1、Corporate Strategy: Vertical Integration and DiversificationPart 2 Strategy Formulation 2013 by The McGraw-Hill Companies, Inc. All rights reserved.8-2LO 8-1Define corporate-level strategy, and describe the three dimensions along which it is assessed.LO 8-2Describe and evaluate different options fir

2、ms have to organize economic activity.LO 8-3Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.LO 8-4Identify and evaluate benefits and risks of vertical integration.LO 8-5Describe and examine alternatives to vertical integration.LO 8

3、-6Describe and evaluate different types of corporate diversification.LO 8-7Apply the core competence market matrix to derive different diversification strategies.LO 8-8Explain when a diversification strategy creates a competitive advantage, and when it does not.8-3ChapterCase 8 Refocusing GE: A Futu

4、re of Clean-Tech and Health Care?Jeffrey Immelt appointed CEO of GE Sept. 7th 2001Environmental Change (e.g., 9/11 and Global Financial Crises)GEs stock price fell by 84% Lost AAA credit ratingRefocus on green economy and health care industriesSold majority stake in NBC Universal to Comcastecomagina

5、tion: solar energy, hybrid locomotives, fuel cellsetc.healthymagination: increase quality and access to health care8-4ChapterCase 8 Refocusing GE: A Future of Clean-Tech and Health Care?GEs Changing Product ScopeSource: Authors depiction of data in GE annual reports.8-5ChapterCase 8 Refocusing GE: A

6、 Future of Clean-Tech and Health Care?GEs Changing Geographic ScopeSource: Authors depiction of data in GE annual reports.8-6What Is Corporate Strategy?Corporate strategyQuest for competitive advantage when competing in multiple industriesEx: Jeffrey Immelts initiative in clean-tech and health care

7、industriesCorporate strategy concerns the scope of the firmIndustry value chainProducts and servicesGeography 8-7What Is Corporate Strategy? (contd)Three dimensionsWhat stages of industry value chain and degrees of vertical integrationWhat range of products and services and degrees of horizontal int

8、egration and diversificationWhere in the world to compete and global strategy8-8EXHIBIT 8.1Three Dimensions of Corporate StrategyScope of the firm determines boundaries along these 3 dimensions.8-9What Is Corporate Strategy? (contd)Economies of scaleAverage per-unit cost decreases as its output incr

9、easesEx: Anheuser-Busch Inbev largest global brewerEconomies of scopeSavings that come from producing more outputs or providing different services at less costEx: Amazon range of products & servicesTransaction costThe cost associated with economic exchangeMake or buy decision8-10LO 8-1Define corpora

10、te-level strategy, and describe the three dimensions along which it is assessed.LO 8-2Describe and evaluate different options firms have to organize economic activity.LO 8-3Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.LO 8-4Iden

11、tify and evaluate benefits and risks of vertical integration.LO 8-5Describe and examine alternatives to vertical integration.LO 8-6Describe and evaluate different types of corporate diversification.LO 8-7Apply the core competence market matrix to derive different diversification strategies.LO 8-8Exp

12、lain when a diversification strategy creates a competitive advantage, and when it does not.8-11Transaction Cost Economics and Scope of the FirmTransaction cost economicsExplains and predicts the scope of the firmMarket vs. firms have differential costsTransaction costsCosts associated with economic

13、exchangesEither in the firm OR in the marketsEx: negotiating and enforcing contractsAdministrative costsCosts pertaining to organizing an exchange within a hierarchyEx: recruiting & training employees8-12Firms vs. Markets: Make or BuyShould a firm do things in-house (to make)? Or obtain externally (

14、to buy)?If Cin-house Cmarket, then the firm should vertically integrate Ex: Microsoft hires programmers to write code in-house rather than contracting outFirms and markets have distinct advantages and disadvantages (see Exhibit 8.2)8-13EXHIBIT 8.2Organizing Economic Activity: Firm vs. Markets8-14Fir

15、ms vs. Markets: Make or Buy?Disadvantage of “make” in-housePrincipal agent problemowner = principal, manager = agentAgent pursues his/her own interestsDisadvantage of “buy” from marketsSearch costOpportunismIncomplete contractingEnforce legal contractsInformation asymmetriesOne party is more informe

16、d than othersAkerlof “Lemons problem” for used cars8-15Alternatives of the Make or Buy ContinuumShort-term contactsCompetitive bidding processLess than one-year termLower prices cost advantagesStrategic alliancesFacilitate investment without administrative costsEx: Long-term contacts, equity allianc

17、es, joint venturesParent subsidiary relationshipMost integrated alternative Parent companies have command and controlEx: GM owns Opel and Vauxhall in Europe8-16EXHIBIT 8.3Alternatives along the Make or Buy Continuum8-17118STRATEGY HIGHLIGHT 8.1Toyota Locks Up Lithium for Car BatteriesWorld demand fo

18、r lithium-ion batteries for carsGrow from $278 million in 09 to $25 billion in 2014Toyota wants to secure long-term supply of lithium to power its hybrid fleetOrocobre holds exploration rights to a large salt-lake areaUpfront investment to extract of lithium is very highShould Orocobre make the inve

19、stment to supply Toyota?To encourage investment, Toyota took an equity position8-18LO 8-1Define corporate-level strategy, and describe the three dimensions along which it is assessed.LO 8-2Describe and evaluate different options firms have to organize economic activity.LO 8-3Describe two types of ve

20、rtical integration along the industry value chain: backward and forward vertical integration.LO 8-4Identify and evaluate benefits and risks of vertical integration.LO 8-5Describe and examine alternatives to vertical integration.LO 8-6Describe and evaluate different types of corporate diversification

21、.LO 8-7Apply the core competence market matrix to derive different diversification strategies.LO 8-8Explain when a diversification strategy creates a competitive advantage, and when it does not.8-19Vertical Integration along the Industry Value ChainIn what stages of the industry value chain should t

22、he firm participate? Vertical integrationOwnership of its inputs, production, & outputs in the value chainHorizontal value chainInternal, firm-level value chains (Chapter 4) Vertical value chainIndustry-level integration from upstream to downstreamExamples: cell phone industry value chainMany differ

23、ent industries and firms8-20EXHIBIT 8.4Backward and Forward Vertical Integration along an Industry Value Chain8-21Types of Vertical IntegrationFull vertical integrationEx: WeyerhaeuserOwns forests, mills, and distribution to retailersBackward vertical integrationEx: HTCs backward integration into de

24、sign of phonesForward vertical integrationEx: HTCs forward integration into sales & brandingNot all industry value chain stages are equally profitableZara primarily designs in-house & partners for speedy new fashions delivered to stores8-22EXHIBIT 8.5HTCs Backward and Forward Integration along the I

25、ndustry Value Chain in the Smartphone Industry8-23LO 8-1Define corporate-level strategy, and describe the three dimensions along which it is assessed.LO 8-2Describe and evaluate different options firms have to organize economic activity.LO 8-3Describe two types of vertical integration along the indu

26、stry value chain: backward and forward vertical integration.LO 8-4Identify and evaluate benefits and risks of vertical integration.LO 8-5Describe and examine alternatives to vertical integration.LO 8-6Describe and evaluate different types of corporate diversification.LO 8-7Apply the core competence

27、market matrix to derive different diversification strategies.LO 8-8Explain when a diversification strategy creates a competitive advantage, and when it does not.8-24Benefits and Risks of Vertical IntegrationBenefits of vertical integrationSecuring critical suppliesLowering costsImproving qualityFaci

28、litating scheduling and planningFacilitating investments in specialized assetsEx: HTC started as OEM & expanded to fully integrated 8-25126STRATEGY HIGHLIGHT 8.2Back to the Future: PepsiCos Forward IntegrationPepsiCo acquired bottlers in 2009Gain control over quality, pricing, distribution, and in-s

29、tore display.Reversed a 1999 decision to sell off Pepsi bottlersGoal now is faster innovative products launchedForward integrationEnhance flexibility and improve decision makingCost saving and interdependence Coca-Cola did the same: forward integration with bottlers8-26Benefits of Vertical Integrati

30、onSpecialized assetsAssets that have significantly more value in their intended use than in their next best useTypes of specialized assetsSite specificityCo-located such as mining equipmentPhysical asset specificityBottling machinery Human asset specificityMastering procedures of a particular organi

31、zation8-27Risks of Vertical IntegrationIncreasing costsInternal suppliers lose incentives to competeReducing qualitySingle captured customer can slow experience effectsReducing flexibilitySlow to respond to changes in technology or demandIncreasing the potential for legal repercussionsFTC carefully

32、reviewed Pepsi plans to buy bottlers8-28Alternatives to Vertical IntegrationTaper integrationBackward integrated but also relies on outside market firms for suppliesORForward integrated but also relies on outside market firms for some of its distributionStrategic outsourcingMoving value chain activi

33、ties outside the firms boundariesEx: EDS and PeopleSoft provide HR services to many firms that choose to outsource it. 8-29EXHIBIT 8.6Taper Integration along the Industry Value ChainOutside suppliers couldalso be off-shored when they are not located in thehome country8-30Corporate Diversification: E

34、xpanding Beyond a Single MarketDegrees of diversificationRange of products and services a firm should offerEx: PepsiCo also owns Lays & Quaker Oats.Diversification strategies:Product diversification Active in several different product categoriesGeographic diversificationActive in several different c

35、ountriesProduct market diversificationActive in a range of both product and countries8-31Types of Corporate DiversificationSingle businessGoogleDominant businessMicrosoftRelated diversificationRelated constrainedExxonMobilRelated linkedDisneyUnrelated diversificationGE 8-32EXHIBIT 8.7Different Types

36、 of Diversification8-33Small Group Exercise 1Agriculture is one of the largest global industries In the U.S. and many other countries, farmers often struggle to turn a profit given the variances of weather and commodity prices. Some working farms are turning to tourism as an additional and complemen

37、tary revenue source. A study from the U.S. Census of Agriculture in 2007 found nearly 25,000 farms providing some level of agri-tourism and recreation services.Small farms worldwide are participating in this trend by offering “pick your own” crops in season as well as a small bed-and-breakfast.What

38、other industries could benefit from diversifying into tourism & recreation? 8-34135STRATEGY HIGHLIGHT 8.3ExxonMobil Diversifies into Natural GasExxonMobil earned highest profit in its history in 2008Majority of profits come from petroleum-based products. Environmental change toward clean energyExxon

39、Mobil must react to the change.ExxonMobil to focus on clean energy: natural gas.ExxonMobil acquired XTO EnergyLeverage core competence in exploration and commercialization of energy sources into natural gas.85% today fossil fuelsExxon is largest producer of natural gas on the planet.Exxon XTO video8

40、-35LO 8-1Define corporate-level strategy, and describe the three dimensions along which it is assessed.LO 8-2Describe and evaluate different options firms have to organize economic activity.LO 8-3Describe two types of vertical integration along the industry value chain: backward and forward vertical

41、 integration.LO 8-4Identify and evaluate benefits and risks of vertical integration.LO 8-5Describe and examine alternatives to vertical integration.LO 8-6Describe and evaluate different types of corporate diversification.LO 8-7Apply the core competence market matrix to derive different diversificati

42、on strategies.LO 8-8Explain when a diversification strategy creates a competitive advantage, and when it does not.8-36Leveraging Core Competencies for Corporate DiversificationCore competenceUnique skills and strengthsAllows firms to increase the value of product/serviceLowers the costExamples: Walm

43、art global supply chainInfosys low-cost global delivery systemThe core competence market matrixProvides guidance to executives on how to diversify in order to achieve continued growth8-37EXHIBIT 8.8The Core Competence Market MatrixBoA - NCNBBoA - Merrill LynchPepsi - GatoradeS8-38Corporate Diversifi

44、cationDiversification discountStock price of diversified firms is lessDiversification premiumStock price of diversified firms is greaterWill diversification increase performance?8-39EXHIBIT 8.9The Diversification-Performance Relationship8-40Corporate Diversification (contd)How does diversification e

45、nhance performance?Economies of scale lower the costEconomies of scope increase the valueReduce cost and increase value simultaneously8-41EXHIBIT 8.10Vertical Integration and Diversification: Sources of Value Creation and Costs8-42Corporate Diversification (contd)RestructuringProcess of reorganizing

46、 and divesting business unitsTo refocus a company to leverage its core competenciesBoston Consulting Group growth-share matrixDogsCash cowsStarsQuestion marks8-43EXHIBIT 8.11BCG Matrix8-44Corporate Diversification (contd)Internal capital marketsSource of value creation in a diversification strategyA

47、llows conglomerate to do a more efficient job of allocating capitalCoordination costA function of number, size, and types of businesses linked to one anotherInfluence costPolitical maneuvering by managers to influence capital and resource allocationBandwagon effectsFirms copying moves of industry ri

48、vals8-45Corporate Strategy: Combining Vertical Integration and DiversificationFirms corporate strategyConcerns level of integration on value chainANDLevel of diversificationEx: Oracle earned $23B in 2009Enterprise software is core competencyBackward integration Sun MicrosystemsForward integration Pe

49、opleSoft Diversification at Oracle: Related IP management bought SophoiUnrelated ID theft bought Bharosa 8-46EXHIBIT 8.12Oracle Corporate Strategy: Combining Vertical Integration and Diversification8-47CHAPTERCASE 8/ Consider ThisWhere do ecomagination and healthymagination fit on the core competenc

50、e market matrix for GE?Take either the energy or health care industry and draw the industry value chain. What areas of potential vertical integration should GE consider?What related diversification would you suggest for GE in reference to its focus for the future?How do GEs corporate-level strategic

51、 initiatives of energy, health care, and globalization reinforce each other? How might they generate conflicts in the company?8-48LO 8-1Define corporate-level strategy, and describe the three dimensions along which it is assessed.While business strategy addresses “how to compete,” corporate strategy

52、 addresses “where to compete.Corporate strategy concerns the scope of the firm along three dimensions: (1) vertical integration (along the industry value chain); (2) horizontal integration (diversification); and (3) geographic scope (global strategy).To gain & sustain competitive advantage, any corp

53、orate strategy must support and strengthen a firms strategic position regardless of whether it is a differentiation, cost leadership, or integration strategy.Take-Away Concepts8-49LO 8-2Describe and evaluate different options firms have to organize economic activity.Transaction cost economics help m

54、anagers decide what activities to do in-house (“make”) versus what services and products to obtain from the external market (“buy”).When the costs to pursue an activity in-house are less than the costs of transacting in the market (Cin-house, Cmarket), then the firm should vertically integrate.In th

55、e resource-based view of the firm, a firms boundaries are delineated by its knowledge bases and competencies.Moving from less integrated to more fully integrated forms of transacting, alternatives include: short-term contracts, strategic alliances (including long-term contracts, equity alliances, an

56、d joint ventures), and parentsubsidiary relationships .Take-Away Concepts (contd)8-50LO 8-3Describe two types of vertical integration along the industry value chain: backward and forward vertical integration.Vertical integration denotes a firms value addedwhat percentage of a firms sales is generate

57、d by the firm within its boundaries .Industry value chains (vertical value chains) depict the transformation of raw materials into finished goods and services. Each stage typically represents a distinct industry in which a number of different firms are competing .Backward vertical integration involv

58、es moving ownership of activities upstream nearer to the originating (inputs) point of the industry value chain .Forward vertical integration involves moving ownership of activities closer to the end (customer) point of the value chain.Take-Away Concepts (contd)8-51LO 8-4 Identify and evaluate benef

59、its and risks of vertical integration. Benefits of vertical integration include: securing critical supplies, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets.Risks of vertical integration include: increasing costs, reducing q

60、uality, reducing flexibility, and increasing the potential for legal repercussions.Vertical integration contributes to competitive advantage if the incremental value created is greater than the incremental costs of the specific corporate-level strategy.LO 8-5Describe and examine alternatives to vert