEGY: HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, AND STRATEGIC OUTSOURCING
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2. Learning Objectives Discuss how corporate-level strategy can be used
Define horizontal integration- advantages & disadvantages
Explain difference between company and industry value chain
Discuss why and under what conditions cooperative relationships may become a substitute for vertical integration
1-2
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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.

3. “The great commander knows when to attack and when to stand down
“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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4. 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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5. 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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6. 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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7. 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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8. 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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9. 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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10. 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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11. Stages in Raw-Materials-to-Customer Value-Added Chain
Figure 9.1
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12. Raw-Materials-to-Customer Value-Added Chain in PC Industry
Figure 9.2
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13. 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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14. 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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15. Vertical Integration Limits
Company-owned suppliers lack incentive to reduce costs
Changing demand/technology reduces ability to be competitive
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16. 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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17. 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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18. Strategic Outsourcing of Primary Value Creation Functions
Figure 9.3
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19. 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
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20. 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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21. “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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