Chapter 09

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Chapter 09

  1. 1. CORPORATE STRATEGY: HORIZONTAL & VERTICAL INTEGRATION, STRATEGIC OUTSOURCING BUSINESS 189 SPRING 2007 DR. MARK FRUIN
  2. 2. CORPORATE STRATEGY <ul><li>NOT BUSINESS LINE STRATEGY or PRODUCTS/PLATFORMS/MARKETS </li></ul><ul><li>CHOICES FIRMS MAKE WHEN PURSUING MULTI-BUSINESS STRATEGY </li></ul><ul><li>CHOICES SHOULD ADD VALUE </li></ul><ul><ul><li>EITHER CREATE MORE VALUE AT LOWER COST </li></ul></ul><ul><ul><li>OR ENABLE SUPERIOR DIFFERENTIATION THAT BRINGS PREMIUM PRICING </li></ul></ul><ul><ul><li>BUT GO BEYOND GENERIC STRATEGIES, IF POSSIBLE </li></ul></ul><ul><ul><li>GOING BEYOND OFTEN CHARACTERIZED AS SYNERGY; MORE THAN SUM OF THE PARTS </li></ul></ul>
  3. 3. LOOKING UP OR DOWN? <ul><li>TRADITIONALLY, THE ARGUMENT HAS BEEN THE CORPORATE-LEVEL STRATEGY SETS THE CONTEXT FOR BUSINESS-LEVEL STRATEGY </li></ul><ul><li>ALTERNATIVELY, LOOK UPWARD AND SAY THAT BUSINESS-LEVEL STRATEGY SHOULD SET THE CONTEXT FOR CORPORATE-LEVEL STRATEGY </li></ul><ul><li>WHICH IS RIGHT IN YOUR OPINION? </li></ul>
  4. 4. FROM THE RBV PERSPECTIVE <ul><li>IT MAKES SENSE TO SAY THAT BUSINESS-LEVEL STRATEGIES SET THE CONTEXT FOR CORP-LEVEL STRAT </li></ul><ul><li>BECAUSE ASSET SPECIFICITY AND THE STICKINESS OF RESOURCES MAKE THEM HARD TO LEVERAGE BROADLY </li></ul><ul><li>UNFORTUNATELY, CORP EXECUTIVES OFTEN THINK THAT THEY CAN MOBILIZE RESOURCES EFFECTIVELY </li></ul><ul><ul><li>“I can manage anything” point of view </li></ul></ul><ul><ul><li>General management as opposed to specific skills </li></ul></ul>
  5. 5. CORPORATE STRATEGY SHOULD <ul><li>ESTABLISH DISTINCTIVE COMPETENCIES AND COMPETITIVE ADVANTAGES AT MULTIPLE BUSINESS LEVELS </li></ul><ul><li>TYPOLOGY OF FIRM-TYPES </li></ul><ul><ul><li>SINGLE PRODUCT FIRM (>80% OF SALES) </li></ul></ul><ul><ul><li>DOMINANT PRODUCT FIRM (>60%) </li></ul></ul><ul><ul><li>RELATED PRODUCT FIRM </li></ul></ul><ul><ul><ul><li>RELATED IN TERMS OF TECHNOLOGY </li></ul></ul></ul><ul><ul><ul><li>RELATED IN TERMS OF MARKET </li></ul></ul></ul><ul><ul><li>UNRELATED PRODUCT FIRM (conglomerate) </li></ul></ul><ul><ul><ul><li>UNRELATED BY DESIGN OR BY TIME? </li></ul></ul></ul>
  6. 6. DIFFERENTIATION VS DIVERSIFICATION <ul><li>OFTEN HARD TO DISTINGUISH </li></ul><ul><li>FROM THE RBV, DIFFERENTIATION CAN BE ACCOMPLISHED ON THE BASIS OF EXISTING RESOURCES & CAPABILITIES (ALTHOUGH THEY BE USED IN NEW WAYS) </li></ul><ul><li>DIVERSIFICATION REQUIRES NEW RESOURCES & CAPABILITIES </li></ul><ul><li>AUTO MAKER MOVES INTO AUTO PARTS </li></ul><ul><ul><li>DIFFERENTIATION OR DIVERSIFICATION? </li></ul></ul>
  7. 7. DIVERSIFICATION <ul><li>MEANS “NOT STICKING TO THE KNITTING” </li></ul><ul><li>HORIZONTAL INTEGRATION VS VERTICAL INTEGRATION: </li></ul><ul><ul><li>WHAT’S THE DIFFERENCE? </li></ul></ul><ul><ul><li>WHAT’S THE LOGIC? </li></ul></ul><ul><ul><li>WHAT’S THE LIKELY OUTCOME? </li></ul></ul>
  8. 8. HORIZONTAL INTEGRATION <ul><li>MERGER WITH & ACQUISITION OF FIRMS IN THE SAME INDUSTRY </li></ul><ul><ul><li>HOW TO DEFINE INDUSTRY BOUNDARIES </li></ul></ul><ul><ul><li>IS IBM GLOBAL SERVICES SAME INDUSTRY AS IBM? IBM HARDWARE? IBM SOFTWARE? </li></ul></ul><ul><ul><li>IS APPLE SAME INDUSTRY AS HP/COMPAQ? </li></ul></ul><ul><li>USUALLY (IN PAST) HORIZONTAL INTEGRATION PRECEDES VERTICAL INTEGRATION - WHY? </li></ul><ul><li>RECENT EXAMPLES: DAIMLER BENZ BUYS CHRYSLER; BOEING BUYS MCDONALD DOUGLAS; HP BUYS COMPAQ </li></ul><ul><ul><li>A GOOD THING? HOW ADD VALUE? </li></ul></ul>
  9. 9. HORIZONTAL INTEGRATION <ul><li>TEXT SAYS ADVANTAGES OF HORIZONTAL INTEGRATION ARE </li></ul><ul><ul><li>REDUCED COSTS </li></ul></ul><ul><ul><li>INCREASED VALUE THROUGH DIFFERENTIATION </li></ul></ul><ul><ul><ul><li>PRODUCT BUNDLING </li></ul></ul></ul><ul><ul><ul><li>TOTAL SOLUTION SELLING </li></ul></ul></ul><ul><ul><ul><li>CROSS SELLING (FINANCIAL SUPERMARKET) </li></ul></ul></ul><ul><ul><ul><li>STRATEGIES IN MATURE INDUSTRIES </li></ul></ul></ul><ul><ul><li>MANAGED RIVALRY </li></ul></ul><ul><ul><ul><li>ELMINATE EXCESS CAPACITY </li></ul></ul></ul><ul><ul><ul><li>PRICE COORDINATION </li></ul></ul></ul><ul><ul><li>INCREASED BARGAINING (MARKET) POWER </li></ul></ul>
  10. 10. HORIZONTAL INTEGRATION PROBLEMS <ul><li>PAY TOO MUCH UP-FRONT </li></ul><ul><li>REALIZE TOO LITTLE ON BACK END </li></ul><ul><li>HARD TO MERGE RESOURCES, CAPABILITIES & CULTURES OF DIFFERENT FIRMS (EVEN WITHIN SAME INDUSTRY) </li></ul><ul><li>ANTITRUST CONCERNS </li></ul><ul><li>RISKS INCREASING OR DECREASING? </li></ul><ul><ul><li>WHAT SORT OF RISK? MKT/ORG/TECH </li></ul></ul>
  11. 11. VERTICAL INTEGRATION <ul><li>BACKWARD OR UPSTREAM INTEGRATION MEANS BUYING YOUR OWN INPUTS </li></ul><ul><li>DOWNSTREAM OR FORWARD INTEGRATION MEANS DISPOSING OF ONES’ OUTPUTS </li></ul><ul><li>HISTORICALLY, V.I. CAME AFTER H.I. IN THE UNITED STATES: DUPONT, GM, GE </li></ul><ul><li>CURRENT SUPPLY CHAIN STRATEGIES ARE MOSTLY VERTICAL INTEGRATION STRATEGIES </li></ul><ul><li>FULL VERSUS TAPER INTEGRATION </li></ul>
  12. 12. VALUE CHAIN <ul><li>THE STAGES OF RESOURCE CONVERSION FROM INPUTS TO OUTPUTS </li></ul><ul><li>VALUE CHAIN IS A CHOICE ABOUT HOW MANY STAGES OF RESOURCE CONVERSION (VERTICAL INTEGRATION) TO DO INTERNALLY </li></ul><ul><li>THE TRADITIONAL LOGIC IS: LESS EXPENSIVE TO DO IT ONESELF </li></ul><ul><ul><li>MARKETS VS HIERARCHIES DEBATE </li></ul></ul><ul><ul><li>OPPORTUNISM AND BOUNDED RATIONALITY </li></ul></ul><ul><ul><li>STABILITY & ACCESS TO MARKETS VARY </li></ul></ul><ul><ul><li>IT CAN LOWER COSTS OF HIERARCHY </li></ul></ul>
  13. 13. WHEN DOES IT MAKE SENSE TO VERTICALLY INTEGRATE? <ul><li>WHEN “UNIQUE” RESOURCES AVAILABLE </li></ul><ul><ul><li>DISTINCTIVE COMPETENCIES MAY BE BASED ON HAVING THE “RIGHT”, LIMITED RESOURCE/S </li></ul></ul><ul><li>WHEN IT IS HARD TO FIND SPECIALIZED ASSETS NEEDED IN ADJACENT STAGES </li></ul><ul><ul><li>RISK OF HOLDUP </li></ul></ul><ul><ul><li>RISK OF QUALITY PROBLEMS </li></ul></ul><ul><li>PROTECT/LEVERAGE MARKET POSITION </li></ul><ul><li>IMPROVE SCHEDULING/TIME TO MARKET </li></ul>
  14. 14. FULL VS PARTIAL (TAPERED) VERTICAL INTEGRATION <ul><li>TAPERED INTEGRATION OCCURS WHEN FIRMS BUY FROM INDEPENDENT SUPPLIERS IN ADDITION TO SELF-SUPPLY </li></ul><ul><li>WHY DO THIS? </li></ul><ul><ul><li>SECURE ALTERNATIVE SOURCES OF SUPPLY </li></ul></ul><ul><ul><li>COMPARATIVE COST CONTROLS </li></ul></ul><ul><ul><li>UNDERSTAND NATURE OF ASSET SPECIFICITY </li></ul></ul><ul><ul><li>PROTECT KEY RESOURCES/CAPABILITIES </li></ul></ul>
  15. 15. DISADVANTAGES OF VERTICAL INTEGRATION <ul><li>IT’S COSTLY </li></ul><ul><li>BEST USE OF FUNDS? </li></ul><ul><li>NARROWS RANGE OF CHOICES/SOURCES AVAILABLE TO FIRM </li></ul><ul><li>MAY REDUCE INNOVATION </li></ul><ul><li>MAY NOT LEVERAGE RESOURCES EFFECTIVELY BECAUSE OF </li></ul><ul><ul><li>BUREAUCRATISM </li></ul></ul><ul><ul><li>LOSS OF MOTIVATION </li></ul></ul><ul><ul><li>UNDER- OR OVER-SUPPLY OF INPUTS (DEMAND MANAGEMENT) </li></ul></ul>
  16. 16. ALTERNATIVES TO VERTICAL BUT NOT HORIZONTAL INTEGR <ul><li>PARTNERSHIPS </li></ul><ul><ul><li>SHORT-TERM CONTRACTS & COMPETITIVE BIDDING </li></ul></ul><ul><ul><li>JOINT VENTURES </li></ul></ul><ul><ul><li>STRATEGIC ALLIANCES </li></ul></ul><ul><ul><ul><li>STRATEGIC OUTSOURCING </li></ul></ul></ul><ul><ul><li>RELATIONAL CONTRACTING </li></ul></ul><ul><ul><ul><li>RELATIONSHIP-BASED PRICING/GOODWILL </li></ul></ul></ul><ul><ul><li>SUPPLIER MANAGEMENT STRATEGIES </li></ul></ul><ul><ul><li>INTERFIRM NETWORK STRATEGIES </li></ul></ul><ul><ul><ul><li>A LA JAPANESE (BUT NOT US) AUTO & ELECTRONICS FIRMS </li></ul></ul></ul>
  17. 17. OUTSOURCING BENEFITS <ul><li>REDUCE COSTS & CERTAIN RISKS </li></ul><ul><li>SPEED OF OPERATIONS </li></ul><ul><li>IMPROVED FOCUS </li></ul><ul><li>INNOVATION ENHANCED & ACCELERATED </li></ul><ul><li>IMPROVE PRODUCT DIFFERENTIATION </li></ul><ul><ul><li>EFFICIENCY </li></ul></ul><ul><ul><li>QUALITY </li></ul></ul><ul><ul><li>ENHANCED CUSTOMER SATISFACTION </li></ul></ul><ul><ul><li>BESIDES FUNCTIONAL STRATS, BETTER LB STRATS: PRODUCT & MKT DEVELOPMENT, PROLIFERATION, ETC. </li></ul></ul>
  18. 18. OUTSOURCING DRAWBACKS <ul><li>THINKING PROBLEMS HAVE GONE AWAY </li></ul><ul><li>HOLDUP </li></ul><ul><li>SCHEDULING & INTEGRATION PROBLEMS (COORDINATION & TRANSACTION COSTS) </li></ul><ul><li>DISPUTE RESOLUTION NOT SIMPLE </li></ul><ul><li>LOSS OF INFORMATION & POTENTIAL PROPRIETARY KNOWHOW </li></ul><ul><li>LINKAGE-BASED KNOWHOW OFTEN LOST (VALUE CHAIN BASED ON LINKED ACTIVITIES) </li></ul>
  19. 19. CL STRAT AS COOPERATION <ul><li>HORIZONTAL & VERTICAL INTEGRATION STRATEGIES ARE COOPERATIVE STRATEGIES SECURED BY OWNERSHIP </li></ul><ul><li>NIELSEN PORTER </li></ul><ul><ul><li>POOLING SHARING ACTIVITIES </li></ul></ul><ul><ul><li>EXCHANGE TRANSFER SKILLS/ </li></ul></ul><ul><ul><li>FINANCIAL MANAGEMENT </li></ul></ul><ul><ul><li>COMPL. SPECIAL- RESTRUCTURING IZATION </li></ul></ul><ul><ul><li>EXPERIMENT & WITHDRAWAL </li></ul></ul>
  20. 20. ALTERNATIVES TO C-L STRATEGIES <ul><li>CONGLOMERATE (A KIND OF UNRELATED C-L STRATEGY) </li></ul><ul><li>BUSINESS GROUP (WITH OR WITHOUT HOLDING COMPANY CONTROL) </li></ul><ul><li>CHOOSE “RIGHT” INDUSTRIAL DISTRICTS </li></ul><ul><li>STRONG NETWORK </li></ul><ul><li>LOOSE NETWORK </li></ul>
  21. 21. COOPERATION SECURED & UNSECURED BY OWNERSHIP <ul><li>CL STRATEGIES ARE GENERALLY SECURED BY OWNERSHIP </li></ul><ul><li>NETWORK-BASED STRATEGIES ARE OFTEN NOT SECURED BY OWNERSHIP </li></ul><ul><li>WHY THE DIFFERENCE? </li></ul><ul><ul><li>TIMING OF COOPERATION; DOWNSTREAM COOP IS MORE DIFFICULT THAN UPSTREAM </li></ul></ul><ul><ul><li>CATCH-UP OR NOT </li></ul></ul><ul><ul><li>SPEED OF COOP ACTIVITIES </li></ul></ul><ul><ul><li>ALTERNATIVE SOURCES OF POWER/GOVERNANCE </li></ul></ul><ul><ul><li>COMPLEXITY OF INTERACTIVE ROUTINES </li></ul></ul><ul><ul><li>IMITATIONOF ACTIONS DOES NOT REQUIRE DUPLICATION OF MEANS </li></ul></ul>
  22. 22. NETWORK ALTERNATIVES <ul><li>TOYOTA GROUP </li></ul><ul><li>ABOUT 10% OF 1ST TIER FIRMS HAVE TOYOTA INVESTM. </li></ul><ul><li>COORDINATE THRU TPS/JIT </li></ul><ul><li>ORGANIZATIONAL PROPERTY RIGHTS </li></ul><ul><li>HIERARCHICAL NETWORK WITH MANY SUB-SYSTEMS </li></ul><ul><li>SUN’S JAVA & JINI </li></ul><ul><li>SUN NOT INVEST IN DEVELOPERS </li></ul><ul><li>SUN RETAINS OS PROPERTY RIGHTS </li></ul><ul><li>EVERYTHING ELSE FAIR GAME </li></ul><ul><li>SCALE-FREE NETWORK WITH LOTS OF SELF-ORGANIZING & REDUNDANCY </li></ul>

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