2. CORPORATE-LEVEL STRATEGY AND THE MULTIBUSINESS MODE
The choice of corporate-level strategies is the fnal part of the strategy-formulation process.
Corporate-level strategies drive a company’s business model over time and determine
which types of business- and functional-level strategies managers will choose to maximize
long-term profitability.
Corporate-level strategies should be chosen to
promote the success of its business-level strategies
▪ Which allows it to achieve a sustainable competitive
advantage, leading to higher profitability
▪Corporate level strategy choices:
▪ Which industry/business should the company compete
in?
▪ The value creations functions to be performed in the
business/industry chosen !
▪ How to enter, consolidate, or exit business/industries.
2
3. 9-3
An advantage of staying within one industry is that it allows a
company to focus all of its managerial, financial, technological, and
functional resources and capabilities on competing successfully in
one area.
Acquiring or merging with industry competitors to achieve the
competitive advantages that arise from a large size and scope
of operations
Acquisition: Company uses its capital
resources to purchase another company
Merger: Agreement between two companies to
pool their resources and operations and join
together to better compete in a business or
industry
HORIZONTAL INTEGRATION: SINGLE INDUSTRY CORPORATE
STRATEGY
4. BENEFITS OF
HORIZONTAL
INTEGRATION
▪ Lowers the cost
structure
▪ Increases product
differentiation
▪ Leverages a competitive
advantage
▪ Reduces rivalry within
the industry
▪ Increases bargaining
power over suppliers
and buyers
▪ Enables “cross selling”
and “product bundling”
4
Product bundling: Offering
customers the opportunity to
purchase a range of products at a
single combined price; this
increases the value of a
company’s product line because
customers often obtain a price
discount when purchasing a set of
products at one time, and
customers become used to
dealing with only one company
and its
representatives.
Cross-selling: When a company
takes advantage of or
“leverages” its established
relationship with customers by
way of acquiring
additional product lines or
categories that it can sell to
customers. In this way, a
company increases
differentiation because it can
provide a “total solution” and
satisfy all of a
5. PROBLEMS WITH
HORIZONTAL
INTEGRATION
▪ Difficult to implement
▪ Conflict with the
Regulations
governing market
power
▪ Increase in prices
▪ Abuse of market power
▪ Crushing potential
competitors
6. VERTICAL INTEGRATION
▪ When a company expands its operations either
backward or forward into an industry
▪ Backward vertical integration - Produces inputs for the
company’s products
▪ Forward vertical integration - Uses, distributes, or sells
the company’s products
6
7. STAGES IN THE RAW-MATERIALS-TO-
CUSTOMER VALUE-ADDED CHAIN
7
THE RAW-MATERIALS-TO-CUSTOMER VALUE-
ADDED CHAIN IN THE PC INDUSTRY
8. INCREASING
PROFITABILITY
THROUGH VERTICAL
INTEGRATION
▪ Vertical integration
increases product
differentiation, lowers
costs, and reduces
industry competition when
it:
▪ Facilitates investments in
efficiency-enhancing
specialized assets
▪ Protects product quality
▪ Results in improved scheduling
8
Holdup: When a company is taken
advantage of by another company it
does
business with after it has made an
investment in expensive specialized
assets to better meet the needs of the
other company.
Tapered integration: When a firm uses
a mix of vertical integration and
market transactions for a given input.
For example,
a firm might operate limited
semiconductor
manufacturing itself, while also buying
semiconductor chips on the market.
Doing so helps to prevent supplier
holdup (because the firm can credibly
commit to
not buying from external suppliers)
and increases its ability to judge the
quality and cost of purchased
supplies.
9. 9
PROBLEMS WITH
VERTICAL INTEGRATION
▪ Increasing cost structure
▪ Disadvantages that arise when
technology is changing fast
▪ Disadvantages that arise when
demand is unpredictable,
sometimes so significant that it
reduces profit.
▪ Vertical disintegration: When
a company decides to exit
industries either forward or
backward in the industry value
chain to its core industry to
increase profitability
Transfer pricing: The price that
one
division of a company charges
another division for its products,
which are the inputs the other
division requires to manufacture
its own products.
10. ALTERNATIVES TO VERTICAL INTEGRATION:
COOPERATIVE RELATIONSHIPS
▪ Quasi integration: The use of long-term
relationships, or investment into some of
the activities normally performed by suppliers
or buyers, in place of full ownership of
operations that are backward or forward in the
supply chain.
10
11. COMPETITIVE BIDDING AND SHORT-
TERM CONTRACTS
▪ Competitive bidding strategy - Independent
component suppliers compete to be chosen to
supply a particular component
▪ Short-term contracts - Last for a year or less
▪ Does not result in specialized investments
▪ Signals a company’s lack of long-term commitment to
its suppliers
12. STRATEGIC ALLIANCES AND LONG-
TERM CONTRACTING
▪ Strategic alliances: Long-term agreements
between two or more companies to jointly
develop new products or processes
▪ Substitute for vertical integration
▪ Avoids bureaucratic costs
▪ Component suppliers benefit because their
business and profitability grow as the companies
they supply grow
12
13. RELATIONSHIPS
▪ Hostage taking: Means of
exchanging valuable resources to
guarantee that each partner to
an agreement will keep its side
of the bargain.
▪ Credible commitment:
Believable promise or pledge to
support the development of a
long-term relationship between
companies
▪ Each company should possess a
kind of power to discipline its
partner, if the need arise
13
Northrop is a major subcontractor for Boeing’s commercial airline
division, providing many components for its aircraft. To serve
Boeing’s special needs, Northrop has had to make substantial
investments in specialized assets, and, in theory, because of this
investment, Northrop has become dependent
on Boeing—which can threaten to change orders to other suppliers
as a way of driving down Northrop’s prices. In practice, Boeing is
highly unlikely to make a change of suppliers because it is, in turn, a
major supplier to Northrop’s defense division and provides many
parts for its Stealth aircraft; it also has made major investments in
specialized assets to serve Northrop’s needs. Thus, the companies
are mutually dependent; each company holds a hostage—the
specialized investment the other has made.
GE is one of the major suppliers of advanced semiconductor chips
to IBM, and many of the chips are customized to IBM’s
requirements. To meet IBM’s specific needs, GE has had to make
substantial investments in specialized assets that have little other
value. As a consequence, GE is dependent on IBM and faces a risk
that IBM will take advantage of this dependence to demand lower
prices. In theory, IBM could back up its demand by threatening to
switch its business to another supplier. However, GE reduced this
risk by having IBM enter into a contractual agreement that
committed IBM to purchase chips from GE for a 10-year period. In
addition, IBM agreed to share the costs of the specialized assets
needed to develop the customized chips, thereby reducing the risks
associated with GE’s investment
14. STRATEGIC OUTSOURCING
▪ Decision to allow one or more of a company’s
value-chain activities to be performed by
independent, specialist companies
▪ Virtual corporation: Companies pursued
extensive strategic outsourcing to the extent
that they only perform the central value creation
functions that lead to competitive advantage
Parallel sourcing policy: A policy in which a company enters into
long-term contracts with at least two suppliers for the same
component to prevent any problems of opportunism.
17. RISKS OF OUTSOURCING
▪ Holdup
▪ Risk that a company will become too dependent upon
the specialist provider of an outsourced activity
▪ Increased competition
▪ Building of an industry-wide resource that lowers the
barriers to entry in that industry
▪ Loss of information and forfeited learning
opportunities
17
Quazi Tafsirul Islam.
Find more at www.quazitafsir.com
