1. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-1 Chapter 9: Corporate Strategy -- Vertical Integration, Diversification, and Strategic Alliances Text by Charles W. L. Hill Gareth R. Jones Multimedia Slides by Milton M. Pressley Univ. of New Orleans

2. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-2 Preview 4 4Concentration on a Single Business 4 4Vertical Integration 4 4Alternatives to Vertical Integration: Cooperative Relationships and Strategic Outsourcing 4 4Diversification 4 4Strategic Alliances as an Alternative to Diversification

3. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-3 Concentration on a Single Business SEARS Coca-Cola McDonalds

4. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-4 Concentration on a Single Business (Continued) Allows Company to Focus Resources and Capabilities in Just One AreaAllows Company to Focus Resources and Capabilities in Just One Area Does Not Diversify Into Areas That It Knows Little About and Where Resources and Capabilities Add Little ValueDoes Not Diversify Into Areas That It Knows Little About and Where Resources and Capabilities Add Little Value Advantages

5. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-5 Concentration on a Single Business (Continued) Vertical Integration May Be Required to Create Value and Establish a Competitive AdvantageVertical Integration May Be Required to Create Value and Establish a Competitive Advantage Opportunities May Be MissedOpportunities May Be Missed Disadvantages

6. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-6 Vertical Integration Vertical Integration DefinedVertical Integration Defined

7. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-7 Figure 9.1: Stages in the Raw Material to Consumer Value Chain Intermediate Manufacturer Raw Materials Assembly Distribution End User Upstream Downstream

8. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-8 IntelMotorola Dow Chemicals Union Carbide Bizmart Computer World AppleCompaq Examples Figure 9.2: The Raw Material to Consumer Value Chain in the PC Industry Intermediate Manufacturer Intermediate Manufacturer Raw Materials Assembly Distribution End User

9. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-9 Figure 9.3: Full and Taper Integration Suppliers Customers A B C Full Integration Taper Integration Suppliers

10. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-10 Creating Value Through Vertical Integration Building Barriers to EntryBuilding Barriers to Entry Facilitating Investments in Specialized AssetsFacilitating Investments in Specialized Assets Protecting Product QualityProtecting Product Quality Improved SchedulingImproved Scheduling

11. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-11 Arguments Against Vertical Integration Cost DisadvantagesCost Disadvantages Technological ChangeTechnological Change Demand UncertaintyDemand Uncertainty

12. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-12 Bureaucratic Costs and the Limits of Vertical Integration Lack of Incentive to Reduce Operating CostsLack of Incentive to Reduce Operating Costs Lack of Strategic Flexibility in Times of Changing TechnologyLack of Strategic Flexibility in Times of Changing Technology Uncertain DemandUncertain Demand

13. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-13 Alternatives to Vertical Integration: Cooperative Relationships and Strategic Outsourcing Short-Term Contracts and Competitive BiddingShort-Term Contracts and Competitive Bidding

14. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-14 Alternatives to Vertical Integration: Cooperative Relationships and Strategic Outsourcing Short-Term Contracts and Competitive BiddingShort-Term Contracts and Competitive Bidding Strategic Alliances and Long-Term ContractingStrategic Alliances and Long-Term Contracting

15. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-15 Alternatives to Vertical Integration: Cooperative Relationships and Strategic Outsourcing Hostage TakingHostage Taking Credible CommitmentsCredible Commitments Maintaining Market DisciplineMaintaining Market Discipline –Periodic Renegotiation –Parallel Sourcing Policy Building Long-Term Cooperative Relationships

16. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-16 Alternatives to Vertical Integration: Cooperative Relationships and Strategic Outsourcing OutsourcingOutsourcing Virtual CorporationVirtual Corporation

17. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-17 Diversification Related DiversificationRelated Diversification

18. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-18 Diversification Related DiversificationRelated Diversification Unrelated DiversificationUnrelated Diversification

19. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-19 Creating Value Through Diversification Acquiring and RestructuringAcquiring and Restructuring Transferring CompetenciesTransferring Competencies Economies of ScopeEconomies of Scope Diversification

20. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-20 Bureaucratic Costs and the Limits of Diversification Number of BusinessesNumber of Businesses Coordination Among BusinessesCoordination Among Businesses Diversification

21. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-21 Figure 9.4: Structure of a Company Sharing Marketing Between Two Business Units Packaged Food Products Head Office Marketing Household Products Consumers

22. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-22 Bureaucratic Costs and the Limits of Diversification (Continued) Number of BusinessesNumber of Businesses Coordination Among BusinessesCoordination Among Businesses Diversification Limits of DiversificationLimits of Diversification

23. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-23 Diversification That Dissipates Value Diversification to Pool RisksDiversification to Pool Risks Diversification to Achieve Greater GrowthDiversification to Achieve Greater Growth Diversification

24. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-24 Table 9.1: Comparing Related and Unrelated Diversification Related and Unrelated Diversification

25. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-25 Strategic Alliances as an Alternative to Diversification Strategic Alliance DefinedStrategic Alliance Defined Advantages:Advantages: –Firms May Create Value by Realizing Economies of Scope –Enable Companies to Swap Complementary Skills DisadvantageDisadvantage –Profits Must Be Split –Risk That One Firm May Give Away Critical Know-How That May Create a Competitor from the Alliance Partner

26. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 9-26 Chapter Summary   CONCENTRATION ON A SINGLE BUSINESS   VERTICAL INTEGRATION   ALTERNATIVES TO VERTICAL INTE- GRATION: COOPERATIVE RELATIONSHIPS AND STRATEGIC OUTSOURCING   DIVERSIFICATION   STRATEGIC ALLIANCES AS AN ALTERNATIVE TO DIVERSIFICATION