1. Corporate Strategies: Vertical integration and Diversification
Chapters 6 and 7

2. Corporate strategy Product scope Geographic scope
Diversification
Geographic scope
Local market or global markets
Vertical scope (value chain)
Short value chain or long value chain (vertical integration or outsourcing)
Source : Grant

3. Vertical integration Types
Backward, forward
Value and rarity of vertical integration – When should firms vertically integrate?
Opportunism and transaction specific investments - quality
Firm capabilities
Flexibility and uncertainty – improved scheduling
Strategic alliances
Barriers to entry
Opportunism – unfair advantages?
Capabilities – Only if they can exploit resources/capabilities (VRIO)
Flexibility – how costly is it for a firm to alter its strategic and organizational decisions? Research suggests that veritical integration makes a firm less flexible to change strategically.

4. Body Glove International
                                  
Source:

5. Disadvantages of vertical integration
Inefficiency
Loss of flexibility (technological change)
Demand uncertainty
Compounding of risk
Bureaucratic costs

6. Do vertical empires work?
Been there, done that : General Motors, Ford, Lockheed Martin
Building vertically integrated structures : Microsoft, AOL-Time Warner
Problems – costs, loss of customers, ethical and moral questions
Lean, mean approach, Outsourcing through contractual arrangements : Dell, Hewlett-Packard, Nortel Networks
Source: Business Week, 2000

7. Imitability Direct duplication Alternatives to vertical integration
Path dependencies, social complexity, and causal ambiguity make imitation differences
Alternatives to vertical integration
Short term contracts
Long term contracts / strategic alliances and joint ventures
Strategic outsourcing

8. JV-distributes to hotels, embassies Worldwide airport kiosks
STARBUCKS
Philippines
Korea
Shinsegne
Japan
Rustan
“To a large degree our international expansion will be driven by JV offers we receive”
… Founder
Licensee
Licensee
Singapore
China
JV stores
Bonvests
BAIC
Beijing
Licensee stores
JV-distributes to hotels, embassies
Geographic partners
Cobranding partners
Customer alliances
70 million passengers per year, worldwide
Retail formats
Host
In-store stores
Canada bookstores
Worldwide airport kiosks
Note: Starbucks Coffee, Sazaby’s, ITT Sheraton, United Airlines, Chapters, Host Marriott Services, Barnes & Noble Inc., Dreyer’s Grand Ice Cream, and Pepsi are proprietary trademarks, other partners include Nordstrom, Costco

9. Organization Functional structure Controls Compensation
Conflict resolution
Controls
Budgets, internal management committees
Compensation
Firm specific investments by individuals and groups, flexibility
Individual and group linked compensation
Salary, bonuses and stock options, grants

10. International Expansion
The Cost – Control Tradeoff
Cost
(Capital at Risk)
High
Greenfield Investment
Vertically
Integrated
Acquisition
Strategic Alliance
Somewhat
Vertically
Integrated
Franchising
Licensing
Not Vertically Integrated
Exporting
Control
Low
High

11. Corporate strategy Product scope Geographic scope
Diversification
Geographic scope
Local market or global markets
“Virtually all of the 500 largest firms in the U.S. and the world are diversified along product lines or geographically – yet the verdict is still out on performance benefits”
 must create economic value!

12. Types of Diversification
Limited
Single business - 95% or more of firm revenues in one industry/business (e.g. Delta Airlines)
Dominant business – 70 – 95% of firm revenues in a single industry/business (e.g. Donato’s Pizza)
Related
Constrained - <70% of firm revenues in a single business; different businesses share numerous links and common attributes (e.g. Bic or PepsiCo)
Linked - <70% of firm revenues in a single business; different businesses share only a few links and attributes (e.g. Newell-Rubbermaid or Disney)
Unrelated
Less than 70% of firm revenues in a single business and there are few, if any, links or common attributes (e.g. Tyco International)
Conglomerates or “management as portfolio”
Virtually all of the 500 largest firms in the U.S. and the world are diversified along product lines or geographically – verdict is still out on performance benefits
Newell-Rubbermaid – cleaning and organization products, home and family products, home fashions, office products, tools and hardware – under various brand names
Tyco – electronics, fire and security, medical devices, plastics and adhesives, sprinklers, valves

13. Proctor and Gamble

14. Diversification How attractive is the industry to be entered?
Can the firm establish a competitive advantage within an industry?
Motives for diversification
Growth
Risk reduction
Profitability
Source : Grant

15. Diversification Advantages Disadvantages Market power / size
Transfer of competencies, Leveraging competencies
Economies of scope – when the value of products or services increase as function of the number of businesses that firm operates in
Managing rivalry through multipoint competition
Exploiting organizational competencies
Disadvantages
Bureaucratic costs (information overload0
Co-ordination costs
Accountability issues

16. Economies of scope Operational Financial Anticompetitive
Shared activities and shared core competencies
Financial
Internal capital allocation, risk reduction, and tax advantages
Anticompetitive
Multipoint competition and exploiting market power
Employee and stakeholder incentives
Minimizing management compensation

17. Imitability Diversification is not rare Substitutes
Underlying economies of scope are rare
Tacit/intangible economies of scope
Substitutes
Internal growth
Strategic alliances

18. International diversification
Cultural risk
Perception of country of origin
Neutral branding
Financial risk
Currency rates, economic conditions
Hedging, diversification
Political risk
Nationalization, regulations, tariffs, quotas
Building local identity, alliance with local company/Government