Discussion Topics to consider (remember, you don’t need to address all of these):
What are the benefits/risks of being more vertically integrated?
How do you utilize the BCG growth-share matrix? Â What is it for?
How should you decide how diversified to be?
Why do so many M&As fail?
Why do firms still do M&As if they usually fail.
When firms do alliances with other firms, how should they choose which of the three types is best?
Corporate Strategy: Vertical Integration and
What Is Corporate Strategy?
â€¢ Corporate strategy
âž¢ Quest for competitive advantage when competing in multiple
â€¢ Corporate strategy concerns the scope of the firm
âž¢ Industry value chain
âž¢ Products and services
Three Dimensions of Corporate Strategy
â€¢ What stages of industry value chain: vertical
â€¢ What range of products and services: horizontal
integration or diversification
â€¢ Where in the world to compete: global strategy
What Is Corporate Strategy?
â€¢ Compare to Business-level Strategy
âž¢ How to compete
âž¢ Where to compete
â€¢ Economies of scope
âž¢ Savings that come from producing more outputs or
providing different services at less cost
â– Ex: Amazon range of products & services
â€¢ Make vs Buy
Firms vs. Markets: Make or Buy
â€¢ Should a firm do things in-house (to make)? Or
obtain externally (to buy)?
â€¢ If Cin-house < Cmarket, then the firm should vertically integrate (make) âž¢ Ex: Microsoft hires programmers to write code in-house rather than contracting out Make or Buy: A "Cut" at Vertical Integration Alternatives of the Make or Buy Continuum â€¢ Short-term contacts âž¢ Competitive bidding process âž¢ Less than one-year term âž¢ Lower prices â†’ cost advantages â€¢ Strategic alliances âž¢ Facilitate investment without administrative costs â– Ex: Long-term contacts, equity alliances, joint ventures â€¢ Parent â€“ subsidiary relationship âž¢ Most integrated alternative âž¢ Parent companies have command and control â– Ex: GM owns Opel and Vauxhall in Europe Alternatives along the Make or Buy Continuum Vertical Integration along the Industry Value Chain â€¢ Vertical integration âž¢ Ownership of its inputs, production, & outputs in the value chain â€¢ Vertical value chain âž¢ Industry-level integration from upstream to downstream â€¢ 30 Rock Example of Vertical Integration Backward and Forward Vertical Integration along an Industry Value Chain Types of Vertical Integration â€¢ Full vertical integration â€¢ Backward vertical integration â€¢ Forward vertical integration â€¢ Not all industry value chain stages are equally profitable âž¢ Porterâ€™s 5-forces (Chapter 3) is useful here. Example: HTCâ€™s Backward and Forward Integration along the Industry Value Chain in the Smartphone Industry Benefits and Risks of Vertical Integration â€¢ Benefits of vertical integration âž¢ Securing critical supplies âž¢ Lowering costs âž¢ Improving quality âž¢ Facilitating scheduling and planning âž¢ Facilitating investments in specialized assets Risks of Vertical Integration â€¢ Increasing costs â€¢ Reducing quality â€¢ Reducing flexibility Benefits and Risks of Vertical Integration Alternatives to Vertical Integration â€¢ Taper integration âž¢ Backward integrated but also relies on outside market firms for supplies OR âž¢ Forward integrated but also relies on outside market firms for some of its distribution â€¢ Strategic outsourcing âž¢ Moving value chain activities outside the firm's boundaries Decreasing Vertical Integration Through Outsourcing Corporate (Horizontal) Diversification: Expanding Beyond a Single Market Degrees of diversification âž¢ Range of products and services a firm should offer â– Ex: PepsiCo also owns Lay's & Quaker Oats. Diversification strategies: âž¢ Product diversification â– Active in several different product categories âž¢ Geographic diversification â– Active in several different countries âž¢ Product â€“ market diversification â– Active in a range of both product and countries Refocusing GE: A Future of Clean-Tech and Health Care? GEâ€™s Changing Product Scope Refocusing GE: A Future of Clean-Tech and Health Care? GEâ€™s Changing Geographic Scope Different Types of Diversification Diversification â€“ Performance Relationship Single or Dominant Firms Advantages Disadvantages â€¢ Strategic Focus â€¢ Expertise in complex markets â€¢ Fast response time â€¢ Lower administrative costs â€¢ Flatter organizational structure â€¢ Employee motivation â€¢ Uneven cash flows â€¢ Cash poor during growth â€¢ Cash rich at maturity â€¢ Limited growth opportunities â€¢ Size? â€¢ Risk? Leveraging Core Competencies for Corporate Diversification â€¢ Examples: â– Walmart â€“ global supply chain â– Infosys âˆ’ high-quality/low-cost IT services â– What kinds of Core Competencies can apply to many areas? â€¢ What if youâ€™ve gotten off track and need to reorganize your corporation? â– Underutilizing your strengths â– Doing too much business in your weak areas Corporate Diversification â€¢ Restructuring âž¢ Process of reorganizing and divesting business units âž¢ To refocus a company to leverage its core competencies â€¢ Boston Consulting Group growth-share matrix âž¢ Dogs âž¢ Cash cows âž¢ Stars âž¢ Question marks BCG Matrix THE Question â€¢ Does corporate diversification lead to superior performance? Yes or No? âž¢ Are the individual businesses worth more under the corporate umbrella than they would be separately? â– Performance12 > Performance1 + Performance2
â– Value Creation > Cost + Risk
â€¢ Some data to help you decide
âž¢ 70%-90% acquisitions end in divestiture within 5 years
âž¢ 53% of acquisitions decrease stock price of acquiring firm
âž¢ 30% of acquisitions do not change stock price of firm
â€¢ CEO pay is strongly correlated with company
size (particularly revenues)
â€¢ CEO power, prestige, reputation
â€¢ CEO personal challenge
â€¢ Reduce CEO employment risk
â€¢ Hide poor performance
Exhibit 8.10 Vertical Integration and
Diversification: Sources of Value Creation and Costs
Fair Oaks Farm Example
Fair Oaks Farm
â€¢ What type of Diversification is this?
â€¢ What other industries could combine with tourist
or recreational opportunities?
â€¢ Think of other industry combinations that you
have seen have success.
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