Copyright 1998 by Houghton Mifflin Company. All rights reserved. 9-1 Chapter 9: Corporate Strategy...

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

9-1

Chapter 9: Corporate Strategy -- Chapter 9: Corporate Strategy -- Vertical Integration, Diversification, Vertical Integration, Diversification,

and Strategic Alliancesand Strategic Alliances

Text byCharles W. L. HillGareth R. Jones

Multimedia Slides byMilton M. Pressley

Univ. of New Orleans


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PreviewPreview

Concentration on a Single Business

Vertical Integration Alternatives to Vertical

Integration: Cooperative Relationships and Strategic Outsourcing

Diversification Strategic Alliances as an

Alternative to Diversification


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Concentration on a Single Concentration on a Single BusinessBusiness

SEARSCoca-ColaCoca-Cola

McDonaldsMcDonalds


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Concentration on a Single Concentration on a Single Business Business (Continued)(Continued)

• Allows Company to Focus Allows Company to Focus Resources and Capabilities in Just Resources and Capabilities in Just One AreaOne Area

• Does Not Diversify Into Areas That Does Not Diversify Into Areas That It Knows Little About and Where It Knows Little About and Where Resources and Capabilities Add Resources and Capabilities Add Little ValueLittle Value

AdvantagesAdvantages


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Concentration on a Single Concentration on a Single Business Business (Continued)(Continued)

• Vertical Integration May Be Vertical Integration May Be Required to Create Value and Required to Create Value and Establish a Competitive AdvantageEstablish a Competitive Advantage

• Opportunities May Be MissedOpportunities May Be Missed

DisadvantagesDisadvantages


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Vertical IntegrationVertical Integration

• Vertical Integration DefinedVertical Integration Defined


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Figure 9.1: Stages in Figure 9.1: Stages in the Raw Material to the Raw Material to

Consumer Value Consumer Value ChainChainIntermediate

Manufacturer

RawMaterials

Assembly

Distribution

End User

Upstream Downstream


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IntelIntelMotorolaMotorola

Dow ChemicalsDow ChemicalsUnion CarbideUnion Carbide

BizmartBizmartComputer WorldComputer World

AppleAppleCompaqCompaq

ExamplesExamples

Figure 9.2: The Raw Material to Consumer Figure 9.2: The Raw Material to Consumer Value Chain in the PC IndustryValue Chain in the PC Industry

IntermediateManufacturer

IntermediateManufacturer

RawMaterials

Assembly

Distribution

End User


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Figure 9.3: Full and Taper Figure 9.3: Full and Taper IntegrationIntegration

Suppliers Suppliers CustomersCustomers

CustomersCustomers

A B C

A B C

Full Integration

Taper Integration

Suppliers Suppliers


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Creating Value Through Creating Value Through Vertical IntegrationVertical Integration

• Building Barriers to EntryBuilding Barriers to Entry• Facilitating Investments in Facilitating Investments in

Specialized AssetsSpecialized Assets• Protecting Product QualityProtecting Product Quality• Improved SchedulingImproved Scheduling


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Arguments Against Vertical Arguments Against Vertical IntegrationIntegration

• Cost DisadvantagesCost Disadvantages• Technological ChangeTechnological Change• Demand UncertaintyDemand Uncertainty


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

• Lack of Incentive to Reduce Lack of Incentive to Reduce Operating CostsOperating Costs

• Lack of Strategic Flexibility Lack of Strategic Flexibility in Times of Changing in Times of Changing TechnologyTechnology

• Uncertain DemandUncertain Demand


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Alternatives to Vertical Integration: Alternatives to Vertical Integration: Cooperative Relationships and Cooperative Relationships and

Strategic OutsourcingStrategic Outsourcing

• Short-Term Contracts Short-Term Contracts and Competitive Biddingand Competitive Bidding


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• Short-Term Contracts Short-Term Contracts and Competitive Biddingand Competitive Bidding

• Strategic Alliances and Strategic Alliances and Long-Term ContractingLong-Term Contracting


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• Hostage TakingHostage Taking• Credible CommitmentsCredible Commitments• Maintaining Market DisciplineMaintaining Market Discipline

– Periodic RenegotiationPeriodic Renegotiation– Parallel Sourcing PolicyParallel Sourcing Policy

Building Long-Term Building Long-Term Cooperative RelationshipsCooperative Relationships


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Alternatives to Vertical Alternatives to Vertical Integration: Cooperative Integration: Cooperative

Relationships and Strategic Relationships and Strategic OutsourcingOutsourcing

• OutsourcingOutsourcing• Virtual CorporationVirtual Corporation


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DiversificationDiversification

• Related Related Diversification Diversification


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• Related Related Diversification Diversification

• Unrelated Unrelated DiversificationDiversification


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Creating Value Through Creating Value Through DiversificationDiversification

• Acquiring and RestructuringAcquiring and Restructuring• Transferring CompetenciesTransferring Competencies• Economies of ScopeEconomies of Scope



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Bureaucratic Costs and the Bureaucratic Costs and the Limits of DiversificationLimits of Diversification

• Number of BusinessesNumber of Businesses• Coordination Among BusinessesCoordination Among Businesses



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Figure 9.4: Structure of a Company Sharing Figure 9.4: Structure of a Company Sharing Marketing Between Two Business UnitsMarketing Between Two Business Units

PackagedFood Products

Head Office

MarketingHouseholdProducts

Consumers


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Bureaucratic Costs and the Bureaucratic Costs and the Limits of Diversification Limits of Diversification

(Continued)(Continued)• Number of BusinessesNumber of Businesses• Coordination Among BusinessesCoordination Among Businesses


• Limits of DiversificationLimits of Diversification


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Diversification That Diversification That Dissipates ValueDissipates Value

• Diversification to Pool Diversification to Pool RisksRisks

• Diversification to Achieve Diversification to Achieve Greater GrowthGreater Growth



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Table 9.1: Comparing Related and Unrelated DiversificationTable 9.1: Comparing Related and Unrelated Diversification

Related and Unrelated Related and Unrelated DiversificationDiversification

Source ofBureaucratic

Costs

RelatedDiversification

RestructuringTransferring SkillsEconomies of

Scope

Number ofBusinesses

CoordinationAmong Businesses

Restructuring Number ofBusinesses

Ways ofCreating ValueStrategy

UnrelatedDiversification


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Strategic Alliances as an Strategic Alliances as an Alternative to DiversificationAlternative to Diversification• Strategic Alliance DefinedStrategic Alliance Defined• Advantages:Advantages:

– Firms May Create Value by Realizing Economies Firms May Create Value by Realizing Economies of Scopeof Scope

– Enable Companies to Swap Complementary SkillsEnable Companies to Swap Complementary Skills

• DisadvantageDisadvantage– Profits Must Be SplitProfits Must Be Split– Risk That One Firm May Give Away Critical Know-Risk That One Firm May Give Away Critical Know-

How That May Create a Competitor from the How That May Create a Competitor from the Alliance PartnerAlliance Partner


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Chapter SummaryChapter Summary

CONCENTRATION ON A

SINGLE BUSINESS

VERTICAL INTEGRATION

ALTERNATIVES TO VERTICAL INTE-

GRATION: COOPERATIVE

RELATIONSHIPS AND STRATEGIC

OUTSOURCING

DIVERSIFICATION

STRATEGIC ALLIANCES AS AN

ALTERNATIVE TO DIVERSIFICATION

Copyright 1998 by Houghton Mifflin Company. All rights reserved. 9-1 Chapter 9: Corporate Strategy...

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Transcript of Copyright 1998 by Houghton Mifflin Company. All rights reserved. 9-1 Chapter 9: Corporate Strategy...