1. Corporate Strategy: Vertical Integration and Diversification
Instructor:
Dr.Gehan Shanmuganathan

2. Part 2 Strategy Formulation
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3. LO 8-5 Describe and examine alternatives to vertical integration.
LO 8-1 Define corporate-level strategy, and describe the three dimensions along which it is assessed.
LO 8-2 Describe and evaluate different options firms have to organize economic activity.
LO 8-3 Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.
LO 8-4 Identify and evaluate benefits and risks of vertical integration.
LO 8-5 Describe and examine alternatives to vertical integration.
LO 8-6 Describe and evaluate different types of corporate diversification.
LO 8-7 Apply the core competence – market matrix to derive different diversification strategies.
LO 8-8 Explain when a diversification strategy creates a competitive advantage, and when it does not.
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4. ChapterCase 8 Refocusing GE: A Future of Clean-Tech and Health Care?
Jeffrey Immelt appointed CEO of GE Sept. 7th 2001
Environmental Change (e.g., 9/11 and Global Financial Crises)
GE’s stock price fell by 84%
Lost AAA credit rating
Refocus on green economy and health care industries
Sold majority stake in NBC Universal to Comcast
ecomagination: solar energy, hybrid locomotives, fuel cells…etc.
healthymagination: increase quality and access to health care
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5. What Is Corporate Strategy?
Quest for competitive advantage when competing in multiple industries
Ex: Jeffrey Immelt’s initiative in clean-tech and health care industries
Corporate strategy concerns the scope of the firm
Industry value chain
Products and services
Geography
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6. What Is Corporate Strategy? (cont'd)
Economies of scale
Average per-unit cost decreases as its output increases
Ex: Anheuser-Busch Inbev largest global brewer
Economies of scope
Savings that come from producing more outputs or providing different services at less cost
Ex: Amazon range of products & services
Transaction cost
The cost associated with economic exchange
"Make or buy" decision
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7. Transaction Cost Economics and Scope of the Firm
Explains and predicts the scope of the firm
"Market vs. firms" have differential costs
Transaction costs
Costs associated with economic exchanges
Either in the firm OR in the markets
Ex: negotiating and enforcing contracts
Administrative costs
Costs pertaining to organizing an exchange within a hierarchy
Ex: recruiting & training employees
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8. Toyota Locks Up Lithium for Car Batteries
STRATEGY HIGHLIGHT 8.1
Toyota Locks Up Lithium for Car Batteries
World demand for lithium-ion batteries for cars
Grow from $278 million in ‘09 to $25 billion in 2014
Toyota wants to secure long-term supply of lithium to power its hybrid fleet
Orocobre holds exploration rights to a large salt-lake area
Upfront investment to extract of lithium is very high
Should Orocobre make the investment to supply Toyota?
To encourage investment, Toyota took an equity position
A 6-minute video on China’s vital role in the supply of global rare earth metals. In fall of 2010, China restricted exports of the materials. The video was produced by The New York Times in November 2010.
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China Rare Earth Video
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9. Vertical Integration along the Industry Value Chain
In what stages of the industry value chain should the firm participate?
Vertical integration
Ownership of its inputs, production, & outputs in the value chain
Horizontal value chain
Internal, firm-level value chains (Chapter 4)
Vertical value chain
Industry-level integration from upstream to downstream
Examples: cell phone industry value chain
Many different industries and firms
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10. HTC’s Backward and Forward Integration along the Industry Value Chain in the Smartphone Industry
EXHIBIT 8.5
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11. Types of Corporate Diversification
Single business
Google
Dominant business
Microsoft
Related diversification
Related constrained
ExxonMobil
Related linked
Disney
Unrelated diversification GE
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12. Leveraging Core Competencies for Corporate Diversification
Core competence
Unique skills and strengths
Allows firms to increase the value of product/service
Lowers the cost
Examples:
Walmart – global supply chain
Infosys – low-cost global delivery system
The core competence – market matrix
Provides guidance to executives on how to diversify in order to achieve continued growth
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13. Corporate Diversification
Boston Consulting Group (BCG):
growth-share matrix
Question marks
Dogs
Stars
Cash cows
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14. Corporate Strategy: Combining Vertical Integration and Diversification
Firms’ corporate strategy
Concerns level of integration on value chain
AND
Level of diversification
Ex: Oracle earned $23B in 2009
Enterprise software is core competency
Backward integration – Sun Microsystems
Forward integration – PeopleSoft
Diversification at Oracle:
Related – IP management bought Sophoi
Unrelated – ID theft bought Bharosa
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15. CHAPTERCASE 8/ Consider This…
Where do ecomagination and healthymagination fit on the core competence – market matrix for GE?
Take either the energy or health care industry and draw the industry value chain. What areas of potential vertical integration should GE consider?
What related diversification would you suggest for GE in reference to its focus for the future?
How do GE’s corporate-level strategic initiatives of energy, health care, and globalization reinforce each other? How might they generate conflicts in the company?
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