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Corporate Strategy: Horizontal Integration, Vertical Integration,

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Title: Corporate Strategy: Horizontal Integration, Vertical Integration,


1
7 8
  • Corporate Strategy Horizontal Integration,
    Vertical Integration,
  • and Outsourcing

2
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 companys
    products
  • Strategic outsourcing
  • Letting some value creation activities within a
    business be performed by an independent entity
  • Implementing Corporate Strategy

3
Benefits of Horizontal Integration
  • Reducing costs
  • Increasing value
  • Product bundling
  • Cross selling
  • Managing industry rivalry (especially in mature
    or declining industries)
  • Increasing bargaining power
  • Market power (monopoly power)

4
Drawbacks and Limits of Horizontal Integration
  • Majority of mergers and acquisitions do not
    create value
  • Implementing a horizontal integration strategy is
    complicated
  • Mergers and acquisitions often fail to produce
    the anticipated gains (either synergies or cost
    savings)
  • Can bring the company into conflict with
    antitrust law

5
The Raw Material to Consumer Value Chain
6
Full and Taper Integration
7
Increasing Profitability Through Vertical
Integration
  • Building barriers to entry
  • Facilitating investments in specialized assets
  • Protecting product quality
  • Improved scheduling

8
Evidence Against Vertical Integration
  • Cost disadvantages
  • Company-owned suppliers typically 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

9
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

10
Outsourcing of Primary Value Creation Functions
11
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

12
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

13
  • Implementing Corporate Strategy Diversification,
    Acquisitions, and Internal New Ventures

14
Overview
  • Diversification
  • The process of adding new businesses to the
    company that are distinct from its established
    operations
  • Vehicles for diversification
  • Internal new venturing
  • Starting a new business from scratch
  • Acquisitions
  • Joint ventures
  • Restructuring
  • Reducing the scope of diversified operations by
    exiting from business areas

15
Expanding Beyond a Single Industry
  • Advantages of staying in a single industry
  • Focus resources and capabilities on competing
    successfully in one area
  • Focus on what the company knows and does best
  • Disadvantages of being in a single industry
  • Danger of the industry declining
  • Missing the opportunity to leverage resources and
    capabilities to other activities
  • Resting on laurels and not continually learning

16
Increasing Profitability Through Diversification
  • Transferring competencies
  • Taking a distinctive competence developed in one
    industry and applying it to an existing business
    in another industry
  • The competencies transferred must involve
    activities that are important for establishing
    competitive advantage
  • Sharing resources economies of scope
  • Cost reductions associated with sharing resources
    across businesses

17
Transfer of Competencies at Philip Morris
18
Sharing Resources at Proctor Gamble
19
Increasing Profitability Through Diversification
  • Managing rivalry multipoint competition
  • Diversifying into an industry in order to hold a
    competitor in check that has either entered its
    industry or has the potential to do so
  • Multipoint competition companies competing
    against each other in different industries
  • A strategy for strategic parity which is not
    associated with superior profitability

20
Types of Diversification
  • Related diversification
  • Entry into a new business activity in a different
    industry that is related to a companys existing
    business activity, or activities, by
    commonalities between one or more components of
    each activitys value chain
  • Unrelated diversification
  • Entry into industries that have no obvious
    connection to any of a companys value chain
    activities in its present industry or industries

21
The Limits of Diversification
  • Related diversification is only marginally more
    profitable than unrelated diversification
  • Extensive diversification tends to depress rather
    than improve profitability

22
Bureaucratic Costs and Diversification Strategy
  • The costs increases that arise in large, complex
    organizations due to managerial inefficiencies
  • Number of businesses in a companys portfolio
  • Information overload
  • Coordination among businesses
  • Inability to identify the unique profit
    contribution of a business unit that shares
    resources with another unit

23
Coordination Among Related Business Units
24
Bureaucratic Costs and Diversification Strategy
  • Limits of diversification
  • Bureaucratic costs place a limit on the amount of
    diversification that can profitably be pursued
  • Related or unrelated diversification?
  • Related diversified companies can create value in
    more ways than unrelated companies and both have
    to bear high bureaucratic costs

25
Diversification That Dissipates Value
  • Diversifying to pool risks
  • Stockholders can diversify their own portfolios
    at lower costs than the company can
  • Research suggests that corporate diversification
    is not an effective way to pool risks
  • Diversifying to achieve greater growth
  • Growth on its own does not create value

26
Entry Strategy Internal New VenturesAttractions
  • To execute corporate-level strategies when a
    company has a set of valuable competencies in its
    existing businesses that can be leveraged to
    enter the new business area
  • When entering a newly emerging or embryonic
    industry
  • Most useful when speed of entry is less important

27
Guidelines for Successful Internal New Venturing
  • Structured approach to managing internal new
    venturing
  • Research research aimed at advancing basic
    science and technology
  • Development research aimed at finding and
    refining commercial applications for the
    technology
  • Foster close links between RD and marketing
    between RD and manufacturing
  • Selection process for choosing ventures
  • Monitor progress

28
Entry Strategy AcquisitionsAttractions
  • To achieve horizontal integration
  • To achieve diversification when the company lacks
    important competencies
  • To move quickly
  • Perceived as less risky than internal new
    ventures
  • When the new industry is well established and
    enterprises enjoy protection from barriers to
    entry

29
Entry Strategy AcquisitionsPitfalls
  • Difficulty with post-acquisition integration
  • Overestimating economic benefits
  • The expense of acquisitions
  • Inadequate pre-acquisition screening

30
Guidelines for Successful Acquisition
  • Target identification and preacquisition
    screening
  • Bidding strategy
  • Hostile vs. friendly takeover
  • Integration
  • Learning from experience

31
Entry Strategy Joint VenturesAttractions
  • Helps avoid the risks and costs of building a new
    operation up from the ground floor
  • Teaming with another company that has
    complementary skills and assets may increase the
    probability of success

32
Entry Strategy Joint VenturesPitfalls
  • Requires the sharing of profits if the new
    business succeeds
  • Venture partners must share control conflicts on
    how to run the joint venture can cause failure
  • Runs the risk of giving critical know-how away to
    joint venture partner

33
Restructuring
  • Reducing the scope of the company by exiting
    business areas
  • Why restructure?
  • Diversification discount investors see highly
    diversified companies as less attractive
  • Complexity and lack of transparency in financial
    statements
  • Too much diversification or for the wrong reasons
  • Response to failed acquisitions
  • Innovations have diminished the advantages of
    vertical integration or diversification

34
Restructuring Strategies
  • Exit strategies
  • Divestment
  • Spinoff
  • Selling to another company
  • Management buyout (MBO)
  • Harvest
  • Liquidation
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