1. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-1 Chapter 9 CORPORATE-LEVEL STRATEGY: HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, AND STRATEGIC OUTSOURCING

2. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-2 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1-2 Learning Objectives Discuss how corporate-level strategy can be usedDiscuss how corporate-level strategy can be used Define horizontal integration- advantages & disadvantagesDefine horizontal integration- advantages & disadvantages Explain difference between company and industry value chainExplain difference between company and industry value chain Discuss why and under what conditions cooperative relationships may become a substitute for vertical integrationDiscuss why and under what conditions cooperative relationships may become a substitute for vertical integration

3. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-3 “The great commander knows when to attack and when to stand down. Never fight a battle when nothing is gained by winning.” - General George S. Patton - General George S. Patton

4. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-4 How do we sustain competitive advantages in our current business? What new businesses or industries do we wish to enter? Corporate-Level Strategy Corporate strategy is used to identify: 1.Businesses/industries firm should be in 2.Value creation activities firm should perform 3.Methods to enter/exit businesses/industries to maximize long-run profitability Companies must adopt a long-term perspective in formulating a corporate-level strategy. in formulating a corporate-level strategy.

5. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-5 Corporate-Level Strategy and Multi-Business Model Multi-Business Company Must Construct: 1)Business model & strategies for each business unit/division in every industry it competes 2)Higher-level model- justifies entry into different businesses & industries Division Business Unit Dept.Dept. Dept.

6. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-6 o Horizontal Integration- acquiring/merging with industry competitors o Vertical Integration- expanding operations backward into industry that produces inputs for company or forward into industry that distributes company’s products o Strategic Outsourcing- letting some value creation activities within business be performed by independent entity Repositioning & Redefining A Business Model Corporate-level strategies primarily directed toward improving company’s competitive advantage and profitability in present business or product line.

7. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-7 Horizontal Integration: Single-Industry Strategy oFocus resources - resources devoted to competing successfully in one area o‘Stick to the knitting’ - company stays focused on what it does best Process of acquiring/merging with industry competitors in effort to achieve competitive advantages that come with large scale & scope. Staying in single industry allows firm to:

8. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-8 Benefits of Horizontal Integration Profits/profitability increase if horizontal integration: 1.Lowers cost structure 2.Increases product differentiation Product bundlingProduct bundling Cross-sellingCross-selling 3.Replicates business model 4.Reduces industry rivalry 5.Increases bargaining power

9. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-9 Problems with Horizontal Integration Data suggests the majority of mergers/acquisitions DO NOT create value and many may DESTROY value. oImplementing horizontal integration not easy task Problems with merging different company culturesProblems with merging different company cultures High management turnover in acquired when acquisition is hostileHigh management turnover in acquired when acquisition is hostile Managers tend to overestimate benefits of mergerManagers tend to overestimate benefits of merger Managers tend to underestimate problems in mergingManagers tend to underestimate problems in merging oMerger may be blocked if perceived to: Create dominant competitorCreate dominant competitor Create too much industry consolidationCreate too much industry consolidation Have potential for future abuse of market powerHave potential for future abuse of market power

10. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-10 Vertical Integration: Entering New Industries o Backward Vertical- e xpands into industry that produces inputs to company o Forward Vertical- c ompany expands into industry that uses, distributes, sells company’s products

11. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-11 Stages in Raw-Materials-to- Customer Value-Added Chain Figure 9.1

12. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-12 Raw-Materials-to-Customer Value-Added Chain in PC Industry Figure 9.2

13. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-13 “...strengthens the business model of the core business or... improves its competitive position. Increasing Profitability Through Vertical Integration 1.Facilitates investments in specialized assets- lowers cost structure or better differentiation. 2.Enhances product quality- strengthens its differentiation advantage through either forward or backward integration 3.Improved scheduling Easier & more cost-effective to plan, transfer of product in value-added chainEasier & more cost-effective to plan, transfer of product in value-added chain Enables company to respond better to changes in demandEnables company to respond better to changes in demand

14. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-14 Problems with Vertical Integration oIncreased Cost Structure Company-owned suppliers develop higher cost structure than independent suppliersCompany-owned suppliers develop higher cost structure than independent suppliers Bureaucratic costs of solving transaction difficultiesBureaucratic costs of solving transaction difficulties oTechnological Change May lock into old/inefficient technologyMay lock into old/inefficient technology Prevent company from changing to new technology that could strengthen business modelPrevent company from changing to new technology that could strengthen business model oUnpredictable Demand oCreates risk in vertical integration investments

15. Vertical Integration Limits  Company-owned suppliers lack incentive to reduce costs  Changing demand/technology reduces ability to be competitive 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-15

16. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-16 Alternatives to Vertical Integration: Cooperative Relationships o Short-term contracts/competitive bidding- lack of commitment to supplier o Strategic alliances/long-term contracting Enables creation of stable long-term relationshipEnables creation of stable long-term relationship Becomes substitute for vertical integrationBecomes substitute for vertical integration Avoids problems of managing additional companyAvoids problems of managing additional company o Building long-term cooperative relationships Hostage taking – creating mutual dependencyHostage taking – creating mutual dependency Credible commitments – believable promise/pledgeCredible commitments – believable promise/pledge Maintaining market disciplineMaintaining market discipline Periodic contract renegotiation Periodic contract renegotiation Parallel sourcing policy Parallel sourcing policy

17. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-17 Strategic Outsourcing oFocus on fewer value-creation activities oGoal to outsource noncore/nonstrategic activities oVirtual Corporation- companies that pursue extensive strategic outsourcing Allows one or more of company’s value-chain activities/functions to be performed by independent specialized companies to focus all skills/knowledge on one activity.

18. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-18 Strategic Outsourcing of Primary Value Creation Functions Figure 9.3

19. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-19 Benefits of Outsourcing 1.Lower cost structure- specialist cost is less than performing activity internally 2.Enhanced differentiation- quality of activity performed by specialist is greater than if activity were performed by the company 3.Focus on the core business Distractions are removedDistractions are removed Company can focus attention/resources on activities important for value creation/competitive advantageCompany can focus attention/resources on activities important for value creation/competitive advantage

20. Risks of Outsourcing  Holdup – company becomes too dependent on specialist provider  Loss of information – company loses important customer contact or competitive information 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-20

21. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9-21 - Douglas Daft, - Douglas Daft, Chairman, Coca-Cola Chairman, Coca-Cola “Coke can grow faster by forming alliances that give it access to research and other expertise.”