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Corporate Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing

2. 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
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3. 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?
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4. 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?
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5. 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.”
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6. 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?
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7. 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.
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8. SWOT and Strategic Choice
Weaknesses
Opportunities
Strengths
Threats
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9. Porter’s Five Forces Model
The five forces are threats from:
Competitors
Powerful suppliers
Powerful buyers
Substitute product, and
New entrants
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10. Competitive Advantage – Four Ways to Achieve
Superior efficiency
Quality
Innovation
Responsiveness to customers
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11. 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.
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12. The World of 1990 Service Credit Engineering Billing Distribution
Production
Distribution
The World of 1990
Dr. M. Hammer
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13. The World of 2000: The Good News
Service
Credit
Engineering
ERP
Billing
Distribution
Production
Dr. M. Hammer
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14. The World of 2000: The Bad News
Service
Credit
Engineering
Service
Credit
Engineering
ERP
ERP
Billing
Distribution
Production
Billing
Distribution
Production
Dr. M. Hammer
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15. A Frightening Observation
The walls between enterprises dwarf the walls within enterprises
Dr. M. Hammer
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16. 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
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17. Internet - The Real Question
What is the real significance of the Internet for real companies in the real and global economy?
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18. 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
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19. 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?”
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20. 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.
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21. 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
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22. Benefits of Horizontal Integration
Reducing costs
Increasing value
Product bundling
Cross selling
Managing industry rivalry
Increasing bargaining power
Market power (monopoly power)
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23. 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
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24. Vertical Integration: Stages in the Raw Material to Consumer Value Chain
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25. The Raw Material to Consumer Value Chain in the Personal Computer Industry
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26. Full and Taper Integration
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27. Increasing Profitability Through Vertical Integration
Building barriers to entry
Facilitating investments in specialized assets
Protecting product quality
Improved scheduling
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28. 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
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29. 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
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30. Strategic Outsourcing of Primary Value Creation Functions
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31. 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
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32. 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
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33. The End
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