1. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 8 Corporate Strategy: Vertical Integration and Diversification

2. 8-2

3. 8-3 Chapter Outline 8.1 What Is Corporate Strategy? 8.2 The Boundaries of the Firm Firms vs. Markets: Make or Buy? Alternatives on the Make-or-Buy Continuum 8.3 Vertical Integration along the Industry Value Chain Types of Vertical Integration 8.4 Corporate Diversification: Expanding Beyond a Single Market Types of Corporate Diversification Leveraging Core Competencies for Corporate Diversification Corporate Diversification and Firm Performance 8.5 Implications for the Strategist 8.1 What Is Corporate Strategy? 8.2 The Boundaries of the Firm Firms vs. Markets: Make or Buy? Alternatives on the Make-or-Buy Continuum 8.3 Vertical Integration along the Industry Value Chain Types of Vertical Integration 8.4 Corporate Diversification: Expanding Beyond a Single Market Types of Corporate Diversification Leveraging Core Competencies for Corporate Diversification Corporate Diversification and Firm Performance 8.5 Implications for the Strategist

4. 8-4 ChapterCase 8 Refocusing GE: A Future of Clean-Tech and Health Care?  In 2008, more than half of GE’s profits came from GE Capital.  Global financial crisis hit the company hard. Stock price fell from $42.12 to $6.66 in 17 months!  GE launched two strategic initiatives: 1.Ecomagination − clean-tech focus 2.Healthymagination – increase access and reduce costs of health care services  Also sold 51% of NBC to Comcast in 2011 and the rest in 2013. Refocusing GE: A Future of Clean-Tech and Health Care?  In 2008, more than half of GE’s profits came from GE Capital.  Global financial crisis hit the company hard. Stock price fell from $42.12 to $6.66 in 17 months!  GE launched two strategic initiatives: 1.Ecomagination − clean-tech focus 2.Healthymagination – increase access and reduce costs of health care services  Also sold 51% of NBC to Comcast in 2011 and the rest in 2013. Courtesy of GE Healthcare

5. 8-5  In what stages of the industry value chain should the firm participate?  Vertical integration Ownership of its inputs, production, & outputs in the value chain Vertical value chain Industry-level integration from upstream to downstream Examples: cell phone industry value chain Many different industries and firms 8.3 Vertical Integration along the Industry Value Chain

6. 8-6 Exhibit 8.5 HTC’s Backward and Forward Integration along the Industry Value Chain in the Smartphone Industry

7. 8-7  Securing critical supplies  Lowering costs & improving quality  Facilitating investments in specialized assets  Increasing costs & reducing quality  Reducing flexibility  Increasing the potential for legal repercussions Benefits and Risks of Vertical Integration SOME BENEFITS OF VERTICAL INTEGRATION SOME RISKS OF VERTICAL INTEGRATION

8. 8-8  Degrees of diversification Range of products and services a firm should offer Ex: PepsiCo also owns Lay's & Quaker Oats, but sold off KFC Differences in corporate strategy between KFC & Chick-fil-A  Diversification strategies Product diversification Active in several different product categories Geographic diversification Active in several different countries Product–market diversification Active in a range of both products and countries 8.4 Corporate Diversification: Expanding Beyond a Single Market SECOND CORPORATE STRATEGY QUESTION

9. 8-9  Single-business firm derives >95% from one business Google revenues from online search  Dominant-business firm 70% to 95% from one business Harley-Davidson yields 10% revenues from clothing  Related diversification strategy <70% from one business Related-constrained – leverage current competencies ExxonMobil strategic move into natural gas Related-linked – share only limited links to current business Amazon move into cloud computing, Kindle tablets, & video streaming  Unrelated diversification <70% and few if any links among businesses (a conglomerate) GE, LG, Tata Types of Corporate Diversification

10. 10 SOURCES OF VALUE FROM RELATED DIVERSIFICATION Economies of scale/scope  Lower price of a common resource by combining purchases  Share manufacturing capacity to reduce average costs  Share distribution to reduce average distribution costs Revenue-enhancing synergies  Bundle products to appeal to new customers  Cross sell to existing customers  Achieve higher valuation from larger, more predictable cash flows

11. The U.S. Automobile Industry’s Profit Pool

12. 8-12 Strategy Highlight 8.2 The Tata Group: Integration at the Corporate Level  Tata Group of India founded in 1868 – uses unrelated diversification Tea, hospitality, steel, IT, power, and automobiles 500,000 employees and $100 billion in annual revenues  Tata Motors The luxury division with the Jaguar and Land Rover brands focused differentiation strategy for developed markets The Nano car division with the Tata Nano brand Focused cost-leadership strategy for emerging markets Targets non-consumers moving up from mopeds and bicycles The Tata Group: Integration at the Corporate Level  Tata Group of India founded in 1868 – uses unrelated diversification Tea, hospitality, steel, IT, power, and automobiles 500,000 employees and $100 billion in annual revenues  Tata Motors The luxury division with the Jaguar and Land Rover brands focused differentiation strategy for developed markets The Nano car division with the Tata Nano brand Focused cost-leadership strategy for emerging markets Targets non-consumers moving up from mopeds and bicycles

13. 8-13 Exhibit 8.8 The Core Competence-Market Matrix

14. 8-14  Does corporate diversification lead to superior performance?  The critical question to ask: Are the individual businesses worth more under the company’s management than if each were managed in separate firms?  Research finds an inverted U-shaped relationship Type of diversification Overall firm performance Corporate Diversification and Firm Performance

15. 8-15 15 DIVERSIFICATION IS DIFFICULT TO MANAGE

16. Portfolio Management 5-16

17. 8-17 Exhibit 8.11 Restructuring the Corporate Portfolio: The Boston Consulting Group Growth-Share Matrix

18. 8-18 8.5 Implications for the Strategist  Effective corporate strategy helps to gain and sustain a competitive advantage.  Corporate strategy needs to be dynamic over time. GE CEO Jeffrey Immelt formulated a new corporate strategy in clean-tech and health care. (ChapterCase 8) Strategic positions of Nike and adidas another example adidas founded in 1924 focused on athletic shoes  Integrated manufacturing model Globalization led adidas to less integration and wider sports apparel  2013 − 40% shoes, 50% apparel, 10% equipment Nike started in 1978 as a vertically disintegrated firm.

19. 8-19 ChapterCase 8 Consider This… 2012 – GE split the energy business into three SBUs: Power and Water; Oil and Gas; and Energy Management. This move has both internal and external benefits. GE increasing its global footprint International sales were 19% in 1980; to over 52% in 2012. Tackling big problems isa strength for a conglomerate. India is seeking to replicate a “leap frog” approach in energy similar to that used in telecommunications. Challenges for firms based in developed economies Need robust solutions yet very economical Consider This… 2012 – GE split the energy business into three SBUs: Power and Water; Oil and Gas; and Energy Management. This move has both internal and external benefits. GE increasing its global footprint International sales were 19% in 1980; to over 52% in 2012. Tackling big problems isa strength for a conglomerate. India is seeking to replicate a “leap frog” approach in energy similar to that used in telecommunications. Challenges for firms based in developed economies Need robust solutions yet very economical Courtesy of GE Healthcare