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
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
Copyright 1998 by Houghton Mifflin Company. All rights reserved. 9-3 Concentration on a Single Business SEARS Coca-Cola McDonalds
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
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
Copyright 1998 by Houghton Mifflin Company. All rights reserved. 9-6 Vertical Integration Vertical Integration DefinedVertical Integration Defined
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
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
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
Copyright 1998 by Houghton Mifflin Company. All rights reserved 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
Copyright 1998 by Houghton Mifflin Company. All rights reserved Arguments Against Vertical Integration Cost DisadvantagesCost Disadvantages Technological ChangeTechnological Change Demand UncertaintyDemand Uncertainty
Copyright 1998 by Houghton Mifflin Company. All rights reserved 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
Copyright 1998 by Houghton Mifflin Company. All rights reserved Alternatives to Vertical Integration: Cooperative Relationships and Strategic Outsourcing Short-Term Contracts and Competitive BiddingShort-Term Contracts and Competitive Bidding
Copyright 1998 by Houghton Mifflin Company. All rights reserved 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
Copyright 1998 by Houghton Mifflin Company. All rights reserved 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
Copyright 1998 by Houghton Mifflin Company. All rights reserved Alternatives to Vertical Integration: Cooperative Relationships and Strategic Outsourcing OutsourcingOutsourcing Virtual CorporationVirtual Corporation
Copyright 1998 by Houghton Mifflin Company. All rights reserved Diversification Related DiversificationRelated Diversification
Copyright 1998 by Houghton Mifflin Company. All rights reserved Diversification Related DiversificationRelated Diversification Unrelated DiversificationUnrelated Diversification
Copyright 1998 by Houghton Mifflin Company. All rights reserved Creating Value Through Diversification Acquiring and RestructuringAcquiring and Restructuring Transferring CompetenciesTransferring Competencies Economies of ScopeEconomies of Scope Diversification
Copyright 1998 by Houghton Mifflin Company. All rights reserved Bureaucratic Costs and the Limits of Diversification Number of BusinessesNumber of Businesses Coordination Among BusinessesCoordination Among Businesses Diversification
Copyright 1998 by Houghton Mifflin Company. All rights reserved Figure 9.4: Structure of a Company Sharing Marketing Between Two Business Units Packaged Food Products Head Office Marketing Household Products Consumers
Copyright 1998 by Houghton Mifflin Company. All rights reserved Bureaucratic Costs and the Limits of Diversification (Continued) Number of BusinessesNumber of Businesses Coordination Among BusinessesCoordination Among Businesses Diversification Limits of DiversificationLimits of Diversification
Copyright 1998 by Houghton Mifflin Company. All rights reserved Diversification That Dissipates Value Diversification to Pool RisksDiversification to Pool Risks Diversification to Achieve Greater GrowthDiversification to Achieve Greater Growth Diversification
Copyright 1998 by Houghton Mifflin Company. All rights reserved Table 9.1: Comparing Related and Unrelated Diversification Related and Unrelated Diversification
Copyright 1998 by Houghton Mifflin Company. All rights reserved 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
Copyright 1998 by Houghton Mifflin Company. All rights reserved 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