copyright © 2001 houghton mifflin company. all rights reserved. chapter 9 corporate strategy:...

Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Chapter 9Chapter 9

Corporate Strategy:Corporate Strategy:Vertical Integration, Diversification, Vertical Integration, Diversification, and Strategic Alliancesand Strategic Alliances

StrategicStrategic Charles W. L. HillCharles W. L. Hill

ManagementManagement Gareth R. JonesGareth R. Jones

Fifth EditionFifth Edition

PowerPoint Presentation PowerPoint Presentation by Charlie Cookby Charlie Cook

An Integrated ApproachAn Integrated Approach

Copyright © 2001 Houghton Mifflin Company. All rights reserved. 9-2

FIGURE 9.1

Stages in the Raw-Material-to-Stages in the Raw-Material-to-Consumer Value ChainConsumer Value Chain

Upstream Downstream


Concentration on a Single Concentration on a Single BusinessBusinessAdvantagesAdvantages

Operational focus on a Operational focus on a single familiar industry or single familiar industry or market.market.

Current resources and Current resources and capabilities add value.capabilities add value.

Growing with the market Growing with the market brings competitive brings competitive advantage.advantage.

DisadvantagesDisadvantages No diversification of market No diversification of market

risks.risks. Vertical integration may be Vertical integration may be

required to create value and required to create value and establish competitive establish competitive advantage.advantage.

Opportunities to create Opportunities to create value and make a profit may value and make a profit may be missed.be missed.


Stages in the Raw-Material-to-Consumer Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Value Chain in the Personal Computer IndustryIndustry

FIGURE 9.2

End userDistributionAssemblyIntermediatemanufacturer

Raw materials

Examples:Examples:Dow ChemicalDow ChemicalUnion CarbideUnion CarbideKyoceraKyocera

Examples:Examples:IntelIntelSeagateSeagateMicronMicron

Examples:Examples:AppleAppleCompaqCompaqDellDell

Examples:Examples:Computer WorldComputer WorldOffice MaxOffice Max


Vertical IntegrationVertical Integration

Integration backward into supplier functionsIntegration backward into supplier functions Assures constant supply of inputs.Assures constant supply of inputs. Protects against price increases.Protects against price increases.

Integration forward into distributor functionsIntegration forward into distributor functions Assures proper disposal of outputs.Assures proper disposal of outputs. Captures additional profits beyond activity costs.Captures additional profits beyond activity costs.

Integration choice is that of which value-Integration choice is that of which value-adding activities to compete in and which are adding activities to compete in and which are better suited for others to carry out.better suited for others to carry out.


FIGURE 9.3

Full and Taper IntegrationFull and Taper Integration

Full Integration

Taper Integration


FIGURE 9.4

Structure of a Company Sharing Structure of a Company Sharing Marketing Between Two Business UnitsMarketing Between Two Business Units


Creating Value Through Vertical Creating Value Through Vertical IntegrationIntegrationAdvantages of a vertical integration strategy:Advantages of a vertical integration strategy:

Builds entry barriers to new competitors by denying Builds entry barriers to new competitors by denying them inputs and customers.them inputs and customers.

Facilitates investment in efficiency-enhancing assets Facilitates investment in efficiency-enhancing assets that solve internal mutual dependence problems.that solve internal mutual dependence problems.

Protects product quality through control of input Protects product quality through control of input quality and distribution and service of outputs.quality and distribution and service of outputs.

Improves internal scheduling (e.g., JIT inventory Improves internal scheduling (e.g., JIT inventory systems) responses to changes in demand.systems) responses to changes in demand.


Creating Value Through Vertical Creating Value Through Vertical IntegrationIntegrationDisadvantages of vertical integrationDisadvantages of vertical integration

Cost disadvantages of internal supply purchasing.Cost disadvantages of internal supply purchasing. Remaining tied to obsolescent technology.Remaining tied to obsolescent technology. Aligning input and output capacities with uncertainty Aligning input and output capacities with uncertainty

in market demand is difficult for integrated in market demand is difficult for integrated companies.companies.


Bureaucratic Costs and the Limits of Bureaucratic Costs and the Limits of Vertical IntegrationVertical Integration

The costs of running an organization rise with The costs of running an organization rise with integration due to:integration due to:

The lack of an incentive for internal suppliers to The lack of an incentive for internal suppliers to reduce their operating costs.reduce their operating costs.

The lack of strategic flexibility in times of changing The lack of strategic flexibility in times of changing technology or uncertain demand.technology or uncertain demand.

Bureaucratic costs reduce the value of vertical Bureaucratic costs reduce the value of vertical integration.integration.


Alternatives to Vertical Integration: Alternatives to Vertical Integration: Cooperative Relationships and Strategic Cooperative Relationships and Strategic OutsourcingOutsourcingShort-term contracts and competitive biddingShort-term contracts and competitive bidding

Strong competitors attempt to control supplier costs Strong competitors attempt to control supplier costs with minimal-length contracts. Poor treatment of with minimal-length contracts. Poor treatment of suppliers raises competitor input costs.suppliers raises competitor input costs.

Strategic alliances and long-term contractingStrategic alliances and long-term contracting Long-term contracts foster cooperative relationships.Long-term contracts foster cooperative relationships. Alliances reduce the need for vertical integration.Alliances reduce the need for vertical integration.


Building Long-Term Cooperative Building Long-Term Cooperative RelationshipsRelationships

Hostage takingHostage taking Both parties arrange to become mutually dependent Both parties arrange to become mutually dependent

on each other, fostering a cooperative relationship.on each other, fostering a cooperative relationship.

Credible commitmentsCredible commitments A believable commitment to support the long-term A believable commitment to support the long-term

relationship.relationship.

Maintaining market discipline requires:Maintaining market discipline requires: Periodic renegotiation of the contractual relationship.Periodic renegotiation of the contractual relationship. Developing a parallel sourcing policy with two Developing a parallel sourcing policy with two

suppliers for critical inputs.suppliers for critical inputs.


Strategic Outsourcing and the Strategic Outsourcing and the Virtual CorporationVirtual Corporation

OutsourcingOutsourcing Allowing subcontractors to perform value creation activities.Allowing subcontractors to perform value creation activities.

Outsourcing advantagesOutsourcing advantages Efficient subcontractors Efficient subcontractors

reduce overall costs.reduce overall costs. Better product differentiation.Better product differentiation. Allows for the concentrationAllows for the concentration

of available resources.of available resources. Firm becomes more flexible Firm becomes more flexible

and responsive.and responsive.

Outsourcing disadvantagesOutsourcing disadvantages Failure to learn from Failure to learn from

outsourced activity.outsourced activity. Too much dependence on a Too much dependence on a

single supplier.single supplier. Danger of outsourcing value Danger of outsourcing value

creation activities leading to creation activities leading to competitive advantage.competitive advantage.


DiversificationDiversification

Related diversificationRelated diversification Entry into new business activity based on shared Entry into new business activity based on shared

commonalities in the components of the value chains commonalities in the components of the value chains of the firms.of the firms.

Unrelated diversificationUnrelated diversification Entry into a new business area that has no obvious Entry into a new business area that has no obvious

relationship with any area of the existing business.relationship with any area of the existing business.


Creating Value Through Creating Value Through DiversificationDiversificationSuperior internal governanceSuperior internal governance

Place business units in self-contained divisions.Place business units in self-contained divisions. Manage divisions in a decentralized manner.Manage divisions in a decentralized manner. Link performance to incentive pay.Link performance to incentive pay.

Acquisition and restructuring strategyAcquisition and restructuring strategy Replace nonperforming top management team.Replace nonperforming top management team. Dispose of unproductive assets.Dispose of unproductive assets. Establish performance goals requiring significant Establish performance goals requiring significant

improvements in operating efficiency.improvements in operating efficiency.


Creating Value Through Creating Value Through DiversificationDiversificationTransferring competencies:Transferring competencies:

Lowers the cost of value creation activities in the Lowers the cost of value creation activities in the diversified businesses.diversified businesses.

Creates opportunities for differentiation and premium Creates opportunities for differentiation and premium pricing value creation activities.pricing value creation activities.

Adds value where commonalities important to Adds value where commonalities important to competitive advantage exist.competitive advantage exist.

Creates value by applying skills for one business Creates value by applying skills for one business opportunity and applying them to another.opportunity and applying them to another.


Creating Value Through Creating Value Through DiversificationDiversificationEconomies of scopeEconomies of scope

Sharing of resources and functions by business units Sharing of resources and functions by business units creates value in high asset utilization and lower creates value in high asset utilization and lower operating costs.operating costs.

Economies of scope and scale are closely related. Economies of scope and scale are closely related. Greater operational capacity and larger markets can Greater operational capacity and larger markets can help a competitor attain low-cost position.help a competitor attain low-cost position.

Resource sharing creates significant competitive Resource sharing creates significant competitive advantage when it outweighs coordination costs.advantage when it outweighs coordination costs.


Bureaucratic Costs and the Limits of Bureaucratic Costs and the Limits of DiversificationDiversification

Number of businessesNumber of businesses Information overload can lead to poor resource allocation Information overload can lead to poor resource allocation

decisions and create inefficiencies.decisions and create inefficiencies.

Coordination among businessesCoordination among businesses As the scope of diversification widens, control and As the scope of diversification widens, control and

bureaucratic costs increase.bureaucratic costs increase. Resource sharing and pooling arrangements that create value Resource sharing and pooling arrangements that create value

also cause coordination problems.also cause coordination problems. Limits of diversificationLimits of diversification

The extent of diversification must be balanced with its The extent of diversification must be balanced with its bureaucratic costs.bureaucratic costs.


Diversification That Dissipates Diversification That Dissipates ValueValueDiversification to pool risksDiversification to pool risks

An ineffective attempt to offset the cyclical effects of An ineffective attempt to offset the cyclical effects of businesses by merging their income streams.businesses by merging their income streams.

Downturns in one business are intended to be offset Downturns in one business are intended to be offset by upturns in another business.by upturns in another business.

Diversification to achieve greater growthDiversification to achieve greater growth Concept focuses on growth (which is normally a by-Concept focuses on growth (which is normally a by-

product of diversification) and not value creation.product of diversification) and not value creation. Usually the choice of “empire builders”.Usually the choice of “empire builders”.


Related Versus Unrelated Related Versus Unrelated DiversificationDiversification

Comparing Related and Unrelated DiversificationComparing Related and Unrelated Diversification

StrategyStrategy Ways of Creating ValueWays of Creating Value Source of Bureaucratic CostsSource of Bureaucratic Costs

Related Related diversificationdiversification

• RestructuringRestructuring• Transferring of skillsTransferring of skills• Economies of scopeEconomies of scope

• Number of businessesNumber of businesses• Coordination among businessesCoordination among businesses

Unrelated Unrelated diversificationdiversification

• RestructuringRestructuring • Number of businessesNumber of businesses

TABLE 9.1


Strategic Alliance as An Alternative Strategic Alliance as An Alternative to Diversificationto Diversification

AdvantagesAdvantagesAvoids bureaucratic costs of diversification.Avoids bureaucratic costs of diversification.Shared costs and risks.Shared costs and risks.Uses complementary skills of each partner.Uses complementary skills of each partner.Creates value through economies of scope.Creates value through economies of scope.

DisadvantagesDisadvantagesProfits must be shared.Profits must be shared.Disclosure of critical know-how to potential competitor.Disclosure of critical know-how to potential competitor.

copyright © 2001 houghton mifflin company. all rights reserved. chapter 9 corporate strategy:...

Documents

value of vertical integration

vertical integration

vertical integrationadvantages

integration choice

supplier costs

bureaucratic costs

consumer value chainfigure

value creation activities