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9
Corporate Strategy:
Horizontal
Integration,
Vertical
Integration, and
Strategic
Outsourcing
Plotting a Route to the Top
• Do a SWOT analysis for yourself
• Outline a strategy for yourself
– Unique
• Making yourself known is absolutely
essential
– Next to talent, the second most important factor
in career or entrepreneurial success is taking the
time and effort to develop visibility
• Get your name in print
• Give speeches
• Volunteer for industry association and
professional organization jobs
• Take time off for a stint in government
• Make your superiors look good
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9-2
Jack Welch, Formerly of GE
• Class Objectives:
– To illustrate the formal strategic planning
process.
– To examine and illustrate the concept of
organizational culture.
– To discuss diversification, acquisitions, and
internal new ventures.
• Discussion Questions:
– Do you think that GE’s diversification came
about more through internal new venturing
or acquisitions?
– What has Welch done to help ensure that
GE’s various divisions avoid failure and
sustain their competitive advantage?
– What part does taking risk play in the
Welch-driven organizational culture at GE?
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9-3
Discussion Quiz 5 – Related or Unrelated Diversification
• Research suggests that the average related
company is no more profitable than the
average unrelated company.
– If related diversification is associated with more
benefits than unrelated diversification, why isn’t
the strategy consistently more profitable?
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9-4
Computing for the future
• For the CEO “…more
interested in creating the
future than in watching
it happen.
– It is not about catching
up, it’s about getting
ahead.”
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9-5
Assignment Questions
• What do you feel about the authors’ notions
presented in Competing for the Future?
• Do you agree with the statement that,
– …the key to industry leadership is to develop an
independent point of view about tomorrow’s
opportunities and build capabilities that exploit them.
• How would you relate what the authors are saying
to, say, a Michael Dell as he considers the
direction Dell should take to be profitable in the
21st Century?
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9-6
Bureaucratic Costs and the Limits of
Diversification
•Number of businesses
– Information overload can lead to poor resource allocation
decisions and create inefficiencies.
•Coordination among businesses
– As the scope of diversification widens, control and
bureaucratic costs increase.
– Resource sharing and pooling arrangements that create value
also cause coordination problems.
•Limits of diversification
– The extent of diversification must be balanced with its
bureaucratic costs.
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9-7
SWOT and Strategic Choice
Weaknesses
Strengths
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Opportunities
Threats
9-8
Porter’s Five Forces Model
•
The five forces are threats from:
1.
2.
3.
4.
5.
Competitors
Powerful suppliers
Powerful buyers
Substitute product, and
New entrants
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9-9
Competitive Advantage – Four Ways to
Achieve
1.
2.
3.
4.
Superior efficiency
Quality
Innovation
Responsiveness to customers
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9 - 10
Choosing a Generic Business-Level
Strategy (Continued)
MY FIRM HAS
A COMPETITIVE
ADVANTAGE
No, my FIRM HAS
A COMPETITIVE
ADVANTAGE
STUCK
IN THE
MIDDLE
Easy to lose control unless strategic managers keep close
track of the business and its environment, constantly
adjusting product/market choices to suit changing conditions
within the industry. Must monitor the environment so that
they can keep the firm’s sources of competitive advantage in
tune with changing opportunities and threats.
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9 - 11
The World of 1990
Service
Billing
Credit
Distribution
Engineering
Production
Dr. M. Hammer
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9 - 12
The World of 2000: The Good News
Service
Credit
Engineering
ERP
Billing
Distribution
Production
Dr. M. Hammer
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9 - 13
The World of 2000: The Bad News
Service
Credit
Engineering
Service
Credit
Engineering
ERP
ERP
Billing
Distribution
Production
Billing
Distribution
Production
Dr. M. Hammer
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9 - 14
A Frightening Observation
The walls between enterprises
dwarf the walls within
enterprises
Dr. M. Hammer
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9 - 15
An Abridged History of the Next Ten
Years
The 2000’s will be about breaking
down external walls: integrating
and redesigning inter-enterprise
processes using the Internet
Dr. M. Hammer
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9 - 16
Internet - The Real Question
• What is the real significance of the Internet for
real companies in the real and global
economy?
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9 - 17
The Internet Industry
• If the Internet is the answer, then what’s the
question
• Bottom-line Question:
– What impact will the Internet have on Strategy
Formulation and Strategy Implementation
issues in the 2000’s? PCN
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9 - 18
Hammer – Rethinking Strategy: You Are
What You Do
• Michael Porter’s competitive factors – five forces.
• Hamel and Prahalad’s core competencies.
– A firms needs to identify the things it does well and build
its strategy around them.
• Hammer – By focusing on process and defining a
business in terms of how it works, the processcentered perspective leads to strategies that address
not only the question “What should we do?” but also
“Can we do it?”
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9 - 19
Review
Strategy & Competitive Advantage
• Strategy – refers to the ideas, plans,
and support that firms use to compete
successfully against rivals.
• Competitive advantage – comes
from a firm’s ability to perform
activities more distinctively or more
effectively than its rivals.
• Distinctive competencies 
“unique strengths that allow a
company to achieve superior
efficiency, quality, innovation, or
customer responsiveness.”
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9 - 20
Overview
• Horizontal integration
– The process of acquiring or merging with industry
competitors
• Acquisition and merger
• Vertical integration
– Expanding operations backward into an industry that
produces inputs for the company or forward into an
industry that distributes the company’s products
• Strategic outsourcing
– Letting some value creation activities within a business be
performed by an independent entity
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9 - 21
Benefits of Horizontal Integration
• Reducing costs
• Increasing value
– Product bundling
– Cross selling
• Managing industry rivalry
• Increasing bargaining power
– Market power (monopoly power)
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9 - 22
Drawbacks and Limits of Horizontal
Integration
• Majority of mergers and acquisitions do not
create value
• Implementing a horizontal integration strategy
is not easy
• Mergers and acquisitions often fail to produce
the anticipated gains
• Can bring the company into conflict with
antitrust law
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9 - 23
Vertical Integration: Stages in the Raw
Material to Consumer Value Chain
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9 - 24
The Raw Material to Consumer Value Chain
in the Personal Computer Industry
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9 - 25
Full and Taper Integration
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9 - 26
Increasing Profitability Through Vertical
Integration
•
•
•
•
Building barriers to entry
Facilitating investments in specialized assets
Protecting product quality
Improved scheduling
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9 - 27
Arguments Against Vertical Integration
• Cost disadvantages
– Company-owned suppliers that have higher costs
than external suppliers
• Rapid technological change
– Tying a company to an obsolescent technology
• Demand unpredictability
– Difficulty of achieving close coordination among
vertically integrated activities
• Bureaucratic costs
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9 - 28
Alternatives to Vertical Integration:
Cooperative Relationships
• Short-term contracts and competitive bidding
• Strategic alliances and long-term contracting
• Building long-term cooperative relationships
– Hostage taking
– Credible commitments
– Maintaining market discipline
• Parallel sourcing policy
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9 - 29
Strategic Outsourcing of Primary Value
Creation Functions
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9 - 30
Benefits of Outsourcing
• Reducing costs
– The specialist company is less than what it would cost to
perform the activity internally
• Differentiation
– The quality of the activity performed by the specialist is
greater than if the activity were performed by the company
• Focus
– Distractions are removed; the company can focus attention
and resources on activities important for value creation and
competitive advantage
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9 - 31
Identifying and Managing the Risks of
Outsourcing
• Holdup
– The company can become too dependent on the
provider of the outsourced activity so that the
provider can raise prices
• Scheduling of activities
– Loss of control can result in distorted signals in the
supply chain
• Loss of information
– Contact with the customer may be lost
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9 - 32
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9 - 33