9 Has not been proofread. Corporate Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing

Plotting a Route to the Top Do a SWOT analysis for yourself Outline a strategy for yourself Unique Making yourself known is absolutely essential Next to talent, the second most important factor in career or entrepreneurial success is taking the time and effort to develop visibility Get your name in print Give speeches Volunteer for industry association and professional organization jobs Take time off for a stint in government Make your superiors look good Copyright © Houghton Mifflin Company. All rights reserved.

Jack Welch, Formerly of GE Class Objectives: To illustrate the formal strategic planning process. To examine and illustrate the concept of organizational culture. To discuss diversification, acquisitions, and internal new ventures. Discussion Questions: Do you think that GE’s diversification came about more through internal new venturing or acquisitions? What has Welch done to help ensure that GE’s various divisions avoid failure and sustain their competitive advantage? What part does taking risk play in the Welch-driven organizational culture at GE? Copyright © Houghton Mifflin Company. All rights reserved.

Discussion Quiz 5 – Related or Unrelated Diversification Research suggests that the average related company is no more profitable than the average unrelated company. If related diversification is associated with more benefits than unrelated diversification, why isn’t the strategy consistently more profitable? Copyright © Houghton Mifflin Company. All rights reserved.

Computing for the future For the CEO “…more interested in creating the future than in watching it happen. It is not about catching up, it’s about getting ahead.” Copyright © Houghton Mifflin Company. All rights reserved.

Assignment Questions What do you feel about the authors’ notions presented in Competing for the Future? Do you agree with the statement that, …the key to industry leadership is to develop an independent point of view about tomorrow’s opportunities and build capabilities that exploit them. How would you relate what the authors are saying to, say, a Michael Dell as he considers the direction Dell should take to be profitable in the 21st Century? Copyright © Houghton Mifflin Company. All rights reserved.

Bureaucratic Costs and the Limits of Diversification Number of businesses Information overload can lead to poor resource allocation decisions and create inefficiencies. Coordination among businesses As the scope of diversification widens, control and bureaucratic costs increase. Resource sharing and pooling arrangements that create value also cause coordination problems. Limits of diversification The extent of diversification must be balanced with its bureaucratic costs. Copyright © Houghton Mifflin Company. All rights reserved.

SWOT and Strategic Choice Weaknesses Opportunities Strengths Threats Copyright © Houghton Mifflin Company. All rights reserved. 14

Porter’s Five Forces Model The five forces are threats from: Competitors Powerful suppliers Powerful buyers Substitute product, and New entrants Copyright © Houghton Mifflin Company. All rights reserved.

Competitive Advantage – Four Ways to Achieve Superior efficiency Quality Innovation Responsiveness to customers Copyright © Houghton Mifflin Company. All rights reserved.

Choosing a Generic Business-Level Strategy (Continued) MY FIRM HAS A COMPETITIVE ADVANTAGE No, my FIRM HAS A COMPETITIVE ADVANTAGE STUCK IN THE MIDDLE Easy to lose control unless strategic managers keep close track of the business and its environment, constantly adjusting product/market choices to suit changing conditions within the industry. Must monitor the environment so that they can keep the firm’s sources of competitive advantage in tune with changing opportunities and threats. Copyright © Houghton Mifflin Company. All rights reserved. 14

The World of 1990 Service Credit Engineering Billing Distribution Production Distribution The World of 1990 Dr. M. Hammer Copyright © Houghton Mifflin Company. All rights reserved.

The World of 2000: The Good News Service Credit Engineering ERP Billing Distribution Production Dr. M. Hammer Copyright © Houghton Mifflin Company. All rights reserved.

The World of 2000: The Bad News Service Credit Engineering Service Credit Engineering ERP ERP Billing Distribution Production Billing Distribution Production Dr. M. Hammer Copyright © Houghton Mifflin Company. All rights reserved.

A Frightening Observation The walls between enterprises dwarf the walls within enterprises Dr. M. Hammer Copyright © Houghton Mifflin Company. All rights reserved.

An Abridged History of the Next Ten Years The 2000’s will be about breaking down external walls: integrating and redesigning inter-enterprise processes using the Internet Dr. M. Hammer Copyright © Houghton Mifflin Company. All rights reserved.

Internet - The Real Question What is the real significance of the Internet for real companies in the real and global economy? Copyright © Houghton Mifflin Company. All rights reserved.

The Internet Industry If the Internet is the answer, then what’s the question Bottom-line Question: What impact will the Internet have on Strategy Formulation and Strategy Implementation issues in the 2000’s? PCN Copyright © Houghton Mifflin Company. All rights reserved.

Hammer – Rethinking Strategy: You Are What You Do Michael Porter’s competitive factors – five forces. Hamel and Prahalad’s core competencies. A firms needs to identify the things it does well and build its strategy around them. Hammer – By focusing on process and defining a business in terms of how it works, the process-centered perspective leads to strategies that address not only the question “What should we do?” but also “Can we do it?” Copyright © Houghton Mifflin Company. All rights reserved.

Strategy & Competitive Advantage Review Strategy & Competitive Advantage Strategy – refers to the ideas, plans, and support that firms use to compete successfully against rivals. Competitive advantage – comes from a firm’s ability to perform activities more distinctively or more effectively than its rivals. Distinctive competencies  “unique strengths that allow a company to achieve superior efficiency, quality, innovation, or customer responsiveness.” Distinctive competencies (Chapter 4) e.g., Microsoft. Copyright © Houghton Mifflin Company. All rights reserved.

Overview Horizontal integration Vertical integration The process of acquiring or merging with industry competitors Acquisition and merger Vertical integration Expanding operations backward into an industry that produces inputs for the company or forward into an industry that distributes the company’s products Strategic outsourcing Letting some value creation activities within a business be performed by an independent entity Copyright © Houghton Mifflin Company. All rights reserved.

Benefits of Horizontal Integration Reducing costs Increasing value Product bundling Cross selling Managing industry rivalry Increasing bargaining power Market power (monopoly power) Copyright © Houghton Mifflin Company. All rights reserved.

Drawbacks and Limits of Horizontal Integration Majority of mergers and acquisitions do not create value Implementing a horizontal integration strategy is not easy Mergers and acquisitions often fail to produce the anticipated gains Can bring the company into conflict with antitrust law Copyright © Houghton Mifflin Company. All rights reserved.

Vertical Integration: Stages in the Raw Material to Consumer Value Chain Copyright © Houghton Mifflin Company. All rights reserved.

The Raw Material to Consumer Value Chain in the Personal Computer Industry Copyright © Houghton Mifflin Company. All rights reserved.

Full and Taper Integration Copyright © Houghton Mifflin Company. All rights reserved.

Increasing Profitability Through Vertical Integration Building barriers to entry Facilitating investments in specialized assets Protecting product quality Improved scheduling Copyright © Houghton Mifflin Company. All rights reserved.

Arguments Against Vertical Integration Cost disadvantages Company-owned suppliers that have higher costs than external suppliers Rapid technological change Tying a company to an obsolescent technology Demand unpredictability Difficulty of achieving close coordination among vertically integrated activities Bureaucratic costs Copyright © Houghton Mifflin Company. All rights reserved.

Alternatives to Vertical Integration: Cooperative Relationships Short-term contracts and competitive bidding Strategic alliances and long-term contracting Building long-term cooperative relationships Hostage taking Credible commitments Maintaining market discipline Parallel sourcing policy Copyright © Houghton Mifflin Company. All rights reserved.

Strategic Outsourcing of Primary Value Creation Functions Copyright © Houghton Mifflin Company. All rights reserved.

Benefits of Outsourcing Reducing costs The specialist company is less than what it would cost to perform the activity internally Differentiation The quality of the activity performed by the specialist is greater than if the activity were performed by the company Focus Distractions are removed; the company can focus attention and resources on activities important for value creation and competitive advantage Copyright © Houghton Mifflin Company. All rights reserved.

Identifying and Managing the Risks of Outsourcing Holdup The company can become too dependent on the provider of the outsourced activity so that the provider can raise prices Scheduling of activities Loss of control can result in distorted signals in the supply chain Loss of information Contact with the customer may be lost Copyright © Houghton Mifflin Company. All rights reserved.

The End Copyright © Houghton Mifflin Company. All rights reserved.