Horizontal integration, Vertical integration

1
Horizontal integration, Vertical integration
strategic outsourcing

• Session 14

2
Corporate strategy

• Product scope
• Specialization, horizontal integration,
  diversification
  
• Geographical scope
• Local market or global markets
• Vertical scope (value chain)
• Short value chain or long value chain (vertical
  integration or outsourcing)

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
Horizontal integration

• Cost reduction (economies of scale, reduction of
  duplication)
  
• Value (product bundling, cross selling)
• Managing rivalry
• Increased bargaining power
• Drawbacks implementation (success of MAs,
  conflict with regulatory authority)
  

5
Railroad Tycoon
Source New York Times
6
Vertical integration

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

7
CBS Viacom, Paramount, Spelling
Source NY Times
8
Keeping it in the family

• Warner Bros sells television rights for Harry
  Potter and the Sorcerers Stone to Disneys ABC
  
• Instead of selling it to AOL-TWs TV outlets
  (TBS, TNT and WB)
  
• Selling outside the group for more money
• Overcoming inefficiencies of vertical
  integration
  
• Vertical integration doesnt necessarily increase
  profits for the firm

9
Disadvantages of vertical integration

• Inefficiency
• Loss of flexibility (technological change)
• Demand uncertainty
• Compounding of risk
• Bureaucratic costs

10
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
11
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

12
STARBUCKS
Philippines
Korea
Rustan
Shinsegne
Japan
To a large degree our international expansion
will be driven by JV offers we receive
Founder
Licensee
Licensee
Singapore
China
Bonvests
JV stores
BAIC Beijing
Licensee stores
Geographic partners
JV-distributes to hotels, embassies
Cobranding partners
Customer alliances
70 million passengers per year, worldwide
Retail formats
Host
In-store stores
Canada bookstores
Worldwide airport kiosks
Note Starbucks Coffee, Sazabys, ITT Sheraton,
United Airlines, Chapters, Host Marriott
Services, Barnes Noble Inc.,Dreyers Grand Ice
Cream, and Pepsi are proprietary trademarks,
other partners include Nordstrom, Costco
13
Strategic Alliances

• Walt Disney and Frito Lay from multi year
  alliance
  
• Frito Lay products to be featured at Disney
  World, Disneyland resorts and the theme parks
  
• Frito Lay sponsors park attractions
• California Screamin (in California Adventure)
• Both partners benefit Frito Lay increase
  distribution channels, Disney gets sponsorship to
  defray expenses
  

Source Business Wire
14
Outsourcing

• Topsy Tail founded in 1991
• Achieved sales of 80 million in two years
• How many employees?

15
Strategic outsourcing

• Virtual corporations
• Benefits flexibility, speed, cost reduction,
  differentiation, pools resources and capabilities
  of many firms and focus on core activities
  
• Risks holdup, loss of control over scheduling,
  loss of information and capabilities