Vertical integration, diversification

1
Vertical integration, diversification strategic
alliances

• Session 14

2
Corporate strategy

• Product scope
• Specialization or diversification
• Geographical scope
• Local market or global markets
• Vertical scope (value chain)
• Short value chain or long value chain

Source Grant
3
Scope of the firm

• Markets v/s hierarchies
• Transaction costs v/s administrative costs
• Transaction costs
• Opportunism, Bounded Rationality, Uncertainty,
  Small numbers
• Administrative costs
• Differences in scale of operations between
  different production stages
• Managing strategically different businesses

4
Railroad Tycoon
Source New York Times
5
Vertical integration

• Types
• Backward, forward
• Full, partial (taper)
• Benefits
• Barriers to entry
• Investment in specialized assets
• Quality
• Improved scheduling

6
CBS Viacom, Paramount, Spelling
Source NY Times
7
Disadvantages of vertical integration

• Inefficiency
• Loss of flexibility
• Demand uncertainty
• Compounding of risk
• Bureaucratic costs

8
Do vertical empires work?

• Been there, done that General Motors, Ford,
  Lockheed Martin
• Building vertically integrated structures
  Microsoft, AOL-Time Warner
• Lean, mean approach, Outsourcing through
  contractual arrangements Dell, Hewlett-Packard,
  Nortel Networks

Source Business Week, 2000
9
Co-operative relationships

• Voice v/s exit strategy
• Short term contracts
• Competitive bidding
• Long term contracts / strategic alliances
• Hostage taking
• Credible commitments
• Maintaining market discipline
• Strategic outsourcing
• Virtual corporations
• Hollow corporations?

10
IDG Group
Source IDG Group
11
USA Networks diversification strategy

• Entertainment (4 cable channels 13 TV stations)
• Internet operations (Ticketmaster.com,
  Citysearch, a web design firm, and an electronic
  hotel reservation service)
• Retailing (Home shopping network and others)
• Creating synergies across the businesses

Source Forbes, 2000 USA Networks web site
12
Diversification

• Related versus unrelated
• Advantages
• Market power
• Acquiring and restructuring
• Transfer of competencies
• Economies of scope
• Disadvantages
• Co-ordination

13
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
14
To diversify or not to diversify

• Distinctive competencies
• Strategic assets
• Catching up with competitors
• Implications of diversification on strategic
  assets (consolidation or break up)
• Player or winner?
• Opportunity and ability to learn
  

Source Markides
15
Star Alliance

• Airline network for the earth
• Members
• Air Canada , Air New Zealand, All Nippon Airways
• Ansett Australia, Lufthansa, SAS, Thai
• United, Varig, Singapore Airlines
• British Midland
• Mexicana
• Enhancing passenger service

Source Aviation Week, Sept 2000
16
Alliances
Source NY Times, Sun, OfficeMax, Gateway web
sites
17
Strategic alliances

• Benefits
• Flexibility
• Speed
• Pools resources and capabilities of many firms
• International expansion
• Drawbacks
• Lack of control
• Assisting competitors
• Informal structure