9 corporate strategy: horizontal integration, vertical integration, and strategic outsourcing has...

9Corporate Strategy:

Horizontal Integration,

Vertical Integration, and

Strategic Outsourcing

Has not been proofread.

Copyright © Houghton Mifflin Company. All rights reserved. 9 - 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


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?


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?


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.”


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?


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.


SWOT and Strategic Choice

Weaknesses Opportunities

Strengths Threats


Porter’s Five Forces Model

• The five forces are threats from:1. Competitors

2. Powerful suppliers

3. Powerful buyers

4. Substitute product, and

5. New entrants


Competitive Advantage – Four Ways to Achieve

1. Superior efficiency

2. Quality

3. Innovation

4. Responsiveness to customers


STUCKIN THEMIDDLE

MY FIRM HASA COMPETITIVE

ADVANTAGE

No, my FIRM HASA COMPETITIVE

ADVANTAGE

Choosing a Generic Business-Level Strategy (Continued)

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.


The World of 1990

CreditService Engineering

Billing ProductionDistribution

Dr. M. Hammer


The World of 2000: The Good News

Credit

ProductionDistributionBilling

Service Engineering

ERP

Dr. M. Hammer


The World of 2000: The Bad News

Production

Credit

Billing

Service Engineering

ERP

Distribution

Credit

Billing

Service Engineering

ERP

Distribution Production

Dr. M. Hammer


A Frightening Observation

The walls between enterprises dwarf the walls within enterprises

Dr. M. Hammer


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


Internet - The Real Question

• What is the real significance of the Internet for real companies in the real and global economy?


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


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?”


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.”

ReviewReview


Overview

• Horizontal 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


Benefits of Horizontal Integration

• Reducing costs

• Increasing value– Product bundling– Cross selling

• Managing industry rivalry

• Increasing bargaining power– Market power (monopoly power)


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


Vertical Integration: Stages in the Raw Material to Consumer Value Chain


The Raw Material to Consumer Value Chain in the Personal Computer Industry


Full and Taper Integration


Increasing Profitability Through Vertical Integration

• Building barriers to entry

• Facilitating investments in specialized assets

• Protecting product quality

• Improved scheduling


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


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


Strategic Outsourcing of Primary Value Creation Functions


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


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

9 corporate strategy: horizontal integration, vertical integration, and strategic outsourcing has...

Documents

ges diversification

good slide

scope of diversification

extent of diversification

average unrelated company

average related company

bureaucratic costs

corporate strategy